G.R. No.

L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the
Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller
had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a
private checks were not generally accepted in payment of money orders, the teller advised him to see the
Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day notice was likewise served upon all
banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of America,
and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face
value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of
America that money order No. 124688 attached to his letter had been found to have been irregularly
issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing
account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with
the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his
office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request
was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice
for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable
doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying
for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to
15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand

the notice given to the Bank of America on September 27, 1961, deducting from said
Bank's clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted
the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and
will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26,
1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post
Office, and that money orders, once issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the remitters payees or endorses, on the
other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For
this reason, ours are generally construed in accordance with the construction given in the United States
to their own postal statutes, in the absence of any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the
reason behind this rule being that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a governmental power for
the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For instance, such
laws and regulations usually provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the letter of
the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is deemed necessary." The conditions
thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving advice that the amount represented by the money order
in question had been deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand,
and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof
on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not
issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In
reality, however, said legal provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon the privilege granted to the
Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office.
Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth
assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with
costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.

Castro and Makasiar, JJ., took no part.

G.R. No. L-49188 January 30, 1990

PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila,
Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, respondents.
GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental
question. Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery
to prevail over a more discerning and just approach? Should we not apply the ancient rule of statutory
construction that laws are to be interpreted by the spirit which vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari
against the order of the Court of First Instance of Manila which issued an alias writ of execution against
the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when
respondent Amelia Tan, under the name and style of Able Printing Press commenced a complaint for
damages before the Court of First Instance of Manila. The case was docketed as Civil Case No. 71307,
entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P.
Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against
petitioner Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual
damages, with legal interest thereon from plaintiffs extra-judicial demand made by the
letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00,
representing the unrealized profit of 10% included in the contract price of P200,000.00
plus legal interest thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and
for moral damages, with legal interest thereon from July 20, 1 967;

4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages
as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-
G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of
P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA
Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a
motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for
reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory and on
May 31, 1977, judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia
Tan filed a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of
Appeals. On October 11, 1977, the trial court, presided over by Judge Galano, issued its order of
execution with the corresponding writ in favor of the respondent. The writ was duly referred to Deputy
Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ
of execution stating that the judgment rendered by the lower court, and affirmed with modification by the
Court of Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of
execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the
respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said
Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering
the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to
surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon
Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent
Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of
Execution" with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge
issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of
Execution with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for
partial alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment
rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the
enforcement thereof. (CA Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal
interest thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through
a letter. Levy was also ordered for the further sum of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no
return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had
already been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by
the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository
bank of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its
manager and garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of
May 16, 1978. Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE

ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT

OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT

THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT

DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the implementing
officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here obtaining is
justified because even with the absence of a Sheriffs return on the original writ, the unalterable
fact remains that such a return is incapable of being obtained (sic) because the officer who is to
make the said return has absconded and cannot be brought to the Court despite the earlier order
of the court for him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition).
Obviously, taking cognizance of this circumstance, the order of May 11, 1978 directing the
issuance of an alias writ was therefore issued. (Annex D. Petition). The need for such a return as
a condition precedent for the issuance of an alias writ was justifiably dispensed with by the court
below and its action in this regard meets with our concurrence. A contrary view will produce an
abhorent situation whereby the mischief of an erring officer of the court could be utilized to
impede indefinitely the undisputed and awarded rights which a prevailing party rightfully deserves
to obtain and with dispatch. The final judgment in this case should not indeed be permitted to
become illusory or incapable of execution for an indefinite and over extended period, as had
already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it
ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the
fruit and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of
Tax Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA
697, 698 [1967]). A judgment cannot be rendered nugatory by the unreasonable application of a strict rule
of procedure. Vested rights were never intended to rest on the requirement of a return, the office of which
is merely to inform the court and the parties, of any and all actions taken under the writ of execution.
Where such information can be established in some other manner, the absence of an executing officer's
return will not preclude a judgment from being treated as discharged or being executed through an alias
writ of execution as the case may be. More so, as in the case at bar. Where the return cannot be
expected to be forthcoming, to require the same would be to compel the enforcement of rights under a
judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a
judgment is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v.
Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his
judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ of
execution is the issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff
by check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won
her case should not be adjudged as having sued in vain. To decide otherwise would not only give her an
empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by
PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan
won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly
declared as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what,
technically, she should have been paid from the start, before 1967, without need of her going to court to
enforce her rights. And all because PAL did not issue the checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his
name did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the proper
person. Article 1240 of the Civil Code provides:

Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. (Emphasis supplied)

Thus, payment must be made to the obligee himself or to an agent having authority, express or implied,
to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made
to one having apparent authority to receive the money will, as a rule, be treated as though actual authority
had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the
creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of
money due on ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See
40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the payment
to such a person so authorized is deemed payment to the creditor. Under ordinary circumstances,
payment by the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish
the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in
checks. The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a
debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402).
Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no
authority to accept anything other than money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar,
does not, per se, operate as a discharge of the judgment debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil
Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60,
61). A check, whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually realized (Art.
1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have
been no payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL.
The theory is that she has received no value for what had been awarded her. Because the checks were
drawn in the name of Emilio Z. Reyes, neither has she received anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making.
We should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of
cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of
the bearer being waylaid or running off with what he is carrying for another. Payment in checks is
precisely intended to avoid the possibility of the money going to the wrong party. The situation is entirely
different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so properly.

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment
debt but the Court has never, in the least bit, suggested that judgment debtors should settle their
obligations by turning over huge amounts of cash or legal tender to sheriffs and other executing officers.
Payment in cash would result in damage or interminable litigations each time a sheriff with huge amounts
of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided
adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of
funds. If particularly big amounts are involved, escrow arrangements with a bank and carefully supervised
by the court would be the safer procedure. Actual transfer of funds takes place within the safety of bank
premises. These practices are perfectly legal. The object is always the safe and incorrupt execution of the
judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of
another. Making the checks payable to the judgment creditor would have prevented the encashment or
the taking of undue advantage by the sheriff, or any person into whose hands the checks may have
fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the
sheriff clearly made possible the misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia
Tan, the petitioner corporation, utilizing the services of its personnel who are or should be
knowledgeable about the accepted procedures and resulting consequences of the checks drawn,
nevertheless, in this instance, without prudence, departed from what is generally observed and
done, and placed as payee in the checks the name of the errant Sheriff and not the name of the
rightful payee. Petitioner thereby created a situation which permitted the said Sheriff to personally
encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit.
For the prejudice that resulted, the petitioner himself must bear the fault. The judicial guideline
which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a breach of
trust, the one who made it possible by his act of confidence must bear the loss. (Blondeau, et al.
v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made
possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers, of
requiring checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a
judgment debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees,
the debtor must report the sheriff immediately to the court which ordered the execution or to the Supreme
Court for appropriate disciplinary action. Fees, commissions, and salaries are paid through regular
channels. This improper procedure also allows such officers, who have sixty (60) days within which to
make a return, to treat the moneys as their personal finds and to deposit the same in their private
accounts to earn sixty (60) days interest, before said finds are turned over to the court or judgment
creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up the
defense that said checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean
and complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of
litigants and the proper administration of justice. The temptation could be far greater, as proved to be in
this case of the absconding sheriff. The correct and prudent thing for the petitioner was to have issued the
checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee, without
the latter's agreement or consent, are as many as the ways that an artful mind could concoct to get
around the safeguards provided by the law on negotiable instruments. An angry litigant who loses a case,
as a rule, would not want the winning party to get what he won in the judgment. He would think of ways to
delay the winning party's getting what has been adjudged in his favor. We cannot condone that practice
especially in cases where the courts and their officers are involved.1âwphi1 We rule against the
petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money
judgment by levying on all the property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not exempt from execution, or on
a sufficient amount of such property, if they be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the
orders of the respondent judge granting the alias writ of execution may not be pronounced as a
nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the
requisite of payment by the officer to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment and none such payment had been concededly made yet by
the absconding Sheriff to the private respondent Amelia Tan. The ultimate and essential step to
complete the execution of the judgment not having been performed by the City Sheriff, the
judgment debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual
circumstances as those obtaining in this petition, the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App.
2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary),
whereas the satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof,
or the conversion by sale of the debtor's property into an amount equal to that due, and, it may be done
otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer are not
prerequisites to the satisfaction of a judgment when the same has already been realized in fact (Section
47, Rule 39). Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor
to achieve. Section 15, Rule 39 merely provides the sheriff with his duties as executing officer including
delivery of the proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress
that the implementing officer's duty should not stop at his receipt of payments but must continue until
payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be
recovered under the alias writ of execution. This logically follows from our ruling that PAL is liable for both
the lost checks and interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally
supersede the trial court's judgment in Civil Case No. 71307. It merely modified the same as to the
principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the
respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution
against the petitioner is upheld without prejudice to any action it should take against the errant sheriff
Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions taken against Emilio Z.
Reyes.

SO ORDERED.

Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ., concur.

Separate Opinions

NARVASA, J., dissenting:

The execution of final judgments and orders is a function of the sheriff, an officer of the court whose
authority is by and large statutorily determined to meet the particular exigencies arising from or connected
with the performance of the multifarious duties of the office. It is the acknowledgment of the many
dimensions of this authority, defined by statute and chiselled by practice, which compels me to disagree
with the decision reached by the majority.

A consideration of the wide latitude of discretion allowed the sheriff as the officer of the court most directly
involved with the implementation and execution of final judgments and orders persuades me that PAL's
payment to the sheriff of its judgment debt to Amelia Tan, though made by check issued in said officer's
name, lawfully satisfied said obligation and foreclosed further recourse therefor against PAL,
notwithstanding the sheriffs failure to deliver to Tan the proceeds of the check.

It is a matter of history that the judiciary .. is an inherit or of the Anglo-American tradition. While
the common law as such .. "is not in force" in this jurisdiction, "to breathe the breath of life into
many of the institutions, introduced [here] under American sovereignty, recourse must be had to
the rules, principles and doctrines of the common law under whose protecting aegis the
prototypes of these institutions had their birth" A sheriff is "an officer of great antiquity," and was
also called the shire reeve. A shire in English law is a Saxon word signifying a division later called
a county. A reeve is an ancient English officer of justice inferior in rank to an alderman ..
appointed to process, keep the King's peace, and put the laws in execution. From a very remote
period in English constitutional history .. the shire had another officer, namely the shire reeve or
as we say, the sheriff. .. The Sheriff was the special representative of the legal or central
authority, and as such usually nominated by the King. .. Since the earliest times, both in England
and the United States, a sheriff has continued his status as an adjunct of the court .. . As it was
there, so it has been in the Philippines from the time of the organization of the judiciary .. . (J.
Fernando's concurring opinion in Bagatsing v. Herrera, 65 SCRA 434)

One of a sheriff s principal functions is to execute final judgments and orders. The Rules of Court require
the writs of execution to issue to him, directing him to enforce such judgments and orders in the manner
therein provided (Rule 39). The mode of enforcement varies according to the nature of the judgment to be
carried out: whether it be against property of the judgment debtor in his hands or in the hands of a third
person i e. money judgment), or for the sale of property, real or personal (i.e. foreclosure of mortgage) or
the delivery thereof, etc. (sec. 8, Rule 39).

Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the judgment debtor's
property as may be sufficient to enforce the money judgment and sell these properties at public auction
after due notice to satisfy the adjudged amount. It is the sheriff who, after the auction sale, conveys to the
purchaser the property thus sold (secs. 25, 26, 27, Rule 39), and pays the judgment creditor so much of
the proceeds as will satisfy the judgment. When the property sold by him on execution is an immovable
which consequently gives rise to a light of redemption on the part of the judgment debtor and others
(secs. 29, 30, Rule 39), it is to him (or to the purchaser or redemptioner that the payments may be made
by those declared by law as entitled to redeem (sec. 31, Rule 39); and in this situation, it becomes his
duty to accept payment and execute the certificate of redemption (Enage v. Vda. y Hijos de Escano, 38
Phil. 657, cited in Moran, Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-327). It is also to the
sheriff that "written notice of any redemption must be given and a duplicate filed with the registrar of
deeds of the province, and if any assessments or taxes are paid by the redemptioner or if he has or
acquires any lien other than that upon which the redemption was made, notice thereof must in like
manner be given to the officer and filed with the registrar of deeds," the effect of failure to file such notice
being that redemption may be made without paying such assessments, taxes, or liens (sec. 30, Rule 39).

The sheriff may likewise be appointed a receiver of the property of the judgment debtor where the
appointment of the receiver is deemed necessary for the execution of the judgment (sec. 32, Rule 39).

At any time before the sale of property on execution, the judgment debtor may prevent the sale by paying
the sheriff the amount required by the execution and the costs that have been incurred therein (sec. 20,
Rule 39).

The sheriff is also authorized to receive payments on account of the judgment debt tendered by "a person
indebted to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment creditor on the execution" (sec. 41, Rule 39).

Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor either in fun, if the price
paid by the highest bidder is equal to, or more than the amount of the judgment or pro tanto if the price
fetched at the sale be less. Such extinction is not in any way dependent upon the judgment creditor's
receiving the amount realized, so that the conversion or embezzlement of the proceeds of the sale by the
sheriff does not revive the judgment debt or render the judgment creditor liable anew therefor.

So, also, the taking by the sheriff of, say, personal property from the judgment debtor for delivery to the
judgment creditor, in fulfillment of the verdict against him, extinguishes the debtor's liability; and the
conversion of said property by the sheriff, does not make said debtor responsible for replacing the
property or paying the value thereof.

In the instances where the Rules allow or direct payments to be made to the sheriff, the payments may be
made by check, but it goes without saying that if the sheriff so desires, he may require payment to be
made in lawful money. If he accepts the check, he places himself in a position where he would be liable to
the judgment creditor if any damages are suffered by the latter as a result of the medium in which
payment was made (Javellana v. Mirasol, et al., 40 Phil. 761). The validity of the payment made by the
judgment debtor, however, is in no wise affected and the latter is discharged from his obligation to the
judgment creditor as of the moment the check issued to the sheriff is encashed and the proceeds are
received by Id. office. The issuance of the check to a person authorized to receive it (Art. 1240, Civil
Code; See. 46 of the Code of Civil Procedure; Enage v. Vda y Hijos de Escano, 38 Phil. 657, cited in
Javellana v. Mirasol, 40 Phil. 761) operates to release the judgment debtor from any further obligations on
the judgment.
The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and
personal liability (concurring opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in
Bagatsing v. Herrera, 65 SCRA 434). Being an officer of the court and acting within the scope of his
authorized functions, the sheriff s receipt of the checks in payment of the judgment execution, may be
deemed, in legal contemplation, as received by the court itself (Lara v. Bayona, 10 May 1955, No. L-
10919).

That the sheriff functions as a conduit of the court is further underscored by the fact that one of the
requisites for appointment to the office is the execution of a bond, "conditioned (upon) the faithful
performance of his (the appointee's) duties .. for the delivery or payment to Government, or the person
entitled thereto, of all properties or sums of money that shall officially come into his hands" (sec. 330,
Revised Administrative Code).

There is no question that the checks came into the sheriffs possession in his official capacity. The court
may require of the judgment debtor, in complying with the judgment, no further burden than his vigilance
in ensuring that the person he is paying money or delivering property to is a person authorized by the
court to receive it. Beyond this, further expectations become unreasonable. To my mind, a proposal that
would make the judgment debtor unqualifiedly the insurer of the judgment creditor's entitlement to the
judgment amount which is really what this case is all about begs the question.

That the checks were made out in the sheriffs name (a practice, by the way, of long and common
acceptance) is of little consequence if juxtaposed with the extent of the authority explicitly granted him by
law as the officer entrusted with the power to execute and implement court judgments. The sheriffs
requirement that the checks in payment of the judgment debt be issued in his name was simply an
assertion of that authority; and PAL's compliance cannot in the premises be faulted merely because of the
sheriffs subsequent malfeasance in absconding with the payment instead of turning it over to the
judgment creditor.

If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to
accept it in settlement of PAL's judgment obligation would even have arisen. Simply because it was made
by checks issued in the sheriff s name does not warrant reaching any different conclusion.

As payment to the court discharges the judgment debtor from his responsibility on the judgment, so too
must payment to the person designated by such court and authorized to act in its behalf, operate to
produce the same effect.

It is unfortunate and deserving of commiseration that Amelia Tan was deprived of what was adjudged to
her when the sheriff misappropriated the payment made to him by PAL in dereliction of his sworn duties.
But I submit that her remedy lies, not here and in reviving liability under a judgment already lawfully
satisfied, but elsewhere.

ACCORDINGLY, I vote to grant the petition.

Melencio-Herrera, Gancayco, J., concurs.

FELICIANO, J., dissenting:

I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely wish to add a few
footnotes to their lucid opinions.
1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the Rules of Court and
our case law to receive either legal tender or checks from the judgment debtor in satisfaction of
the judgment debt. In addition, Padilla, J. has underscored the obligation of the sheriff, imposed
upon him by the nature of his office and the law, to turn over such legal tender, checks and
proceeds of execution sales to the judgment creditor. The failure of a sheriff to effect such
turnover and his conversion of the funds (or goods) held by him to his own uses, do not have the
effect of frustrating payment by and consequent discharge of the judgment debtor.

To hold otherwise would be to throw the risk of the sheriff faithfully performing his duty as a public
officer upon those members of the general public who are compelled to deal with him. It seems to
me that a judgment debtor who turns over funds or property to the sheriff can not reasonably be
made an insurer of the honesty and integrity of the sheriff and that the risk of the sheriff carrying
out his duties honestly and faithfully is properly lodged in the State itself The sheriff, like all other
officers of the court, is appointed and paid and controlled and disciplined by the Government,
more specifically by this Court. The public surely has a duty to report possible wrongdoing by a
sheriff or similar officer to the proper authorities and, if necessary, to testify in the appropriate
judicial and administrative disciplinary proceedings. But to make the individual members of the
general community insurers of the honest performance of duty of a sheriff, or other officer of the
court, over whom they have no control, is not only deeply unfair to the former. It is also a
confession of comprehensive failure and comes too close to an abdication of duty on the part of
the Court itself. This Court should have no part in that.

2. I also feel compelled to comment on the majority opinion written by Gutierrez, J. with all his
customary and special way with words. My learned and eloquent brother in the Court apparently
accepts the proposition that payment by a judgment debtor of cash to a sheriff produces the legal
effects of payment, the sheriff being authorized to accept such payment. Thus, in page 10 of
his ponencia, Gutierrez, J. writes:

The receipt of money due on a judgment by an officer authorized by law to accept it will satisfy
the debt. (Citations omitted)

The theory is where payment is made to a person authorized and recognized by the creditor, the
payment to such a person so authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at bar, to the sheriff would be valid
payment to extinguish the judgment debt.

Shortly thereafter, however, Gutierrez, J. backs off from the above position and strongly implies
that payment in cash to the sheriff is sheer imprudence on the part of the judgment debtor and
that therefore, should the sheriff abscond with the cash, the judgment debtor has not validly
discharged the judgment debt:

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full
legal contemplation. The reasoning is logical but is it valid and proper?

In the first place, PAL did not pay in cash. It paid in checks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big
amounts of cash in a careless and inane manner. Mature thought is given to the possibility of the
cash being lost, of the bearer being waylaid or running off with what he is carrying for another.
Payment in checks is precisely intended to avoid the possibility of the money going to the wrong
party....

Payment in money or cash to the implementing officer may be deemed absolute payment of the
judgment debt but the court has never, in the least bit, suggested that judgment debtors should
 settle their obligations by turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. ... (Emphasis in the original) (Majority opinion, pp. 12-13)

There is no dispute with the suggestion apparently made that maximum safety is secured where the
judgment debtor delivers to the sheriff not cash but a check made out, not in the name of the sheriff,
but in the judgment creditor's name. The fundamental point that must be made, however, is that under our
law only cash is legal tender and that the sheriff can be compelled to accept only cash and not
checks, even if made out to the name of the judgment creditor. 1 The sheriff could have quite lawfully
required PAL to deliver to him only cash, i.e., Philippine currency. If the sheriff had done so, and if PAL
had complied with such a requirement, as it would have had to, one would have to agree that legal
payment must be deemed to have been effected. It requires no particularly acute mind to note that a
dishonest sheriff could easily convert the money and abscond. The fact that the sheriff in the instant case
required, not cash to be delivered to him, but rather a check made out in his name, does not change the
legal situation. PAL did not thereby become negligent; it did not make the loss anymore possible or
probable than if it had instead delivered plain cash to the sheriffs.

It seems to me that the majority opinion's real premise is the unspoken one that the judgment debtor
should bear the risk of the fragility of the sheriff s virtue until the money or property parted with by the
judgment debtor actually reaches the hands of the judgment creditor. This brings me back to my earlier
point that risk is most appropriately borne not by the judgment debtor, nor indeed by the judgment
creditor, but by the State itself. The Court requires all sheriffs to post good and adequate fidelity bonds
before entering upon the performance of their duties and, presumably, to maintain such bonds in force
and effect throughout their stay in office.2 The judgment creditor, in circumstances like those of the instant
case, could be allowed to execute upon the absconding sheriff s bond. 3

I believe the Petition should be granted and I vote accordingly.

PADILLA, J., Dissenting Opinion

From the facts that appear to be undisputed, I reach a conclusion different from that of the majority.
Sheriff Emilio Z. Reyes, the trial court's authorized sheriff, armed with a writ of execution to enforce a final
money judgment against the petitioner Philippine Airlines (PAL) in favor of private respondent Amelia
Tan, proceeded to petitioner PAL's office to implement the writ.

There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting with full authority as
an officer of the law and not in his personal capacity. Stated differently, PAL had every right to assume
that, as an officer of the law, Sheriff Reyes would perform his duties as enjoined by law. It would be
grossly unfair to now charge PAL with advanced or constructive notice that Mr. Reyes would abscond and
not deliver to the judgment creditor the proceeds of the writ of execution. If a judgment debtor cannot rely
on and trust an officer of the law, as the Sheriff, whom else can he trust?

Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of the judgment in
CASH, i.e. Philippine currency, with the corresponding receipt signed by Sheriff Reyes, this would have
been payment by PAL in full legal contemplation, because under Article 1240 of the Civil Code, "payment
shall be made to the person in whose favor the obligation has been constituted or his successor in
interest or any person authorized to receive it." And said payment if made by PAL in cash, i.e., Philippine
currency, to Sheriff Reyes would have satisfied PAL's judgment obligation, as payment is a legally
recognized mode for extinguishing one's obligation. (Article 1231, Civil Code).

Under Sec. 15, Rule 39, Rules of Court which provides that-
 Sec. 15. Execution of money judgments. — The officer must enforce an execution of a money
judgment by levying on all the property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not exempt from execution, or on
a sufficient amount of such property, if there be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...
.(emphasis supplied)

it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of the execution i.e., the
cash received from PAL (under the above assumption). But, the duty of the sheriff to pay the cash to the
judgment creditor would be a matter separate the distinct from the fact that PAL would have satisfied its
judgment obligation to Amelia Tan, the judgment creditor, by delivering the cash amount due under the
judgment to Sheriff Reyes.

Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00 drawn against its
bank account, payable to Sheriff Reyes, for account of the judgment rendered against PAL? I do not think
so, because when Sheriff Reyes encashed the checks, the encashment was in fact a payment by PAL to
Amelia Tan through Sheriff Reyes, an officer of the law authorized to receive payment, and such payment
discharged PAL'S obligation under the executed judgment.

If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be no payment by
PAL and, consequently no discharge or satisfaction of its judgment obligation. But the checks had been
encashed by Sheriff Reyes giving rise to a situation as if PAL had paid Sheriff Reyes in cash, i.e.,
Philippine currency. This, we repeat, is payment, in legal contemplation, on the part of PAL and this
payment legally discharged PAL from its judgment obligation to the judgment creditor. To be sure, the
same encashment by Sheriff Reyes of PAL's checks delivered to him in his official capacity as Sheriff,
imposed an obligation on Sheriff Reyes to pay and deliver the proceeds of the encashment to Amelia Tan
who is deemed to have acquired a cause of action against Sheriff Reyes for his failure to deliver to her
the proceeds of the encashment. As held:

Payment of a judgment, to operate as a release or satisfaction, even pro tanto must be made to
the plaintiff or to some person authorized by him, or by law, to receive it. The payment of money
to the sheriff having an execution satisfies it, and, if the plaintiff fails to receive it, his only remedy
is against the officer (Henderson v. Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).

Payment of an execution satisfies it without regard to whether the officer pays it over to the
creditor or misapplies it (340, 33 C.J.S. 644, citing Elliot v. Higgins, 83 N.C. 459). If defendant
consents to the Sheriff s misapplication of the money, however, defendant is estopped to claim
that the debt is satisfied (340, 33 C.J.S. 644, citing Heptinstall v. Medlin 83 N.C. 16).

The above rulings find even more cogent application in the case at bar because, as contended by
petitioner PAL (not denied by private respondent), when Sheriff Reyes served the writ of execution on
PAL, he (Reyes) was accompanied by private respondent's counsel. Prudence dictated that when PAL
delivered to Sheriff Reyes the two (2) questioned checks (payable to Sheriff Reyes), private respondent's
counsel should have insisted on their immediate encashment by the Sheriff with the drawee bank in order
to promptly get hold of the amount belonging to his client, the judgment creditor.

ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ of execution.

Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.

Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.

Footnotes

1Art. 1249, Civil Code; e.g., Belisario v. Natividad, 60 Phil. 156 (1934); Villanueva v. Santos, 67
Phil 648 (1938).

2 See e.g., Sec. 46, Republic Act No. 296, as amended by Republic Act No. 4814.

3 See e.g., Sec. 9, Act No. 3598.

G.R. No. 176664 July 21, 2008

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SPOUSES REYNALDO AND VICTORIA ROYECA, Respondents.

DECISION

NACHURA, J.:

Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision 1 dated July 12,
2006, and Resolution2 dated February 13, 2007, which dismissed its complaint for replevin and damages
and granted the respondents’ counterclaim for damages.

The case stems from the following undisputed facts:

On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and delivered to
Toyota Shaw, Inc. a Promissory Note3 for ₱577,008.00 payable in 48 equal monthly installments of
₱12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides for a penalty of 3%
for every month or fraction of a month that an installment remains unpaid.

To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage 4 in favor of
Toyota over a certain motor vehicle, more particularly described as follows:
<
p>Make and Type 1993 Toyota Corolla 1.3 XL

Motor No. 2E-2649879

Serial No. EE100-9512571

Color D.B. Gray Met.

Toyota, with notice to respondents, executed a Deed of Assignment 5 transferring all its rights, title, and
interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).

Claiming that the respondents failed to pay four (4) monthly amortizations covering the period from May
18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000 asking for
the payment thereof, plus penalty.6 The respondents refused to pay on the ground that they had already
paid their obligation to FEBTC.

On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents with the
Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an alternative prayer
for the payment of ₱48,084.00 plus interest and/or late payment charges at the rate of 36% per annum
from May 18, 1997 until fully paid. The complaint likewise prayed for the payment of ₱24,462.73 as
attorney’s fees, liquidated damages, bonding fees and other expenses incurred in the seizure of the
vehicle. The complaint was later amended to substitute BPI as plaintiff when it merged with and absorbed
FEBTC.7

In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling ₱97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received the
following checks:

DATE BANK CHECK NO. AMOUNT

26 May 97 Landbank #610945 ₱13,824.15
6 June 97 Head Office #610946 12,381.63
30 May 97 FEBTC #17A00-11550P 12,021.00
15 June 97 Shaw Blvd. #17A00-11549P 12,021.00
30 June 97 " #17A00-11551P 12,021.00
18 June 97 Landbank #610947 11,671.00
18 July 97 Head Office #610948 11,671.00
18 August 97 #610949 11,671.00

The respondents further averred that they did not receive any notice from the drawee banks or from
FEBTC that these checks were dishonored. They explained that, considering this and the fact that the
checks were issued three years ago, they believed in good faith that their obligation had already been
fully paid. They alleged that the complaint is frivolous and plainly vexatious. They then prayed that they
be awarded moral and exemplary damages, attorney’s fees and costs of suit. 9

During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994 and had
assumed the position of Account Analyst since its merger with BPI. He admitted that they had, in fact,
received the eight checks from the respondents. However, two of these checks (Landbank Check No.
0610947 and FEBTC Check No. 17A00-11551P) amounting to ₱23,692.00 were dishonored. He recalled
that the remaining two checks were not deposited anymore due to the previous dishonor of the two
checks. He said that after deducting these payments, the total outstanding balance of the obligation was
₱48,084.00, which represented the last four monthly installments.

On February 23, 2005, the MeTC dismissed the case and granted the respondents’ counterclaim for
damages, thus:

WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of action, and on
the counterclaim, plaintiff is ordered to indemnify the defendants as follows:

a) The sum of PhP30,000.00 as and by way of moral damages;

b) The sum of PhP30,000.00 as and by way of exemplary damages;

c) The sum of PhP20,000.00 as and by way of attorney’s fees; and

d) To pay the costs of the suit.

SO ORDERED.10

On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the respondents to
pay the amount claimed by the petitioner. The dispositive portion of its Decision 11 dated August 11, 2005
reads:

WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9 dated
February 23, 2005 is REVERSED and a new one entered directing the defendants-appellees to pay the
plaintiff-appellant, jointly and severally,

1. The sum of ₱48,084.00 plus interest and/or late payment charges thereon at the rate of 36%
per annum from May 18, 1997 until fully paid;

2. The sum of ₱10,000.00 as attorney’s fees; and

3. The costs of suit.

SO ORDERED.12

The RTC denied the respondents’ motion for reconsideration.13

The respondents elevated the case to the Court of Appeals (CA) through a petition for review. They
succeeded in obtaining a favorable judgment when the CA set aside the RTC’s Decision and reinstated
the MeTC’s Decision on July 12, 2006.14 On February 13, 2007, the CA denied the petitioner’s motion for
reconsideration.15

The issues submitted for resolution in this petition for review are as follows:

I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF THEIR

OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.

II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.

 III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES.16

The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers that,
under the law and existing jurisprudence, delivery of checks does not constitute payment. It points out
that this principle stands despite the fact that there was no notice of dishonor of the two checks and the
demand to pay was made three years after default.

On the other hand, the respondents postulate that they have established payment of the amount being
claimed by the petitioner and, unless the petitioner proves that the checks have been dishonored, they
should not be made liable to pay the obligation again.17

The petition is partly meritorious.

In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is offered
in opposition thereto.18 Thus, the party, whether plaintiff or defendant, who asserts the affirmative of an
issue has the onus to prove his assertion in order to obtain a favorable judgment. For the plaintiff, the
burden to prove its positive assertions never parts. For the defendant, an affirmative defense is one which
is not a denial of an essential ingredient in the plaintiff’s cause of action, but one which, if established, will
be a good defense – i.e. an "avoidance" of the claim.19

In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who, between the
plaintiff and defendant, has the burden to prove the affirmative defense of payment:

As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must
allege non-payment, the general rule is that the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment.

When the existence of a debt is fully established by the evidence contained in the record, the burden of
proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to
the claim of the creditor. Where the debtor introduces some evidence of payment, the burden of going
forward with the evidence - as distinct from the general burden of proof - shifts to the creditor, who is then
under a duty of producing some evidence to show non-payment.21

In applying these principles, the CA and the RTC, however, arrived at different conclusions. While both
agreed that the respondents had the burden of proof to establish payment, the two courts did not agree
on whether the respondents were able to present sufficient evidence of payment — enough to shift the
burden of evidence to the petitioner. The RTC found that the respondents failed to discharge this burden
because they did not introduce evidence of payment, considering that mere delivery of checks does not
constitute payment.22 On the other hand, the CA concluded that the respondents introduced sufficient
evidence of payment, as opposed to the petitioner, which failed to produce evidence that the checks were
in fact dishonored. It noted that the petitioner could have easily presented the dishonored checks or the
advice of dishonor and required respondents to replace the dishonored checks but none was presented.
Further, the CA remarked that it is absurd for a bank, such as petitioner, to demand payment of a failed
amortization only after three years from the due date.

The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC, this is only
proof that respondents delivered eight checks in payment of the amount due. Apparently, this will not
suffice to establish actual payment.
Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment.23 Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery
of checks does not discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized. 24

To establish their defense, the respondents therefore had to present proof, not only that they delivered
the checks to the petitioner, but also that the checks were encashed. The respondents failed to do so.
Had the checks been actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they believed in good faith that
the checks were encashed because they were not notified of the dishonor of the checks and three years
had already lapsed since they issued the checks.1avvphi1

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were dishonored.
The burden of evidence is shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.25

To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed, fell
upon the respondents who would benefit from such fact. That payment was effected through the eight
checks was the respondents’ affirmative allegation that they had to establish with legal certainty. If the
petitioner were seeking to enforce liability upon the check, the burden to prove that a notice of dishonor
was properly given would have devolved upon it.26 The fact is that the petitioner’s cause of action was
based on the original obligation as evidenced by the Promissory Note and the Chattel Mortgage, and not
on the checks issued in payment thereof.

Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform the
respondents of the dishonor of the checks. A notice of dishonor is required only to preserve the right of
the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the check.
Otherwise, if the payee fails to give notice to them, they are discharged from their liability thereon, and the
payee is precluded from enforcing payment on the check. The respondents, therefore, cannot fault the
petitioner for not notifying them of the non-payment of the checks because whatever rights were
transgressed by such omission belonged only to the petitioner.

In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioner’s
possession of the documents pertaining to the obligation strongly buttresses its claim that the obligation
has not been extinguished. The creditor’s possession of the evidence of debt is proof that the debt has
not been discharged by payment.27 A promissory note in the hands of the creditor is a proof of
indebtedness rather than proof of payment. 28 In an action for replevin by a mortgagee, it is prima facie
evidence that the promissory note has not been paid.29 Likewise, an uncanceled mortgage in the
possession of the mortgagee gives rise to the presumption that the mortgage debt is unpaid. 30

Finally, the respondents posit that the petitioner’s claim is barred by laches since it has been three years
since the checks were issued. We do not agree. Laches is a recourse in equity. Equity, however, is
applied only in the absence, never in contravention, of statutory law. Thus, laches cannot, as a rule, abate
a collection suit filed within the prescriptive period mandated by the New Civil Code. 31 The petitioner’s
action was filed within the ten-year prescriptive period provided under Article 1144 of the New Civil Code.
Hence, there is no room for the application of laches.

Nonetheless, the Court cannot ignore what the respondents have consistently raised — that they were
not notified of the non-payment of the checks. Reasonable banking practice and prudence dictates that,
when a check given to a creditor bank in payment of an obligation is dishonored, the bank should
immediately return it to the debtor and demand its replacement or payment lest it causes any prejudice to
the drawer. In light of this and the fact that the obligation has been partially paid, we deem it just and
equitable to reduce the 3% per month penalty charge as stipulated in the Promissory Note to 12% per
annum.32 Although a court is not at liberty to ignore the freedom of the parties to agree on such terms and
conditions as they see fit, as long as they contravene no law, morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous
or unconscionable, or if the principal obligation has been partly or irregularly complied with. 33

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 12, 2006, and Resolution dated February 13, 2007, are REVERSED and SET
ASIDE. The Decision of the Regional Trial Court, dated August 11, 2005, is REINSTATED with the
MODIFICATION that respondents are ordered to deliver the possession of the subject vehicle, or in the
alternative, pay the petitioner ₱48,084.00 plus late penalty charges/interest thereon at the rate of 12% per
annum from May 18, 1997 until fully paid.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING*
Associate Justice

CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Associate Justice

RUBEN T. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify
that the conclusions in the above decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes
* In lieu of Associate Justice Minita V. Chico-Nazario, per Special Order No. 508 dated June 25,
2008.

1Penned by Associate Justice Eliezer R. de los Santos, with Associate Justices Fernanda
Lampas-Peralta and Myrna Dimaranan Vidal concurring; rollo, pp. 25-31.

2 Rollo, p. 33.

3 Id. at 37.

4 Id. at 42-45.

5 Id. at 39.

6 Id. at 58.

7 Id. at 46-49.

8 Id. at 56.

9 Id. at 53.

10 Id at 62-63.

11 Id. at 64-73.

12 Id. at 73.

13 Id. at 11.

14 Id. at 31.

15 Id. at 33.

16 Id. at 15.

17 Id. at 124.

18Encinas v. National Bookstore, Inc., G.R. No. 162704, November 19, 2004, 443 SCRA 293,
302.

19DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc., G.R. No.
147039, January 27, 2006, 480 SCRA 314, 322-323.

20 326 Phil. 89 (1996).

21 Id. at 95.

22 Rollo, p. 72.

23 Abalos v. Macatangay, Jr., G.R. No. 155043, September 30, 2004, 439 SCRA 649, 659.
24Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, January 30, 1990, 181 SCRA 557,
568.

25 Asian Transmission Corporation v. Canlubang Sugar Estates, 457 Phil. 260, 290 (2003).

26 See Negotiable Instruments Law, Sec. 89.

27 Redmond v. Hughes, 135 N.Y.S. 843, 151 App. Div. 99 (1912).

28 Biala v. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA 50, 59.

29 Heagney v. J. I. Case Threshing Mach. Co., 99 N.W. 260 (1904).

30Guerin v. Cassidy, 38 NJ Super 454, 119 A2d 780 (1956); Beattie v. Meeker, 149 N.Y.S. 453
(1914).

31 Agra v. Philippine National Bank, 368 Phil. 829 (1999).

32 Article 1229 of the Civil Code authorizes the judge to equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor.

33 Ligutan v. Court of Appeals, 427 Phil. 42, 51 (2002).

G.R. No. 74451 May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL
CO., respondents.

William R. Veto for petitioner.

Pelaez, Adriano & Gregorio for respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse
judgment against it rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority
Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, 2 be annulled and set
aside.

The facts pertinent to this Petition, as summarized by the Trial Court and adopted by reference by
Respondent Appellate Court, emanated from the case entitled "Edward J. Nell Co. vs. Liberato V. Casals,
Casville Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil
Case No. 25112), and read:
From the evidence submitted by the parties, the Court finds that sometime in 1975
defendant Liberato Casals went to plaintiff Edward J. Nell Company and told its senior
sales engineer, Amado Claustro that he was interested in buying one of the plaintiff's
garrett skidders. Plaintiff was a dealer of machineries, equipment and supplies.
Defendant Casals represented himself as the majority stockholder, president and general
manager of Casville Enterprises, Inc., a firm engaged in the large scale production,
procurement and processing of logs and lumber products, which had a plywood plant in
Sta. Ana, Metro Manila.

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs
executive vice-president, Apolonio Javier, for negotiation in connection with the manner
of payment. When Javier asked for cash payment for the skidders, defendant Casals
informed him that his corporation, defendant Casville Enterprises, Inc., had a credit line
with defendant Equitable Banking Corporation. Apparently, impressed with this assertion,
Javier agreed to have the skidders paid by way of a domestic letter of credit which
defendant Casals promised to open in plaintiffs favor, in lieu of cash payment.
Accordingly, on December 22, 1975, defendant Casville, through its president, defendant
Casals, ordered from plaintiff two units of garrett skidders ...

The purchase order for the garrett skidders bearing No. 0051 and dated December 22,
1975 (Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described in the
bulletin

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE EDWARD J.

NELL CO. or ORDER payable in thirty six (36) months and will be opened within ninety
(90) days after date of shipment. at first installment will be due one hundred eighty (180)
days after date of shipment. Interest-14% per annum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff
the delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de
Oro, on or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the
information that an irrevocable Domestic Letter of Credit would be opened in plaintiff's
favor on or before June 30, 1976 under the terms and conditions agreed upon (Exhibit
"B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff

shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the
amount of P10,640.00 because of the verbal assurance of defendant Casville that it
would be covered by the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of
P300,000.00 postdated August 4, 1976, which was followed by another check of same
date. Plaintiff considered these checks either as partial payment for the skidder that was
already delivered to Cagayan de Oro or as reimbursement for the marginal deposit that
plaintiff was supposed to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff
that their application for a letter of credit for the payment of the Garrett skidders had been
approved by the Equitable Banking Corporation. However, the defendants said that they
would need the sum of P300,000.00 to stand as collateral or marginal deposit in favor of
Equitable Banking Corporation and an additional amount of P100,000.00, also in favor of
Equitable Banking Corporation, to clear the title of the Estrada property belonging to
defendant Casals which had been approved as security for the trust receipts to be issued
by the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by defendant Casville

Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate the
transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of
P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable
to the order of Equitable Banking Corporation and with the following notation or
memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of

balance on Estrada Property to be used as security for trust receipt for
opening L/C of Garrett Skidders in favor of the Edward J. Nell Co." Said
check together with the cash disbursement voucher (Exhibit "2-A")
containing the explanation:

Payment for marginal deposit and other expenses re opening of L/C for
account of Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were
presented to Severino Santos, executive vice president of defendant bank, Santos did
not accept them because the terms and conditions required by the bank for the opening
of the letter of credit had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to
cover its purchase from plaintiff of two Garrett skidders, under the following terms and
conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for
P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to
secure the Trust Receipts; e) We shall chattel mortgage the equipments purchased even
after payment of the first L/C as additional security for the balance of the second L/C and
f) Other conditions you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was
ready to open the letters of credit upon defendant's compliance of the following terms and
conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust
Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and
conditions that our bank may impose.
Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three
postdated checks. In said letter, plaintiff was informed of the requirements imposed by
the defendant bank pointing out that the "cash marginal required under paragraph (c) is
30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada
property or a total of P427,300.00" and that the check covering said amount should be
made payable "to the Order of EQUITABLE BANKING CORPORATION for the account
of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed
postdated checks were intended as replacement of the checks that were previously
issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to
defendant bank for the account of defendant Casville. All the new checks were postdated
November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00
(Exhibit "G") and P100,000.00 (Exhibit "H").

On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the
Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal
covering two pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a

representative of defendant Casville, went to see Severino Santos to find out the status
of the credit line being sought by defendant Casville. Santos assured Umali that the
letters of credit would be opened as soon as the requirements imposed by defendant
bank in its letter dated August 11, 1976 had been complied with by defendant Casville.

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of
EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and
drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the
notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance
of said notation was reproduced in a covering letter dated August 16,1976 that went with
the check (Exhibit "E").<äre||anº•1àw> Both the check and the covering letter were sent
to defendant bank through defendant Casals. Plaintiff entrusted the delivery of the check
and the latter to defendant Casals because it believed that no one, including defendant
Casals, could encash the same as it was made payable to the defendant bank alone.
Besides, defendant Casals was known to the bank as the one following up the application
for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant bank and the bank teller accepted the same
for deposit in defendant Casville's checking account. After depositing said check,
defendant Casville, acting through defendant Casals, then withdrew all the amount
deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three
checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by
defendant Casville as collateral were all dishonored for having been drawn against a
closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed
the mortgage executed by defendant Casville on the Estrada property which was sold in
a public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit
knowing that it took time to process the same. However, when the three checks issued to
it by defendant Casville were dishonored, plaintiff became apprehensive and sent Umali
on November 29, 1976, to inquire about the status of the application for the letters of
 credit. When plaintiff was informed that no letters of credit were opened by the defendant
bank in its favor and then discovered that defendant Casville had in the meanwhile
withdrawn the entire amount of P427,300.00, without paying its obligation to the bank
plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals and Casville assigned the
garrett skidder to plaintiff which credited in favor of defendants the amount of
P450,000.00, as partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they
show lack of interest in disputing plaintiff's claim by not appearing in most of the hearings,
but they also assigned to plaintiff the garrett skidder which is an action of clear
recognition of their liability.

What is left for the Court to determine, therefore, is only the liability of defendant bank to
plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the
pertinent portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are
ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the
amount of plaintiff's check which defendant bank erroneously credited to the account of
defendant Casville and which defendants Casal and Casville misappropriated, with 12%
interest thereon from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the
sum of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly, the Bank)
is liable to private respondent Edward J. Nell Co. (NELL, for short) for the value of the second check
issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE

ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously credited to the Casville
account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay NELL the
value of the check in the sum of P427,300.00, with legal interest. Explained the Trial Court:

The Court finds that the check in question was payable only to the defendant bank and to
no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on
the face of the check after or under the name of defendant bank, the payee was still the
 latter. The addition of said words did not in any way make Casville Enterprises, Inc. the
Payee of the instrument for the words merely indicated for whose account or in
connection with what account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not negotiable
since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only"
and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING
CORPORATION.

But said teller should have exercised more prudence in the handling of Id check because
it was not made out in the usual manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and he should have
clarified the matter with his superiors. Instead of doing so, however, the teller decided to
rely on his own judgment and at the risk of making a wrong decision, credited the entire
amount in the name of defendant Casville although the latter was not the payee named in
the check. Such mistake was crucial and was, without doubt, the proximate cause of
plaintiffs defraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of
Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant
bank to apply the value of the check as payment for the letter of credit which Casville
Enterprises, Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5).
The issuance of the subject check was precisely to meet the bank's prior requirement of
payment before issuing the letter of credit previously applied for by Casville Enterprises in
favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE

ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. 3 As worded, it could be accepted as deposit to the account of the party named after the
symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed
against NELL who caused the ambiguity and could have also avoided it by the exercise of a little more
care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-
negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the subject
check of the words "Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-
negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank teller in
accordance with customary bank practice, and not by NELL as the drawer of the check, and simply meant
that thereafter the same check could no longer be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16 August
1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its own
defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order solely of
"Equitable Banking Corporation." NELL changed the payee in the subject check, Exhibit "E", however, to
"Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also
eliminated both the cash disbursement voucher accompanying the check which read:

Payment for marginal deposit and other expense re opening of L/C for account of
Casville Enterprises.

and the memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in
favor of the Edward Ashville J Nell Co.

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August
1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously, had his
own antagonistic interests to promote. Thus it was that Casals did not purposely present the subject
check to the Executive Vice-President of the Bank, who was aware of the negotiations regarding the
Letter of Credit, and who had rejected the previous check, Exhibit "2," including its three documents
because the terms and conditions required by the Bank for the opening of the Letter of Credit had not yet
been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even
advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of goods, the
price of which is to be covered by a letter of credit, to advance the marginal deposit for the same.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine to secure
the subject check and had accepted the deposit with it of two (2) titles of real properties as collateral for
said postdated checks. Thus, NELL was erroneously confident that its interests were sufficiently
protected. Never had it suspected that those postdated checks would be dishonored, nor that the subject
check would be utilized by Casals for a purpose other than for opening the letter of credit.

In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville Enterprises
to perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau, et al., vs. Nano, et
al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951];
Republic of the Philippines vs. Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).

... As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October
1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration,
are hereby SET ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI. is modified in
that petitioner Equitable Banking Corporation is absolved from any and all liabilities to the private
respondent, Edward J. Nell Company, and the Amended Complaint against petitioner bank is hereby
ordered dismissed. No costs.
SO ORDERED.

Yap, C.J., Paras and Sarmiento, J.J., concur.

Padilla, J., took no part.

Footnotes

1 Penned by, Justice Crisolito Pascual and concurred in by Justices Jose C. Campos, Jr.,
Serafin Ashville E Camilon, and Desiderio P. Jurado.

2 With Justice Desiderio P. Jurado, dissenting

3 Section 8. ...

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

EQUITABLE BANKING V. IAC

161 SCRA 518

FACTS:

Nell Company issued a check to help Casals and Casville Enterprises obtain a letter of credit from

Equitable Banking in connection with equipment, a garrett skidder, which Casals and Casville

were buying from Nell. Nell indicated the payee as follows “EQUITABLE BANKING

CORPORATION A/C

CASVILLE ENTERPRISES INC.”

Casals deposited the check with the bank and the bank teller accepted the same and in accordance

with customary bank practice, stamped in the check the words “non-negotiable”. The amount

was withdrawn after the deposit.

This prompted Nell to file a case against the bank, Casals and Casville. While the instant case

was being tried, Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of

defendants the amount of P450,000, as partial satisfaction of its claim against them.

HELD:

Equitable is not liable to Nell. Nell should bear the loss as it was through its own acts, which put it into

the power of Casals and Casville Enterprises to perpetuate the fraud against it.

The check wasn’t initially non-negotiable. Neither was it cross-checked. The rubber-stamping

transversally on the face of the check was only made the bank teller in accordance with customary bank

practice, and not by Nell as the drawer of the check, and simply meant that thereafter the same

check could no longer be negotiated.

The payee was not indicated with reasonable certainty in contravention of Section 8. As worded, it could
be accepted as deposit to the account of the party named therein after the symbols of A/C, or payable to

the bank as trustee, or as an agent, for Casville with the latter being the ultimate beneficiary.

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK
of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI)
No. D891,2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3 dated
February 4, 1981, and a Detached Assignment4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was
originally filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the Central
Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed

a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred,
assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all
its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE
HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS: THREE
MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express authorization

executed by the transferor intended to complete the assignment through the registration
of the transfer in the name of PhilFinance, which authorization is specifically phrased as
follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer
the said bond/certificates on the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with

PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . .,
which CBCI was among those previously acquired by PhilFinance from Filriters as
averred in paragraph 3 of the Petition;
 6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to
repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE
HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27,
1981, when the checks it issued in favor of petitioner were dishonored for insufficient
funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the

Petitioner to enable the latter to have its title completed and registered in the books of the
respondent. And by means of said Detachment, Philfinance transferred and assigned all,
its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did
thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of
the respondent, and requested the latter to effect the transfer of the CBCI on its books
and to issue a new certificate in the name of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to
do so notwithstanding petitioner's valid and just title over the same and despite repeated
demands in writing, the latest of which is hereto attached as Annex "E" and made an
integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in
person or by his attorney duly authorized in writing, and similarly noted
hereon, and upon payment of a nominal transfer fee which may be
required, a new Certificate shall be issued to the transferee of the
registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its
name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank
of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby
calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of
the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the
trust fund doctrine and to the prejudice of policyholders and to all who have present or
future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-
President-Treasury of Filriters, without any board resolution, knowledge or consent of the
board of directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly assigning CBCI
No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe,

Vice-President-Treasury of Filriters (both of whom were holding the same positions in
Philfinance), without any consideration or benefit redounding to Filriters and to the grave
prejudice of Filriters, its policy holders and all who have present or future claims against
its policies, executed similar detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is
without the knowledge and consent of directors of Filriters, and not duly authorized in
writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and
not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a

requirement under the Insurance Code for its existence as an insurance company and
the pursuit of its business operations. The assignment of the CBCI is illegal act in the
sense of malum in se or malum prohibitum, for anyone to make, either as corporate or
personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by

law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the solvency
deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship),
an inevitable result known to the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.
 a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness
is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the
registered owner as the absolute owner and that the value of the registered certificates
shall be payable only to the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as absolute owner of the
CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides
that the registered certificates are payable only to the registered owner (Article II, Section
1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters
is not a regular transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or authorization from the Insurance
Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or
regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI
by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters

Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal
Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise
failed. The findings of the fact of the said court are hereby reproduced:
 The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No.
D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently,
Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters,
to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase
agreement dated February 4, 1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance failed to buy back the note on
maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to
appellant TRB all its right and the title to CBCI No. D891.

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

Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court adjudge which of them
is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB
now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all
parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent
that the instrument may be transferred by negotiation.

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

Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

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

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-
appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and
the two corporations have identical corporate officers, thus demanding the application of the doctrine or
piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters.
Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance
was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within
the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to
pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal
sum of FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being
equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum of
money. It is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable only to
Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression of consent that the instrument
may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission that the
same is a negotiable instrument, and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom
to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or
entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is

determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding circumstance in
order to more perfectly understand the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI
from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as
to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to
Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", under which the note
was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof
provides that any assignment of registered certificates shall not be valid unless made . . .
by the registered owner thereof in person or by his representative duly authorized in
writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated at the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People vs.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign
or transfer to Traders Royal Bank and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate fiction to
defraud TRB into purchasing the subject CBCI, which purchase now is refused registration by the Central
Bank.

Says the petitioner;

 Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be applied
in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the registered owner of the CBCI as to bar the
latter from claiming, as it has, that it never received any payment for that CBCI sold and
that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI
was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its
(Philfinance's) financing operations, if it were to be consistent therewith, on the issued
raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals
should have ruled that such veil of corporate entity was, in fact, pierced, and the payment
by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable
remedy, and may be awarded only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or
business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime
was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests
of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence
on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the
identity of one shall be maintained as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be disregarded, 19 in
the absence of such grounds, the general rule must upheld. The fact that Filfinance owns majority shares
in Filriters is not by itself a ground to disregard the independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired
the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This should have put
the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or
its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
 TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's
name at any office of the Bank or any agency duly authorized by the Bank, and such
registration is noted hereon. After such registration no transfer thereof shall be valid
unless made at said office (where the Certificates has been registered) by the registered
owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted
hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or
any agency duly authorized by the Bank may deem and treat the bearer of this
Certificate, or if this Certificate is registered as herein authorized, the person in whose
name the same is registered as the absolute owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, and for all other purpose whether or not
this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner
was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify
of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides
that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates

shall not be valid unless made at the office where the same have been issued and
registered or at the Securities Servicing Department, Central Bank of the Philippines, and
by the registered owner thereof, in person or by his representative, duly authorized in
writing. For this purpose, the transferee may be designated as the representative of the
registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the agents
are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as
everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for
all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had
signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not
have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it
is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the
subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can
do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short,

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

A Yes, sir.
 Q Why do you know this?

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

Insurance Commission sometime in early 1981 and this CBCI No. 891
was among the CBCI's that were found to be missing.

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

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

Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal
reserves under Section 213 of the Insurance Code equivalent to 40
percent of the premiums receipt and further, the Insurance Commission
requires this reserve to be invested preferably in government securities
or government binds. This is how this CBCI came to be purchased by the
company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus,
the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the maintenance of the required
reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the
claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is
hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Footnotes

1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices Alfredo L. Benipayo

and Serafain V.C. Guingona, p. 18, Rollo.

2 P. 143, Record.

3 Ibid. at p. 146.

4 Ibid., at p. 148.

5 P. 1, Record.

6 P. 75, Record.
7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.

15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971 ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245 SCRA 134.

19 Guatson International Travel and Tours, Inc. vs. National Labor Relations
Commission, 230 SCRA 815.

20 2 SCRA 632.

21 Official Gazette 9370.

22 See Article 1883, Civil Code.

23 See Article 19, Civil Code.

24 Sec. 213 Every insurance company, other than life, shall maintain a reserve fro
unearned premiums on its policies in force, which shall be charged as a liability in any
determination of its financial condition. Such reserve shall be equal to forty per centum of
the gross permiums, less returns and cancellations, received on policies or risks having
more than a year to run; Provided That for marine cargo risks, the reserve shall be equal
to forty per centum of the premiums written in the policies upon yearly risks, and the full
amount of premiums written during the last two months of the calendar year upon all
other marine risks not terminated. Presidential Decree No. 612 (The Insurance Code of
the Philippines).

TRADERS ROYAL BANK V. CA

269 SCRA 15
FACTS:

Filriters through a Detached Agreement transferred ownership to Philfinance a Central Bank Certificate

of Indebtedness. It was only through one of its officers by which the CBCI was conveyed without

authorization from the company. Petitioner and Philfinance later entered into a Repurchase

agreement, on which petitioner bought the CBCI from Philfinance. The latter agreed to

repurchase the CBCI but failed to do so. When the petitioner tried to have it registered in its name in the

CB, the latter didn't want to recognize the transfer.

HELD:

The CBCI is not a negotiable instrument. The instrument provides for a promise to pay the

registered owner Filriters. Very clearly, the instrument was only payable to Filriters. It lacked the

words of negotiability which should have served as an expression of the consent that the

instrument may be transferred by negotiation.

The language of negotiability which characterize a negotiable paper as a credit instrument is its

freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone

relating to the protection of holders in due course, and the freedom of negotiability is the foundation for

the protection, which the law throws around a holder in due course. This freedom in negotiability

is totally absent in a certificate of indebtedness as it merely acknowledges to pay a sum of

money to a specified person or entity for a period of time.

The transfer of the instrument from Philfinance to TRB was merely an assignment, and is not

governed by the negotiable instruments law. The pertinent question then is—was the transfer of

the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with

existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?

Clearly shown in the record is the fact that Philfinance’s title over CBCI is defective since it

acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the

transfer was for ‘value received‘, there was really no consideration involved. What happened was

Philfinance merely borrowed CBCI from Filriters, a sister corporation. Thus, for lack of any

consideration, the assignment made is a complete nullity. Furthermore, the transfer wasn't in conformity

with the regulations set by the CB. Giving more credence to rule that there was no valid transfer or

assignment to petitioner.

G.R. No. 154127 December 8, 2003

ROMEO C. GARCIA, petitioner,

vs.
DIONISIO V. LLAMAS, respondent.

DECISION

PANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by
the complete incompatibility between the old and the new agreements. Petitioner herein fails to show
either requirement convincingly; hence, the summary judgment holding him liable as a joint and solidary
debtor stands.
 The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the November
26, 2001 Decision2 and the June 26, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
60521. The appellate court disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains
to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the
award for attorney’s fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x
Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is
REMANDED to the court of origin for purposes of receiving ex parte [Respondent] Dionisio Llamas’
evidence against x x x Eduardo de Jesus."4

The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

"This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio
Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-
32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
₱400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they
bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest
per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent] was
compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be recovered
from [petitioner and de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to the complaint
were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].

"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under
the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been
paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of
the check and [respondent’s] acceptance thereof novated or superseded the note.

"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcia’s answer was not even accompanied by a certificate of non-forum shopping. Annexed to the reply
were the face of the check and the reverse side thereof.

"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed
₱400,000.00 loan, he received only ₱360,000.00, the P40,000.00 having been advance interest thereon
for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of ₱120,000.00 by
way of interests; that this was made when [respondent’s] daughter, one Nits Llamas-Quijencio, received
from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of ₱40,000.00, representing the peso equivalent of his accumulated leave credits,
another ₱40,000.00 as advance interest, and still another ₱40,000.00 as interest for the months of March
and April 1997; that he had difficulty in paying the loan and had asked [respondent] for an extension of
time; that [respondent] acted in bad faith in instituting the case, [respondent] having agreed to accept the
benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed the instant
case while his retirement was being processed; and that, in defense of his rights, he agreed to pay his
counsel ₱20,000.00 [as] attorney’s fees, plus ₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-
trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he
would no [longer] present evidence. Given this development, the trial court gave [respondent] permission
to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court
directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia to file his
comment or opposition thereto.

"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present
his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case
for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioner’s and de Jesus’] solidary liability under the promissory note cannot be any clearer, and that
the check issued by de Jesus did not discharge the loan since the check bounced." 5

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as
follows:

"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of

[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally,
the [respondent] the following sums, to wit:

‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per month from
January 23, 1997 until the same shall have been fully paid, less the amount of ₱120,000.00
representing interests already paid by x x x de Jesus;

‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each day of [c]ourt
appearance, and;

‘3) Cost of this suit.’"6

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he
was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the
RTC judgment, even though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the former’s evidence.

As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise
even a single genuine issue regarding any material fact.

The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondent’s acceptance of the check did not serve to make De Jesus the sole debtor because,
first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- which
had been intended to extinguish the obligation -- bounced upon its presentment.

Hence, this Petition.7

Issues

Petitioner submits the following issues for our consideration:

 "I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the
instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of ₱400,000.00
in favor of Respondent Llamas, although the check subsequently bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x

x de Jesus or [the superseding of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount of ₱120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial
difficulties, he be given an extension of time to pay his loan obligation and that his retirement
benefits from the Philippine National Police will answer for said obligation.

"II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and credence considering that subsequent
events showed that the principal obligor was in truth and in fact x x x de Jesus, as evidenced by the
foregoing circumstances showing his assumption of sole liability over the loan obligation.

"III

Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent
Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself
admitted in its Decision, which call for the presentation of evidence in a full-blown trial."8

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the
defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary judgment -- was proper.

The Court’s Ruling

The Petition has no merit.

First Issue:

Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that
novation took place, either through the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, "paid" the loan with the check.

The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, 9 the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.10 Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.11 Both modes of substitution by the
debtor require the consent of the creditor.12

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. 13 Whether extinctive or
modificatory, novation is made either by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. 14 For novation to take place, the
following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.15

Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the
old one on every point.16 The test of incompatibility is whether the two obligations can stand together,
each one with its own independent existence.17

Applying the foregoing to the instant case, we hold that no novation took place.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check, or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the CA correctly observed, the check had
been issued precisely to answer for the obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answers for it. Verily, the two can stand together.

Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation18 -- change
the terms and conditions of the obligation. Such payment was already provided for in the promissory note
and, like the check, was totally in accord with the terms thereof.

Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of debtors.
In order to change the person of the debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in the relation. 19 Well-settled is the
rule that novation is never presumed.20 Consequently, that which arises from a purported change in the
person of the debtor must be clear and express.21 It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.

In the present case, petitioner has not shown that he was expressly released from the obligation, that a
third person was substituted in his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:

"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the nature
of the obligation being solidary due to the fact that the promissory note expressly declared that the liability
of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them simultaneously, and payment made
by one of them extinguishes the obligation. It therefore follows that in case the creditor fails to collect from
one of the solidary debtors, he may still proceed against the other or others. x x x "22

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor. 23 Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express.24 It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact fulfillment from either of the
solidary debtors.25

More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and
solidary obligor of the ₱400,000 loan; thus, he can be released from it only upon its extinguishment.
Respondent’s acceptance of his check did not change the person of the debtor, because a joint and
solidary obligor is required to pay the entirety of the obligation.

It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors.26 It is up to the former to determine against whom to
enforce collection.27 Having made himself jointly and severally liable with De Jesus, petitioner is therefore
liable28 for the entire obligation.29

Second Issue:

Accommodation Party

Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.

This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

"PROMISSORY NOTE

"₱400,000.00

"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.

"It is understood that our liability under this loan is jointly and severally [sic].

"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30
By its terms, the note was made payable to a specific person rather than to bearer or to order 31 -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot
avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation party. Besides, a
non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may
have been created by the assent of the parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for
value even if, at the time of its taking, the latter knew the former to be only an accommodation party. The
relation between an accommodation party and the party accommodated is, in effect, one of principal and
surety -- the accommodation party being the surety.33 It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promissor and debtor from the beginning. The
liability is immediate and direct.34

Third Issue:

Propriety of Summary Judgment

or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after
a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that
(1) except as to the amount of damages, there is no genuine issue regarding any material fact; and (2)
the moving party is entitled to a judgment as a matter of law.

A summary judgment is a procedural device designed for the prompt disposition of actions in which the
pleadings raise only a legal, not a genuine, issue regarding any material fact. 35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or specific
denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be applied for by either a claimant or a
defending party.37

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse party’s pleading. The essential question is whether there are issues generated by the
pleadings.38 A judgment on the pleadings may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. 39

Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was correctly treated
by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either payment or novation. However,
these are not factual issues requiring trial. We quote with approval the CA’s observations:

"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid issues.
Firstly, Garcia’s claim that he was merely an accommodation party is belied by the promissory note that
he signed. Nothing in the note indicates that he was only an accommodation party as he claimed to be.
Quite the contrary, the promissory note bears the statement: ‘It is understood that our liability under this
loan is jointly and severally [sic].’ Secondly, his claim that his co-defendant de Jesus already paid the loan
by means of a check collapses in view of the dishonor thereof as shown at the dorsal side of said
check."41
From the records, it also appears that petitioner himself moved to submit the case for judgment on the
basis of the pleadings and documents.1âwphi1 In a written Manifestation,42 he stated that "judgment on
the pleadings may now be rendered without further evidence, considering the allegations and admissions
of the parties."43

In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court
had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Footnotes

1 Rollo, pp. 11-39.

2 Id.,
pp. 41-46. Tenth Division. Penned by Justice Renato C. Dacudao, with the concurrence of
Justices Ruben T. Reyes (Division chairman) and Mariano C. del Castillo (member).

3 Rollo, pp. 48-49.

4 CA Decision, p. 6; rollo, p. 46.

5 Id., pp. 2-3 & 42-43.

6 RTC Decision, p. 4; rollo, p. 68. Penned by Judge Eudarlio B. Valencia.

7 Only Petitioner Garcia appealed the CA Decision. His Petition was deemed submitted for
decision on January 30, 2003, upon the Court’s receipt of respondent’s Memorandum signed by
Atty. Felipe N. Egargo Jr. Petitioner’s Memorandum, which was signed by Atty. Carlos G. Nery
Jr., was received by the Court on January 16, 2003.

8 Petitioner’s Memorandum, pp. 10-11; rollo, pp. 97-98. Original in upper case.

9 Article 1249 of the Civil Code provides in part:

"The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.

"x x x xxx x x x"

10 Idolor
v. CA, 351 SCRA 399, 407, February 7, 2001; Agro Conglomerates, Inc. v. CA, 348
SCRA 450, 458, December 12, 2000; De Cortes v. Venturanza, 79 SCRA 709, 722-723, October
28, 1977; PNB v. Mallari and The First Nat’l. Surety & Assurance Co., Inc., 104 Phil. 437, 441,
August 29, 1958.
11 Tolentino,Civil Code of the Philippines, Vol. IV (1991 ed.), p. 390; De Cortes v. Venturanza,
supra, p. 723.

12 Garcia v. Khu Yek Chiong, 65 Phil. 466, 468, March 31, 1938; De Cortes v. Venturanza, supra,
p. 723.

13 Babst v. CA, 350 SCRA 341, January 26, 2001.

14 Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533, August 17, 1999.

15 Agro
Conglomerates, Inc. v. CA, supra, pp. 458-459; Security Bank and Trust Company, Inc. v.
Cuenca, 341 SCRA 781, 796, October 3, 2000; Reyes v. CA, 332 Phil. 40, 50, November 4,
1996.

16 Spouses Bautista v. Pilar Development Corporation, supra. See also Article 1292 of the Civil
Code.

17 Molino v. Security Diners International Corporation, 415 Phil. 587, August 16, 2001.

18 Petitioner’s Memorandum, p. 17; rollo, p. 104.

19 Reyes
v. CA, supra; citing Ajax Marketing and Development Corporation v. CA, 248 SCRA 222,
September 14, 1995.

20 Ibid.;
Agro Conglomerates, Inc. v. CA, supra; Security Bank and Trust Company, Inc. v.
Cuenca, supra.

21 Ibid.

22 CA Decision, p. 5; rollo, p. 45.

23 Article 1293 of the Civil Code.

24 Babst v. CA, supra; citing Testate Estate of Mota v. Serra, 47 Phil. 464, February 14, 1925.

25 Article 1216 of the Civil Code provides:

"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or
all of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as the
debt has not been fully collected."

26 PH Credit Corporation v. CA, 370 SCRA 155, November 22, 2001; Industrial Management
International Development Corp. v. National Labor Relations Commission, 387 Phil. 659, May 11,
2000; Inciong Jr. v. CA, 327 Phil. 364, June 26, 1996. See also Article 1216 of the Civil Code.

27 Inciong v. CA, 327 Phil. 364, June 26, 1996.

28 Ibid.;
PH Credit Corporation v. CA, supra; Industrial Management International Development
Corp. v. National Labor Relations Commission, supra.

29 See Articles 1217 and 1218 of the Civil Code.

30 Records, p. 7.

31 Section
1 of the Negotiable Instruments Law provides the requisites for the negotiability of an
instrument, as follows:

"Section 1. Form of negotiable instruments. An instrument to be negotiable must conform to the

following requirements:

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

Must contain an unconditional promise or order to pay a sum certain in money;

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

Must be payable to order or to bearer; and

Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty."

32 Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 1
(1992 ed.), p. 100.

33 SpousesGardose v. Tarroza, 352 Phil. 797, May 19, 1998, citing Caneda Jr. v. CA, 181 SCRA
762, February 5, 1990; Prudencio v. CA, 227 Phil. 7, July 14, 1986.

34 Palmares v. CA, 351 Phil. 664, March 31, 1998.

35 Puyat v. Zabarte, 352 SCRA 738, February 26, 2001.

36 Narra Integrated Corporation v. CA, 344 SCRA 781, November 15, 2000.

37 See §§1 and 2 of Rule 35 of the Rules of Court.

38 Diman v. Alumbres, 359 Phil. 796, November 27, 1998.

39 Ibid.

40 Dated February 2, 1998; records, pp. 21-22.

41 CA Decision, p. 5; rollo, p. 45.

42 Dated May 12, 1998; records, pp. 44-45.

43 Petitioner’s Manifestation dated May 12, 1998, p. 1; id., p. 44.

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA CASTILLO, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of
all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden 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 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 by Gomez as second indorser.1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and 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 office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing.2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the
warrants.3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13,
1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The
total withdrawal was 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.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by
the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court
modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and
Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

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.1âwphi1 That 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.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Footnotes

1 Rollo, pp. 12-13.

2 Ibid., p. 52.

3 Id., p. 14.

4 Id.

5 Through Judge Marciano T. Virola.

6 Penned by Ejercito, J., with Pe and Victor, JJ., concurring.

7 Rollo, p. 84.

8 TSN, July 29, 1983, p. 20.

9 Rollo, p. 61.

10 143 SCRA 20.

11 81 Phil. 359.

12 66 SCRA 29.F

METROPOLITAN BANK V. CA

194 SCRA 169

FACTS:

Gomez opened an account with Golden Savings bank and deposited 38 treasury warrants. All

these warrants were indorsed by the cashier of Golden Savings, and deposited it to the savings

account in a Metrobank branch. They were sent later on for clearing by the branch office to the

principal office of Metrobank, which forwarded them to the Bureau of Treasury for special

clearing. On persistent inquiries on whether the warrants have been cleared, the branch manager

allowed withdrawal of the warrants, only to find out later on that the treasury warrants have been

dishonored.

HELD:

The treasury warrants were not negotiable instruments. Clearly, it is indicated that it was non-

negotiable and of equal significance is the indication that they are payable from a particular

fund, Fund 501. This indication as the source of payment to be made on the treasury warrant

makes the promise to pay conditional and the warrants themselves non-negotiable.

Metrobank then cannot contend that by indorsing the warrants in general, GS assumed that they were genuine
and in all respects what they purport it to be, in accordance to Section 66 of the NIL. The simple reason is that the
law isn’t applicable to the non-negotiable treasury warrants. The indorsement was made for the purpose
of merely depositing them with Metrobank for clearing. It was in fact Metrobank which stamped on the
back of the warrants: “All prior indorsements and/or lack of endorsements guaranteed…”

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the
Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller
had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a
private checks were not generally accepted in payment of money orders, the teller advised him to see the
Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day notice was likewise served upon all
banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of America,
and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face
value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of
America that money order No. 124688 attached to his letter had been found to have been irregularly
issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing
account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with
the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his
office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request
was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice
for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable
doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying
for judgment as follows:
 WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to
15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand

the notice given to the Bank of America on September 27, 1961, deducting from said
Bank's clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted
the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and
will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26,
1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post
Office, and that money orders, once issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the remitters payees or endorses, on the
other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For
this reason, ours are generally construed in accordance with the construction given in the United States
to their own postal statutes, in the absence of any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the
reason behind this rule being that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a governmental power for
the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For instance, such
laws and regulations usually provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of
the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is deemed necessary." The conditions
thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving advice that the amount represented by the money order
in question had been deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand,
and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof
on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not
issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In
reality, however, said legal provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon the privilege granted to the
Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office.
Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth
assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with
costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.

Castro and Makasiar, JJ., took no part.

ase Digests in Negotiable Instruments LawNEGOTIABILITY(1)Philippine Education Co. vs. SorianoGR L-22405,
30 June 197139 SCRA 587FACTS:Enrique Montinola sought to purchase from the Manila Post Office 10 money
orders (P200 each), offering to pay for them with a private check. Montinola was able to leave the building with his
check and the 10 money orders without the knowledge of the teller. Upon discovery, message was sent to all
postmasters and banks involving the unpaid money orders. One of the money orders was received by the Philippine
Education Co. as part of its sales receipt. It was deposited by the company with the Bank of America, which cleared
it with the Bureau of Post. The Postmaster, through the Chief of the MoneyOrder Division of the Manila Post Office
informed the bank of the irregular issuance of the money order. The bank debited the account of the company. The
company moved for reconsideration.ISSUE:Whether postal money orders are negotiable instruments?HELD:Philippine
postal statutes are patterned from those of the United States, and the weight of authority in said country is that Postal
money orders are not negotiable instruments inasmuch as the establishment of a postal money order is an exercise of
governmental power for the public’s benefit. Furthermore, some of the restrictions imposed upon money order by
postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, postal money
orders may be withheld under a variety of circumstances, and which are restricted to not more than one indorsement.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat

Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat
Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized Affidavit of Loss, as required by
defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February
9, 1987, pp. 48-50).
 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the
required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss,
280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-
561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed of Assignment of Time Deposit
(Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the loan upon
its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.)
Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.

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

former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of
the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell
due and on August 5, 1983, the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence
this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit
are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a
holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of
the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of
the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum

of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and surrender of this
certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued,
it is important to note that after the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has deposited" a certain amount
follows. The document further provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein, the depositor. In effect, the
appellee bank acknowledges its depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:

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

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

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

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security
Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the
CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it was Angel
dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.

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.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

Footnotes

1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan
and Luis L. Victor.

2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.

3 Rollo, 24-26.

4 Ibid., 12.

5 Exhibit A, Documentary Evidence for the Plaintiff, 8.

6 Rollo, 28.

7 TSN, February 9, 1987, 46-47.

8 Ibid., id., 152-153.

9 11 Am. Jur. 2d, Bills and Notes, 79.

10 Ibid., 86.

11 Ibid., 87-88.

12 Art. 1377, Civil Code.

13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211.

14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989).

15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680
(1990).

16 Section 2(a), Rule 131, Rules of Court.

17 Original Record, 152.

18 Ibid., 154.

19 Section 3(e), Rule 131, Rules of Court.

20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of
Appeals, et al., G.R. No. 60907.

21 Sec. 30, Act No. 2031.

22 Sec. 191, id.

23 Sec. 27, id.; see also Art. 2118, Civil Code.

24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin,

1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031.

25 Rollo, 25.

26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916);
Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631 (1918); Te
Pate vs. Ingersoll, 43 Phil. 394 (1922).

27 Rollo, 25.

28 Ibid., 15.
 29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984;
Original Record, 209.

30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).

31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA
597 (1981); Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo Industries
Corporation, etc. vs. Commissioner of Internal Revenue, et al., 112 SCRA 136 (1982);
Dulos Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA 425
(1988).

32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).

33 Rollo, 58.

34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982).

35 Luna vs. Abaya, 86 Phil. 472 (1950).

36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.

37 Rollo, 59.

CALTEX V. CA- Negotiable Instruments

12 SCRA 448

FACTS:

Security bank issued Certificates of Time Deposits to Angel dela Cruz. The same were given by Dela

Cruz to petitioner in connection to his purchase of fuel products of the latter. On a later date, Dela Cruz

approached the bank manager, communicated the loss of the certificates and requested for a

reissuance. Upon compliance with some formal requirements, he was issued replacements.

Thereafter, he secured a loan from the bank where he assigned the certificates as security. Here
comes the petitioner, averred that the certificates were not actually lost but were given as security

for payment for fuel purchases. The bank demanded some proof of the agreement but the petitioner

failed to comply. The loan matured and the time deposits were terminated and then applied to the

payment of the loan. Petitioner demands the payment of the certificates but to no avail.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of

PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 &
00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days.
after date, upon presentation and surrender of this certificate, with interest
at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES

HELD:

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.

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." 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

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

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.

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:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of 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 attorney's
fees.

The counterclaim of defendant is dismissed.

With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.

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).

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

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

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

Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and
free from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. 13 This being so, petitioner cannot set up against respondent the
defense of nullity of the contract of sale between her and VMS.

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 matter cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract"
case.

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.

Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

Footnotes

1 Rollo, p. 21.

2 Rollo, pp. 23-24.

 3 Rollo, pp. 57-59.

4 Art. 1481, New Civil Code.

5 Rollo, p. 10.

6 149 SCRA 459 (1987).

7 Ibid.

8 Ex. "7 "; Folder of Exhibits.

9 Section 1, Negotiable Instruments Law, emphasis supplied.

10 Section 31, NIL.

11 Section 32, NIL.

12 Section 52, NIL.

13 Section 57, Negotiable Instruments Law; Consolidated Plywood Industries, Inc. v. IFC
Leasing and Acceptance Corporation, (supra).

14 Rollo, pp. 22-23.

SALAS V. CA

181 SCRA 296

FACTS:

Petitioner bought a car from Viologo Motor Sales Company, which was secured by a promissory

note, which was later on indorsed to Filinvest Finance, which financed the transaction. Petitioner
later on defaulted in her installment payments, allegedly due to the fraud imputed by VMS in

selling her a different vehicle from what was agreed upon. This default in payment prompted Filinvest

Finance to initiate a case against petitioner. The trial court decided in favor of Filinvest, to

which the appellate court upheld by increasing the amount to be paid.

It is the contention of petitioner that since the agreement between her and the motor company was

inexistent, none had been assigned in favor of private respondent.

HELD:

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.

The instrument to be negotiable must contain the so-called words of negotiability. There are only 2 ways
for an instrument to be 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 thus non-negotiable. Any subsequent purchaser thereof will
not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person designated in the instrument and
will thus be open to the defenses available against the latter.
In the case at bar, the promissory notes is earmarked with negotiability and Filinvest is a holder in due
course.

G.R. No. 184458, January 14, 2015 - RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR
CHUA AND S. VIOLETA CHUA, Respondents.; G.R. NO. 184472 - SPS. SALVADOR CHUA
AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

FIRST DIVISION

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA

CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO

RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of
Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which
affirmed with modification the separate rulings of the Manila City trial courts, the Regional
Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court
(MeTC), Branch 30, in Civil Case No. 163661,3 a case for collection of a sum of money due a
promissory note. While all three (3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R.
No. 184458, the appellate court modified the trial courts’ consistent awards: (1) the
stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%) per
annum computed from the date of judicial or extrajudicial demand, and (2) reinstatement of
the award of attorney’s fees also in a reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory
note and questions the entire ruling of the lower courts. On the other hand, petitioners in
G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the
appellate court’s reduction of the stipulated interest rate of sixty percent (60%) to twelve
percent (12%) per annum.
We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and
Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses

Chua:chanroblesvirtuallawlibrary

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA
and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency
(P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00)
One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum
equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire
obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum
equivalent to twenty percent (20%) of the total amount due and payable as and for
attorney’s fees which in no case shall be less than P5,000.00 and to pay in addition the cost
of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court
of the City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory
note, Rivera, as partial payment for the loan, issued and delivered to the Spouses Chua, as
payee, a check numbered 012467, dated 30 December 1998, drawn against Rivera’s
current account with the Philippine Commercial International Bank (PCIB) in the amount of
P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by
Rivera, likewise drawn against Rivera’s PCIB current account, numbered 013224, duly
signed and dated, but blank as to payee and amount. Ostensibly, as per understanding by
the parties, PCIB Check No. 013224 was issued in the amount of P133,454.00 with “cash”
as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the
principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason “account
closed.”

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering
the principal of P120,000.00 plus five percent (5%) interest per month from 1 January 1996
to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no
avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to
file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and
docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed
the subject Promissory Note; (2) in all instances when he obtained a loan from the Spouses
Chua, the loans were always covered by a security; (3) at the time of the filing of the
complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real
estate mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he
delivered to the Spouses Chua on 21 December 1998, should have been issued in the
amount of only P1,300.00, representing the amount he received from the Spouses Chua’s
saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check
for payment in the amount of P133,454.00; and (6) there was no demand for payment of
the amount of P120,000.00 prior to the encashment of PCIB Check No.
0132224. 5chanRoblesvirtualLawlibrary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective

witnesses:chanroblesvirtuallawlibrary

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents Examiner
Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI
document examiner (1989); NBI Senior Document Examiner (1994 to the date he testified);
registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit
Detection conducted by the US Embassy in Manila; attended a seminar on Effective
Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined
more than a hundred thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera]
appearing in the Promissory Note and compared the signature thereon with the specimen
signatures of [Rivera] appearing on several documents. After a thorough study,
examination, and comparison of the signature on the questioned document (Promissory
Note) and the specimen signatures on the documents submitted to him, he concluded that
the questioned signature appearing in the Promissory Note and the specimen signatures of
[Rivera] appearing on the other documents submitted were written by one and the same
person. In connection with his findings, Magbojos prepared Questioned Documents Report
No. 712-1000 dated 8 January 2001, with the following conclusion: “The questioned and the
standard specimen signatures RODGRIGO RIVERA were written by one and the same
person.”

[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” in May 1998,
he obtained a loan from [respondent] Salvador and executed a real estate mortgage over a
parcel of land in favor of [respondent Salvador] as collateral; aside from this loan, in
October, 1998 he borrowed P25,000.00 from Salvador and issued PCIB Check No. 126407
dated 30 December 1998; he expressly denied execution of the Promissory Note dated 24
February 1995 and alleged that the signature appearing thereon was not his signature;
[respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent
Salvador] with the space for amount left blank as he and [respondent] Salvador had agreed
that the latter was to fill it in with the amount of ?1,300.00 which amount he owed [the
spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and told
him that he had written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of
NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the
signature appearing on the Promissory Note was not his signature and that he did not
execute the Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated
interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of
12% percent per annum from 11 June 1999, as actual and compensatory damages; 20% of
the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC,
but deleted the award of attorney’s fees to the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest
of the Decision dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of
Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under
the Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per
annum, and reinstated the award of attorney’s fees in favor of the Spouses
Chua:chanroblesvirtuallawlibrary

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to

the MODIFICATION that the interest rate of 60% per annum is hereby reduced to 12%
per annum and the award of attorney’s fees is reinstated at the reduced amount of
P50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458
and the Spouses Chua in G.R. No. 184472, respectively raising the following
issues:chanroblesvirtuallawlibrary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE

RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE
EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE
NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW
AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE
DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S
FEES.10chanRoblesvirtualLawlibrary

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL

ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE
FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER
RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS
EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR
VOID.11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the
petition, via a Minute Resolution, for failure to sufficiently show any reversible error in the
ruling of the appellate court specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.12chanRoblesvirtualLawlibrary

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning
the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that he executed the Promissory Note; he claims that given his
friendship with the Spouses Chua who were money lenders, he has been able to maintain a
loan account with them. However, each of these loan transactions was respectively “secured
by checks or sufficient collateral.”

Rivera points out that the Spouses Chua “never demanded payment for the loan nor interest
thereof (sic) from [Rivera] for almost four (4) years from the time of the alleged default in
payment [i.e., after December 31, 1995].”13chanRoblesvirtualLawlibrary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart
from the lower courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was
forged, only that the signature is not his and varies from his usual signature. He likewise
makes a confusing defense of having previously obtained loans from the Spouses Chua who
were money lenders and who had allowed him a period of “almost four (4) years” before
demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the
National Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory
note.

On that score, the appellate court aptly disabled Rivera’s

contention:chanroblesvirtuallawlibrary

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory
note is a forgery. The fact of forgery cannot be presumed but must be proved by clear,
positive and convincing evidence. Mere variance of signatures cannot be considered as
conclusive proof that the same was forged. Save for the denial of Rivera that the signature
on the note was not his, there is nothing in the records to support his claim of forgery. And
while it is true that resort to experts is not mandatory or indispensable to the examination
of alleged forged documents, the opinions of handwriting experts are nevertheless helpful in
the court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory
note and the testimony of the NBI witness. In fact, even a perfunctory comparison of the
signatures offered in evidence would lead to the conclusion that the signatures were made
by one and the same person.

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

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have
established a prima facie case in their favor, hence, the burden of evidence has shifted to
[Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14

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

Indeed, Rivera had the burden of proving the material allegations which he sets up in his
Answer to the plaintiff’s claim or cause of action, upon which issue is joined, whether they
relate to the whole case or only to certain issues in the case.17chanRoblesvirtualLawlibrary

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

Hence, the MeTC ruled that:chanroblesvirtuallawlibrary

[Rivera] executed the Promissory Note after consideration of the following: categorical
statement of [respondent] Salvador that [Rivera] signed the Promissory Note before him, in
his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the
questioned signature (appearing on the Promissory Note) and standard specimen signatures
“Rodrigo Rivera” “were written by one and the same person”; actual view at the hearing of
the enlarged photographs of the questioned signature and the standard specimen
signatures.19

Specifically, Rivera insists that: “[i]f that promissory note indeed exists, it is beyond logic
for a money lender to extend another loan on May 4, 1998 secured by a real estate
mortgage, when he was already in default and has not been paying any interest for a loan
incurred in February 1995.”20chanRoblesvirtualLawlibrary

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as
“kumpadres,” Rivera was allowed another loan, albeit this time secured by a real estate
mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing
inconsistent with the Spouses Chua’s two (2) and successive loan accommodations to
Rivera: one, secured by a real estate mortgage and the other, secured by only a Promissory
Note.

Also completely plausible is that given the relationship between the parties, Rivera was
allowed a substantial amount of time before the Spouses Chua demanded payment of the
obligation due under the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a
discordant defense to assail the authenticity and validity of the Promissory Note. Although
the burden of proof rested on the Spouses Chua having instituted the civil case and after
they established a prima facie case against Rivera, the burden of evidence shifted to the
latter to establish his defense.21 Consequently, Rivera failed to discharge the burden of
evidence, refute the existence of the Promissory Note duly signed by him and subsequently,
that he did not fail to pay his obligation thereunder. On the whole, there was no question
left on where the respective evidence of the parties preponderated—in favor of plaintiffs, the
Spouses Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still
necessary in order to charge him liable thereunder. Rivera argues that it was grave error on
the part of the appellate court to apply Section 70 of the Negotiable Instruments Law
(NIL).22chanRoblesvirtualLawlibrary

We agree that the subject promissory note is not a negotiable instrument and the provisions
of the NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the
following elements to be a negotiable instrument:chanroblesvirtuallawlibrary
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note
is:chanroblesvirtuallawlibrary

SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time,
a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own
order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the
Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as
payees.

However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore
outside the coverage of Section 70 of the NIL which provides that presentment for payment
is not necessary to charge the person liable on the instrument, Rivera is still liable under the
terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and
becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already
incurred in delay when he failed to pay the amount of P120,000.00 due to the Spouses
Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides:chanroblesvirtuallawlibrary

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default:
(1) when there is an express stipulation to that effect; (2) where the law so provides; (3)
when the period is the controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two paragraphs, it is not
sufficient that the law or obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of

interest:chanroblesvirtuallawlibrary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00)
One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum
equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire
obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of
default” until the entire obligation is fully paid for. The parties evidently agreed that the
maturity of the obligation at a date certain, 31 December 1995, will give rise to the
obligation to pay interest. The Promissory Note expressly provided that after 31 December
1995, default commences and the stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31
December 1995, the due date of the obligation. On that date, Rivera became liable for the
stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum,
until 31 December 1995, demand was not necessary before Rivera could be held liable for
the principal amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera
became liable to pay the Spouses Chua damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in
the performance of their obligations is laid down on Article 1170 24 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an

indemnity for damages when the obligor incurs in delay:chanroblesvirtuallawlibrary

Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum
of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31
December 1995; and (3) the Promissory Note provides for an indemnity for damages upon
default of Rivera which is the payment of a 5% monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause
although Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal
amount of P120,000.00 upon default.

Article 1226 of the Civil Code provides:chanroblesvirtuallawlibrary

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to
pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.

The penal clause is generally undertaken to insure performance and works as either, or
both, punishment and reparation. It is an exception to the general rules on recovery of
losses and damages. As an exception to the general rule, a penal clause must be specifically
set forth in the obligation.25chanRoblesvirtualLawlibrary

In high relief, the stipulation in the Promissory Note is designated as payment of interest,
not as a penal clause, and is simply an indemnity for damages incurred by the Spouses
Chua because Rivera defaulted in the payment of the amount of P120,000.00. The measure
of damages for the Rivera’s delay is limited to the interest stipulated in the Promissory
Note. In apt instances, in default of stipulation, the interest is that provided by
law.26chanRoblesvirtualLawlibrary

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the
rate of 5% a month or 60% per annum. On this score, the appellate court
ruled:chanroblesvirtuallawlibrary

It bears emphasizing that the undertaking based on the note clearly states the date of
payment to be 31 December 1995. Given this circumstance, demand by the creditor is no
longer necessary in order that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately demand or collect payment of
the value of the note does not exonerate [Rivera] from his liability therefrom. Verily, the
trial court committed no reversible error when it imposed interest from 1 January 1996 on
the ratiocination that [Spouses Chua] were relieved from making demand under Article
1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in
addition to legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable.
Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. Since the interest rate agreed upon is void, the
parties are considered to have no stipulation regarding the interest rate, thus, the rate of
interest should be 12% per annum computed from the date of judicial or extrajudicial
demand.[27chanRoblesvirtualLawlibrary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the
legal interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous and
unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No.
184472 denying the petition of the Spouses Chua for failure to sufficiently show any
reversible error in the ruling of the appellate court, specifically the reduction of the interest
rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the denial of
the petition in G.R. No. 184472 is res judicata in its concept of “bar by prior judgment” on
whether the Court of Appeals correctly reduced the interest rate stipulated in the Promissory
Note.

Res judicata applies in the concept of “bar by prior judgment” if the following requisites
concur: (1) the former judgment or order must be final; (2) the judgment or order must be
on the merits; (3) the decision must have been rendered by a court having jurisdiction over
the subject matter and the parties; and (4) there must be, between the first and the second
action, identity of parties, of subject matter and of causes of
action.28chanRoblesvirtualLawlibrary

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and
subject matter raising specifically errors in the Decision of the Court of Appeals. Where the
Court of Appeals’ disposition on the propriety of the reduction of the interest rate was raised
by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals
is a “bar by prior judgment.”

At the time interest accrued from 1 January 1996, the date of default under the Promissory
Note, the then prevailing rate of legal interest was 12% per annum under Central Bank (CB)
Circular No. 416 in cases involving the loan or forbearance of money. 29 Thus, the legal
interest accruing from the Promissory Note is 12% per annum from the date of default on 1
January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013,
before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799,
Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling
in Nacar v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July
2013. In short, the applicable rate of legal interest from 1 January 1996, the date when
Rivera defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30
June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes
final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to
the date when this Decision becomes final and executory, such is likewise divided into two
periods: (1) 12% per annum from 11 June 1999, the date of judicial demand to 30 June
2013; and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final
and executor.31 We base this imposition of interest on interest due earning legal
interest on Article 2212 of the Civil Code which provides that “interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on
this point.”

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the
Spouses Chua could already be determined with reasonable certainty given the wording of
the Promissory Note.32chanRoblesvirtualLawlibrary

We cite our recent ruling in Nacar v. Gallery Frames:33chanRoblesvirtualLawlibrary

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on “Damages” of the Civil Code govern in determining the measure of
recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:ChanRoblesVirtualawlibrary
 1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.

And, in addition to the above, judgments that have become final and executory prior
to July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the
Promissory Note, we agree with the reduction thereof but not the ratiocination of the
appellate court that the attorney’s fees are in the nature of liquidated damages or penalty.
The interest imposed in the Promissory Note already answers as liquidated damages for
Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced
amount, in recognition that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests.34 Thus, the award of P50,000.00 as attorney’s fees is
proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by
Rivera to the Spouses Chua:chanroblesvirtuallawlibrary

Face value of the Stipulated Interest A & B Interest due earning legal Attorney’s fees Total Amount
Promissory Note interest A & B
February 24, 1995 A. January 1, 1996 to June 30, A. June 11, 1999 (date of Wholesale
to December 31, 2013 judicial demand) to June 30, amount
1995 2013
B. July 1 2013 to date when B. July 1, 2013 to date when
this Decision becomes final this Decision becomes final
 and executory and executory
P120,000.00 A. 12 % per annum on the A. 12% per annum on the P50,000.00 Total amount
principal amount of total amount of column 2 of Columns 1-
P120,000.00 B. 6% per annum on the total 4
B. 6% per annum on the amount of column 235
principal amount of
P120,000.00

The total amount owing to the Spouses Chua set forth in this Decision shall further earn
legal interest at the rate of 6% per annum computed from its finality until full payment
thereof, the interim period being deemed to be a forbearance of credit.chanrobleslaw

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay
respondents Spouse Salvador and Violeta Chua the following:chanroblesvirtuallawlibrary

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00 reckoned from 1 January 1996 until
30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00 form 1 July 2013 to date when this
Decision becomes final and executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand, to 30
June 2013, as interest due earning legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this Decision
becomes final and executor, as interest due earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full payment
thereof.
Costs against petitioner Rodrigo Rivera.

SO ORDERED.cralawlawlibrary

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Perlas-Bernabe, JJ.,

concur.

Endnotes:

1
Rollo in G.R. No. 184458, pp. 52-62; Penned by Associate Justice Ricardo R. Rosario with
Associate Justices Mariano C. Del Castillo (now a member of this Court) and Arcangelita
Romilla-Lontok concurring.

2
Id. at 152-156; Penned by Presiding Judge Eduardo B. Peralta, Jr.

3
Rollo in G.R. No. 184472, pp. 52-56; Penned by Presiding Judge Nina G. Antonio-
Valenzuela.

4
Rollo in G.R. No. 184458, p. 76.

5
Id. at 53-54.
Rollo in G.R. No. 184472, pp. 53-54.
6

7
Id. at 56.

8
Id. at 61.

Rollo in G.R. No. 184458, p. 62.

9

10
Id. at 29.

11
Rollo in G.R. No. 184472, p. 13

12
Id. at p. 103.

13
Rollo in G.R. No. 184458, p. 32.

14
Id. at 58-59.

Siain Enterprises v. Cupertino Realty Corp., G.R. No. 170782, 22 June 2009, 590 SCRA
15

435, 445.

Durban Apartments Corporation v. Pioneer Insurance and Surety Corporation, G.R. No.
16

179419, 12 January 2011, 639 SCRA 441, 449.

17
Francisco, Evidence, (3rd Ed. 1996), p. 385.

18
Lorzano v. Tabayag, Jr., G.R. No. 189647, 6 February 2012, 665 SCRA 38, 47.

19
Rollo in G.R. No. 184458, p. 113.

20
Id. at 33.

21
De Leon v. Bank of the Philippine Islands, G.R. No. 184565, 20 November 2013.

22
Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not
necessary in order to charge the person primarily liable on the instrument; but if the
instrument is, by its terms, payable at a special place, and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a tender of payment upon
his part. But except as herein otherwise provided, presentment for payment is necessary in
order to charge the drawer and indorsers.

23
Rollo in G.R. No. 184472, p. 76.

24
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable
for damages.

25
4 Tolentino, Civil Code of the Philippines, p. 260.

26
5 Tolentino, Civil Code of the Philippines, pp. 649-650.

27
Rollo in G.R. No. 184458, pp. 59-61.
 Agustin v. Sps. Delos Santos, 596 Phil. 630, 642-643 (2009).
28

See Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA
29

78.

30
G.R. No. 189871, 13 August 2013.

31
BSP Circular No. 799, Series of 2013 amending BSP Circular No. 905, Series of 1982.

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of contracts as to such rate or interest,
shall be six percent (6%) per annum. visited 11 May 2014.

32
Article 2213 of the Civil Code: Interest cannot be recovered upon unliquidated claims or
damages except when the demand can be established with reasonable certainty.

33
Supra note 30.

34
Article 2208 of the CIVIL CODE: In the absence of stipulation, attorney’s fees, and
expenses of litigation, other than judicial costs, cannot be recovered, except:
xxxx
(2) when the defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;
xxxx
35
Based on Article 2212 of the Civil Code: Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent upon this point.

RIVERA v. SPS. CHUA G.R. No. 184458, EN BANC, May 12, 1989, MELENCIO-HERRERA, J. There are four instances
when demand is not necessary to constitute the debtor in default: (1) when there is an express stipulation to that
effect; (2) where the law so provides; (3) when the period is the controlling motive or the principal inducement for
the creation of the obligation; and (4) where demand would be useless. The date of default under the Promissory
Note is 1 January 1996, the day following 31 December 1995, the due date of the obligation. On that date, Rivera
became liable for the stipulated interest which the Promissory Note says is equivalent to 5% a month. FACTS: The
parties were friends of long standing having known each other since 1973. In February 1995, Rivera obtained a
loan from the Spouses Chua, in the tune of P120,000.00 embodied in a promissory note with stipulations that
failure on the part of Rivera to pay the amount on December 31, 1995, he agrees to pay 5% interest monthly from
the date of default (January 1, 1996). Three years have passed from the maturity date, when Rivera issued two (2)
checks in favor of Chua as payment for the loan, which, upon presentment, were dishonored for the reason
“account closed.” In their collection suit, Spouses Chua alleged that they have repeatedly demanded payment
from Rivera to no avail. In his Answer, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder. From the MeTC to the CA, the monetary claim of Spouses Chua was sustained. ISSUE:
Whether or not a demand from Sps. Chua is needed to make Rivera liable. (NO) RULING: Demand is no longer
necessary because the law is explicit that when the debtor fails to pay upon maturity date, when the obligation is
due and demandable, he therefore incurs delay. Art. 1169 of the NCC states, “Those obliged to deliver or to do
something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment
 of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: 1)
When the obligation or the law expressly so declare xxx.” There are four instances when demand is not necessary
to constitute the debtor in default: (1) when there is an express stipulation to that effect; (2) where the law so
provides; (3) when the period is the controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two paragraphs, it is not sufficient that the law or
obligation fixes a date for performance; it must further state expressly that after the period lapses, default will
commence. The clause in the Promissory Note containing the stipulation of interest which expressly requires
Rivera to pay 5% monthly interest from the date of default until the entire obligation is fully paid. It is evident that
the maturity of the obligation on a date certain, December 31, 1995, will give rise to the obligation to pay interest.
The date of default under the Promissory Note is 1 January 1996, the DEAN’S CIRCLE 2019 – UST FACULTY OF CIVIL
LAW 8 day following 31 December 1995, the due date of the obligation. On that date, Rivera became liable for the
stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995,
demand was not necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter,
on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of stipulated
interest.

G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order
or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision 1 of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC). 2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank
(PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4
under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they had a
discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch.
The association maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the spouses
would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited
by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total
amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all
members of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the
Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses
Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They
sought to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were
considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery.
PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in
the event that judgment is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate
or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account
No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until
fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of
damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a

result of their having incurred great dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the contractor even threatened to file a
case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court
a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of
action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value
of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by
the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees’ and
PEMSLA’s business arrangement – that the value of the rediscounted checks of the plaintiffs-appellees
would be deposited in PEMSLA’s account for payment of the loans it has approved in exchange for
PEMSLA’s checks with the full value of the said loans. This is the only obvious explanation as to why all
the disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to
the defendant-appellant that led to this present controversy. It also appears that the teller who accepted
the said checks was PEMSLA’s officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-dated

checks to its qualified members who had applied for loans. However, because of PEMSLA’s insufficiency
of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor
of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the
officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were
disqualified for one reason or another. They were able to achieve this conspiracy by using other members
who had loaned lesser amounts of money or had not applied at all. x x x.8 (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious payees" because they were not the
intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces
were unquestionably payable to order; and that PNB committed a breach of contract when it paid the
value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause
of action is not only against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of
which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for
the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999
until fully paid;

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

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in
this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks
to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to
PEMSLA without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

 Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who
bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply
proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the
bank.

Our Ruling

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

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 transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might
have well induced a prudent banker to investigate and other permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-
405, applicable when the transferee "acts dishonestly – where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x
Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-
405 but imposes on all parties an obligation to act with "honesty in fact." x x 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 bank’s thesis shows
that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the
part of the payees, however, was not tantamount to a lack of intention on the part of respondents-
spouses that the payees would not receive the checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks’ proceeds. The bank failed to satisfy a requisite
condition of a fictitious-payee situation – that the maker of the check intended for the payee to have no
interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank
bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations.21 This Court has recognized the unique public
interest possessed by the banking industry and the need for the people to have full trust and confidence
in their banks.22 For this reason, banks are minded to treat their customer’s accounts with utmost care,
confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee
in the check. It should charge to the drawer’s accounts only the payables authorized by the latter.
Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount
charged to the drawer’s account.24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn against
respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of
the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than those
of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27

PNB’s argument that there is no loss to compensate since no demand for payment has been made by the
payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason "Account Closed." These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to
named payees, PNB was duty-bound by law and by banking rules and procedure to require that the
checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held
liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file
an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the
failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-
claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take
against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages
to P50,000.00.29

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

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I certify
that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

1CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P.
Dicdican, with Associate Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; rollo,
pp. 29-42.

2Civil Case No. 99-10892, Regional Trial Court in Negros Occidental, Branch 51, Bacolod City,
dated May 10, 2002; CA rollo, pp. 63-72.

3A financing scheme where a postdated check is exchanged for a current check with a
discounted face value.

4 Current Account No. 810480-4 in the name of Erlando T. Rodriguez

Name of Payees Check No. Date Issued Amount

01. Simon Carmelo B. Libo-on 0001110 11.27.98 40,934.00
02. Simon Carmelo Libo-on 0000011589 02.01.99 29,877.00
03. Simon Libo-on 0000011567 01.25.99 50,350.00
04. Pacifico Castillo 0000011565 01.22.99 39,995.00
05. Jose Bago-od 0000011587 02.01.99 38,000.00
06. Dioleto Delcano 0000011594 02.02.99 28,500.00
07. Antonio Maravilla 0000011593 02.02.99 37,715.00
08. Josel Juguan 0000011595 02.02.99 45,002.00
09. Domingo Roa, Jr. 0000011591 02.01.99 35,373.00
10. Antonio Maravilla 0001657 02.05.99 39,900.00
11. Christy Mae Berden 0001655 02.05.99 28,595.00
12. Nelson Guadalupe 0000011588 02.01.99 34,819.00
13. Antonio Londres 0000011596 02.05.99 32,851.00
14. Arnel Navarosa 0000011597 02.05.99 28,785.00
15. Estrella Alunan 0000011600 02.05.99 32,509.00
16. Dennis Montemayor 0000011598 02.05.99 43,691.00
17. Mickle Argusar 0000011599 02.05.99 31,498.00
18. Perlita Gallego 0000011564 01.21.99 38,000.00
19. Sheila Arcobillas 0000011563 01.19.99 38,000.00
20. Danilo Villarosa 0001656 02.05.99 32,006.00
21. Almie Borce 0000011583 02.01.99 20,093.00
22. Ronie Aragon 0000011566 01.20.99 28,844.00
Total: 775,337.00

Current Account No. 810624-6 in the name of Erlando and/or Norma Rodriguez
 Name of Payees Check No. Date Issued Amount
01. Elma Bacarro 0001944 01.15.99 37,449.00
02. Delfin Recarder 0001927 01.14.99 30,020.00
03. Elma Bacarro 0001926 01.14.99 34,884.00
04. Perlita Gallego 0001924 01.14.99 35,502.00
05. Jose Weber 0001932 01.14.99 38,323.00
06. Rogelio Alfonso 0001922 01.14.99 43,852.00
07. Gianni Amantillo 0001928 01.14.99 32,414.00
08. Eddie Bago-od 0001929 01.14.99 38,361.00
09. Manuel Longero 0001933 01.14.99 38,285.00
10. Anavic Lorenzo 0001923 01.14.99 29,982.00
11. Corazon Salva 0001945 01.15.99 37,449.00
12. Arlene Diamante 0001951 01.18.99 39,995.00
13. Joselin Laurilla 0001955 01.18.99 37,221.00
14. Andy Javellana 0001960 01.22.99 30,923.00
15. Erdelinda Porras 0001958 01.22.99 40,679.00
16. Nelson Guadalupe 0001956 01.18.99 24,700.00
17. Barnard Escano 0001969 01/22/99 38,304.00
18. Buena Coscolluela 0001968 01/22/99 37,706.00
19. Erdelinda Porras 0002021 02/01/99 36,727.00
20. Neda Algara 0002023 02/01/99 38,000.00
21. Eddie Bago-od 0002030 02/02/99 26,600.00
22. Gianni Amantillo 0002032 02/02/99 19,000.00
23. Alfredo Llena 0002020 02/01/99 32,282.00
24. Emmanuel Fermo 0001972 01/22/99 36,376.00
25. Yvonne Ano-os 0001967 01/22/99 36,566.00
26. Joel Abibuag 0002022 02/01/99 37,981.00
27. Ma. Corazon Salva 0002029 02/02/99 25,270.00
28. Jose Bago-od 0001957 01/18/99 34,656.00
29. Avelino Brion 0001965 01/22/99 31,882.00
30. Mickle Algusar 0001962 01/22/99 25,004.00
31. Jose Weber 0001959 01/22/99 37,001.00
32. Joel Velasco 0002028 02/02/99 9,500.00
33. Elma Bacarro 0002031 02/02/99 23,750.00
34. Grace Tambis 0001952 01/18/99 39,995.00
35. Proceso Mailim 0001980 01/21/99 37,193.00
36. Ronnie Aragon 0001983 01/22/99 30,324.00
37. Danilo Villarosa 0001931 01/14/99 31,008.00
38. Joel Abibuag 0001954 01/18/99 26,600.00
39. Danilo Villarosa 0001984 01/22/99 26,790.00
40. Reynard Guia 0001985 01/22/99 42,959.00
41. Estrella Alunan 0001925 01/14/99 39,596.00
42. Eddie Bago-od 0001982 01/22/99 31,018.00
43. Jose Bago-od 0001982 01/22/99 37,240.00
44. Nicandro Aguilar 0001964 01/22/99 52,250.00
45. Guandencia Banaston 0001963 01/22/99 38,000.00
46. Dennis Montemayor 0001961 01/22/99 26,600.00
47. Eduardo Buglosa 0002027 01/02/99 14,250.00
 Total ……………… 1,570,467.00

Grand Total ………. 2,345,804.00

5 Rollo, pp. 64-69.

6 CA rollo, pp. 71-72.

7Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Elvi
John S. Asuncion and Ramon M. Bato, Jr., concurring.

8 Id. at 47.

9 Id. at 41.

10 Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921).

11Negotiable Instruments Law, Sec. 185. Check defined. – A check is a bill of exchange drawn
on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on demand apply to a check.

Section 126. Bill of exchange defined. – 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.

12 Id.

13Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable
Instruments Law (1994), 5th ed., pp. 8-9.

14Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F. 839
(1923); United States v. Chase Nat. Bank, 250 F. 105 (1918).

15 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920).

16 Id.

17 Mueller & Martin v. Liberty Insurance Bank, id.

18 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405.

19Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc., id., citing
Peck v. Chase Manhattan Bank, 190 AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi
Trust Co., 186 AD 2d 425, 427 (1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276
(1989); Merrill Lynch, Pierce, Fenner & Smith v. Chemical Bank, 57 NY 2d 447 (1982).

20See Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10,
2002, 390 SCRA 608.

21 Id.
 22
Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, December 6, 2006, 510
SCRA 259.

23Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994,
232 SCRA 559; Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162,
February 21, 1992, 206 SCRA 408.

24
Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612, January 31, 1996, 252
SCRA 620, 631.

25 G.R. No. 102383, November 26, 1992, 216 SCRA 51.

26 Bank of the Philippine Islands v. Court of Appeals, id. at 71.

27 Id. at 77.

28Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of. – If the defending party fails to
answer within the time allowed therefor, the court shall, upon motion of the claiming party with
notice to the defending party, and proof of such failure, declare the defending party in default.
Thereupon, the court shall proceed to render judgment granting the claimant such relief as his
pleading may warrant, unless the court in its discretion requires the claimant to submit evidence.
Such reception of evidence may be delegated to the clerk of court.

29 Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274 SCRA 282.

FACTS:

Respondents-Spouses Rodriguez maintained savings and demand/checking accounts with petitioner.

In line with their informal lending business, they had a discounting arrangement with PEMSLA, an association of
PNB employees, which regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds, and would replace the postdated checks with
their own checks issued in the name of the members.

PNB later on found out that some PEMSLA officers took out loans in the names of other members, without their
knowledge or consent by forging the indorsement of the named payees in the checks.

PNB then closed the current account of PEMSLA. The checks deposited to PEMSLA however, were debited from
the Rodriguez account. Thus, spouses Rodriguez incurred losses.

The spouses Rodriguez filed a civil complaint for damages against PEMSLA and 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 PNB paid the wrong payees, hence, it should bear the loss.

The RTC rendered judgment in favor of spouses Rodriguez, and ruled that PNB is liable to return the value of the
checks.
On appeal, the CA affirmed the RTC Decicion..

ISSUE:

Whether the subject checks are payable to order or to bearer and who bears the loss.

RULING:

A check is “a bill of exchange drawn on a bank payable on demand.” It is either an order or a bearer instrument.

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.

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.

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.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the
named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows that the payees did
not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was
not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the
checks’ proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual
payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees
would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB
failed to present sufficient evidence to defeat the claim of respondents 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.

G.R. No. 167567 September 22, 2010

SAN MIGUEL CORPORATION, Petitioner,

vs.
BARTOLOME PUZON, JR., Respondent.
 DECISION

DEL CASTILLO, J.:

This petition for review assails the December 21, 2004 Decision1 and March 28, 2005 Resolution2 of the
Court of Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the petition before it and denied
reconsideration, respectively.

Factual Antecedents

Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer
products of petitioner San Miguel Corporation (SMC) for Parañaque City. Puzon purchased SMC
products on credit. To ensure payment and as a business practice, SMC required him to issue postdated
checks equivalent to the value of the products purchased on credit before the same were released to him.
Said checks were returned to Puzon when the transactions covered by these checks were paid or settled
in full.

On December 31, 2000, Puzon purchased products on credit amounting to ₱11,820,327 for which he
issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for ₱309,500.00) and
27903 (for ₱11,510,827.00) to cover the said transaction.

On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in Parañaque
City to reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No.
17657. However, when he got hold of BPI Check No. 27903 which was attached to a bond paper together
with BPI Check No. 17657 he allegedly immediately left the office with his accountant, bringing the
checks with them.

SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon ignored the
demand hence SMC filed a complaint against him for theft with the City Prosecutor’s Office of Parañaque
City.

Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)

The investigating prosecutor, Elizabeth Yu Guray found that the "relationship between [SMC] and [Puzon]
appears to be one of credit or creditor-debtor relationship. The problem lies in the reconciliation of
accounts and the non-payment of beer empties which cannot give rise to a criminal prosecution for
theft."3 Thus, in her July 31, 2001 Resolution,4 she recommended the dismissal of

the case for lack of evidence. SMC appealed.

On June 4, 2003, the DOJ issued its resolution 5 affirming the prosecutor’s Resolution dismissing the
case. Its motion for reconsideration having been denied in the April 23, 2004 DOJ Resolution, 6 SMC filed
a petition for certiorari with the CA.

Ruling of the Court of Appeals

The CA found that the postdated checks were issued by Puzon merely as a security for the payment of
his purchases and that these were not intended to be encashed. It thus concluded that SMC did not
acquire ownership of the checks as it was duty bound to return the same checks to Puzon after the
transactions covering them were settled. The CA agreed with the prosecutor that there was no theft,
considering that a person cannot be charged with theft for taking personal property that belongs to
himself. It disposed of the appeal as follows:
WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant petition
is hereby DISMISSED. The assailed Resolutions of public respondent, dated 04 June 2003 and 23 April
2004, are AFFIRMED. No costs at this instance.

SO ORDERED.7

The motion for reconsideration of SMC was denied. Hence, the present petition.

Issues

Petitioner now raises the following issues:

WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG OTHERS BPI
CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE
HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00)

II

WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI CHECK NO.
27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED
TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00), WERE ISSUED IN
PAYMENT OF HIS BEER PURCHASES OR WERE USED MERELY AS SECURITY TO ENSURE
PAYMENT OF PUZON’S OBLIGATION.

III

WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS ISSUED IN

PAYMENT OF BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE TRANSACTIONS
COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY DATES THEREOF COULD BE
LIKENED TO A CONTRACT OF PLEDGE.

IV

WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE INDICTMENT OF

PUZON FOR THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE REVISED PENAL CODE.8

Petitioner's Arguments

SMC contends that Puzon was positively identified by its employees to have taken the subject postdated
checks. It also contends that ownership of the checks was transferred to it because these were issued,
not merely as security but were, in payment of Puzon’s purchases. SMC points out that it has established
more than sufficient probable cause to justify the indictment of Puzon for the crime of Theft.

Respondent’s Arguments

On the other hand, Puzon contends that SMC raises questions of fact that are beyond the province of an
appeal on certiorari. He also insists that there is no probable cause to charge him with theft because the
subject checks were issued only as security and he therefore retained ownership of the same.

Our Ruling
 The petition has no merit.

Preliminary Matters

At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The resolution of the
first issue raised by SMC of whether respondent stole the subject check, which calls for the Court to
determine whether respondent is guilty of a felony, first requires that the facts be duly established in the
proper forum and in accord with the proper procedure. This issue cannot be resolved based on mere
allegations of facts and affidavits. The same is true with the second issue raised by petitioner, to wit:
whether the checks issued by Puzon were payments for his purchases or were intended merely as
security to ensure payment. These issues cannot be properly resolved in the present petition for review
on certiorari which is rooted merely on the resolution of the prosecutor finding no probable cause for the
filing of an information for theft.

The third issue raised by petitioner, on the other hand, would entail venturing into constitutional matters
for a complete resolution. This route is unnecessary in the present case considering that the main matter
for resolution here only concerns grave abuse of discretion and the existence of probable cause for theft,
which at this point is more properly resolved through another more clear cut route.

Probable Cause for Theft

"Probable cause is defined as such facts and circumstances that will engender a well-founded belief that
a crime has been committed and that the respondent is probably guilty thereof and should be held for
trial."9 On the fine points of the determination of probable cause, Reyes v. Pearlbank Securities,
Inc.10 comprehensively elaborated that:

The determination of [the existence or absence of probable cause] lies within the discretion of the
prosecuting officers after conducting a preliminary investigation upon complaint of an offended party.
Thus, the decision whether to dismiss a complaint or not is dependent upon the sound discretion of the
prosecuting fiscal. He may dismiss the complaint forthwith, if he finds the charge insufficient in form or
substance or without any ground. Or he may proceed with the investigation if the complaint in his view is
sufficient and in proper form. To emphasize, the determination of probable cause for the filing of
information in court is an executive function, one that properly pertains at the first instance to the public
prosecutor and, ultimately, to the Secretary of Justice, who may direct the filing of the corresponding
information or move for the dismissal of the case. Ultimately, whether or not a complaint will be dismissed
is dependent on the sound discretion of the Secretary of Justice. And unless made with grave abuse of
discretion, findings of the Secretary of Justice are not subject to review.

For this reason, the Court considers it sound judicial policy to refrain from interfering in the conduct of
preliminary investigations and to leave the Department of Justice ample latitude of discretion in the
determination of what constitutes sufficient evidence to establish probable cause for the prosecution of
supposed offenders. Consistent with this policy, courts do not reverse the Secretary of Justice's findings
and conclusions on the matter of probable cause except in clear cases of grave abuse of discretion.

In the present case, we are also not sufficiently convinced to deviate from the general rule of non-
interference. Indeed the CA did not err in dismissing the petition for certiorari before it, absent grave
abuse of discretion on the part of the DOJ Secretary in not finding probable cause against Puzon for theft.

The Revised Penal Code provides:

Art. 308. Who are liable for theft. - Theft is committed by any person who, with intent to gain but without
violence against, or intimidation of persons nor force upon things, shall take personal property of another
without the latter’s consent.
xxxx

"[T]he essential elements of the crime of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4) that
the taking be done without the consent of the owner; and (5) that the taking be accomplished without the
use of violence or intimidation against persons or force upon things."11

Considering that the second element is that the thing taken belongs to another, it is relevant to determine
whether ownership of the subject check was transferred to petitioner. On this point the Negotiable
Instruments Law provides:

Sec. 12. Antedated and postdated – The instrument is not invalid for the reason only that it is antedated
or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the date of delivery. (Underscoring
supplied.)

Note however that delivery as the term is used in the aforementioned provision means that the party
delivering did so for the purpose of giving effect thereto.12 Otherwise, it cannot be said that there has
been delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.

If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving effect
to the instrument is evident thus title to or ownership of the check was transferred upon delivery.
However, if the check was not given as payment, there being no intent to give effect to the instrument,
then ownership of the check was not transferred to SMC.

The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon.
There was no provisional receipt or official receipt issued for the amount of the check. What was issued
was a receipt for the document, a "POSTDATED CHECK SLIP."13

Furthermore, the petitioner's demand letter sent to respondent states "As per company policies on
receivables, all issuances are to be covered by post-dated checks. However, you have deviated from this
policy by forcibly taking away the check you have issued to us to cover the December
issuance."14 Notably, the term "payment" was not used instead the terms "covered" and "cover" were
used.

Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit that the check
was given in payment of the obligation of Puzon, the same is contradicted by his statements in paragraph
4, where he states that "As a standard company operating procedure, all beer purchases by dealers on
credit shall be covered by postdated checks equivalent to the value of the beer products purchased"; in
paragraph 9 where he states that "the transaction covered by the said check had not yet been paid for,"
and in paragraph 8 which clearly shows that partial payment is expected to be made by the return of beer
empties, and not by the deposit or encashment of the check.1avvphi1 Clearly the term "cover" was not
meant to be used interchangeably with "payment."

When taken in conjunction with the counter-affidavit of Puzon – where he states that "As the [liquid beer]
contents are paid for, SMC return[s] to me the corresponding PDCs or request[s] me to replace them with
whatever was the unpaid balance."15 – it becomes clear that both parties did not intend for the check
to pay for the beer products. The evidence proves that the check was accepted, not as payment, but in
accordance with the long-standing policy of SMC to require its dealers to issue postdated checks to cover
its receivables. The check was only meant to cover the transaction and in the meantime Puzon was to
pay for the transaction by some other means other than the check. This being so, title to the check did not
transfer to SMC; it remained with Puzon. The second element of the felony of theft was therefore not
established. Petitioner was not able to show that Puzon took a check that belonged to another. Hence,
the prosecutor and the DOJ were correct in finding no probable cause for theft.

Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ in
sustaining the dismissal of the case for theft for lack of probable cause.

WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005 Resolution
of the Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson

CONCHITA CARPIO MORALES* PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

JOSE PORTUGAL PEREZ

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision
had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s
Division.

RENATO C. CORONA
Chief Justice

Footnotes

* In lieu of Associate Justice Teresita J. Leonardo-De Castro per Special Order No. 884 dated
September 1, 2010.

1Rollo,pp. 32-42; penned by Associate Justice Perlita J. Tria Tirona and concurred in by
Associate Justices Ruben T. Reyes and Jose C. Reyes, Jr.

2 Id. at 43-45.

3 Id. at 141.

4 Id. at 140-142.
5 CA rollo, pp. 24-27.

6 Id. at 22-23.

7 Rollo, p. 41.

8 Id. at 305.

9 Sanrio Company Limited v. Lim, G.R. No. 168662, February 19, 2008, 546 SCRA 303, 312-313.

10G.R. No.171435, July 30, 2008, 560 SCRA 518, 535-536, citing Public Utilitites Department v.
Hon. Guingona, Jr., 417 Phil. 798, 804 (2001).

11Aoas v. People, G.R. No. 155339, March 3, 2008, 547 SCRA 311, 317-318; People v. Puig,
G.R. Nos. 173654-765, August 28, 2008, 563 SCRA 564, 570; Cruz v. People, G.R. No. 176504,
September 3, 2008, 564 SCRA 99, 110.

12 Sec. 16 of the Negotiable Instruments Law.

13 Rollo, p. 76.

14 Demand letter. Id. at 79.

15 Id. at 113.
G.R. No. 167567, September 22, 2010S A N M I G U E L C O R P O R A T I O N , P E T I T I O N E R , V S .
B A R T O L O M E P U Z O N , J R . , RESPONDENT.DEL CASTILLO, J.:Factual AntecedentsRespondent
Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer products of
petitioner San Miguel Corporation (SMC) for Parañaque City. Puzonpurchased SMC products on credit.
SMC required him to issue postdated checks equivalent tothe value of the products purchased on credit as
a security and said checks are to be returned toPuzon when the transactions covered by these checks were paid
or settled in full.Bank of the Philippine Islands (BPI) Check Nos. 27904 (for P309,500.00) and 27903
(forP 1 1 , 5 1 0 , 8 2 7 . 0 0 ) to co v e r t h e s a i d t ra n s a c t i o n o f P u zo n t o S M C wa s i s s u e d . B P I C h e c k
N o . 27903 was allegedly stolen by Puzon when he together with his accountant visited SMC office for
reconciliation of their accounts.SMC sent a letter to Puzon on March 6, 2001 demanding the return of the
said checks. Puzonignored the demand hence SMC filed a complaint against him for theft with the City
Prosecutor'sOffice of Parañaque City. Th e p r o s e c u t o r fo un d l a c k o f e v i d e n ce fo r t h e c o m mi s s i o n o f
t h e c r i me wh i c h wa s affirmed by the RTC. Petition for certiorari with the CA was also denied which states
thatthepostdated checks were issued by Puzon merely as a security for the payment of his purchases andt h a t
these were not intended to be encashed. It thus concluded that SMC did not
a c q u i r e ownership of the checks as it was dut y bound to return the same chec ks to P uzon
a f t e r t h e transactions covering them were settled. The CA agreed with the prosecutor that there was
notheft, considering that a person cannot be charged with theft for taking personal property
thatbelongs to him. Issues: W H E T H E R o r n o t t h e p o s t d a t e d c h e c k s i s s u e d b y P u z o n
t r a n s f e r r e d o w n e r s h i p t o petitioner making him liable for theft?RULING:No, the check still belongs to
Puzon, hence not liable of theft. Negotiable InstrumentsLaw provides:Sec. 12. Antedated and postdated- The
instrument is not invalid for the reason only thatit is antedated or postdated, provided this is not done for
an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires
the title thereto as of the date of delivery. (Underscoring supplied.)Note however that delivery as the
term is used in the aforementioned provision means that the party delivering did so for the purpose
of giving effect thereto. Otherwise, it cannot be said that there has been delivery of the negotiable
instrument. Once there is delivery, the personto whom the instrument is delivered gets the title to the instrument
completely and irrevocably.I f t h e s u b j e c t c h e c k w a s g i v e n b y P u z o n t o S M C i n p a y m e n t o f
t h e o b l i g a t i o n , t h e purpose of giving effect to the instrument is evident thus title to or ownership of
the check wastransferred upon delivery. However, if the check w as not given as payment, but
being mere
security for debt, there being no intent to give effect to the instrument, then ownership of
thecheck was not transferred to SMC.

United States Court of Appeals,Eleventh Circuit.

Eugene E. POWELL, Plaintiff-Appellant, v. Joyce Marie POWELL;  John

Dalton, Secretary of the Navy, Defendants-Appellees.

95-8313. No.

Decided: April 15, 1996

Before KRAVITCH and CARNES, Circuit Judges,

and HILL, Senior Circuit Judge. Sandra J.
Popson,Brown, Katz, Flatau & Hasty, Macon, GA,
for Appellant. W. Edward Meeks, Jr., Walters,
Davis, Meeks & Pujadas, P.C., Ocilla, GA, William
D. Gifford, Asst. U.S. Atty., Macon, GA, Robert P.
Monahan, U.S. Navy, Office of the Judge
Advocate General, Alexandria, VA, for Appellees.
Instead of appealing that award, Mr. Powell filed
a complaint in federal district court against Mrs.
Powell and John Dalton, who is Secretary of the
Navy, contending that the FSPA is
unconstitutional as applied to him, because it
amounts to an unconstitutional taking of his
property. 1408, a state court awarded part of
Eugene Powell's naval retirement pay to his ex-
wife, Joyce Powell, as alimony. Pursuant to the
Uniformed Services Former Spouses' Protection
Act (the “FSPA”), 10 U.S.C. §
Nonetheless, for the reasons stated below, we
hold that under the Rooker-Feldman doctrine the
district court lacked subject matter jurisdiction
over Mr. Powell's complaint. The court did not
address the Secretary's Rooker-Feldman
defense. The district court entered summary
judgment against Mr. Powell, holding that the
FSPA is not unconstitutional as applied to him,
and, alternatively, that he was barred from
bringing his action under principles of res judicata.
1
Accordingly, we vacate the district court's
judgment and remand to that court with
instructions to dismiss the complaint.
BACKGROUND I.
He retired from the Navy in 1975, after honorably
serving for approximately twenty-four years. In
1974, Eugene Powell signed his last re-enlistment
contract with the Navy, which, like his prior
contracts, promised that he would receive certain
benefits including retirement pay.
When it acted to override the McCarty decision,
Congress assumed that that decision applied to
community property and equitable distribution
states alike. See McCarty, 453 U.S. at 224-28,
101 S.Ct. at 2737-39 (holding that, under federal
law, military retirement pay is a “personal
entitlement” and that Congress intended that
military retirement pay reach the veteran and no
one else). Although the McCarty Court spoke in
terms of the application of community property
principles to military retirement pay, the Court's
reasoning appeared to apply equally to the
application of equitable distribution principles to
such pay. On June 26, 1981, the Supreme Court
ruled in McCarty v. McCarty, 453 U.S. 210, 232,
101 S.Ct. 2728, 2741, 69 L.Ed.2d 589 (1981), that
“the application of community property principles
to military retired pay threatens grave harm to
‘clear and substantial’ federal interests,” and
therefore that the application of community
property principles is federally preempted.
1408(d)(1). Id. at § The FSPA created a
payment mechanism, whereby the spouse who is
awarded a portion of the ex-spouse's military
retirement pay in the state court may seek direct
payment of it through the Secretary of the
concerned armed forces branch. 1408(c)
(West.Supp.1995). 10 U.S.C.A. § The FSPA
allows state courts to treat military retirement pay
“for pay periods beginning after June 25, 1981,
either as property solely of the [retiree] or as
property of the [retiree] and his spouse in
accordance with the law of the jurisdiction.” See
Mansell v. Mansell, 490 U.S. 581, 584 n. 2, 109
S.Ct. 2023, 2026 n. 2, 104 L.Ed.2d 675 (1989)
(stating that the FSPA “covers both community
property and equitable distribution States”). In
1982, Congress enacted the FSPA, to reverse the
effect of McCarty and allow the application of both
community property and equitable distribution
principles to military retirement pay.
The jury declined to award Mrs. Powell any of Mr.
Powell's other retirement pay, which came from
his employment with a private corporation.
Pursuant to a provision in the FSPA, the
Secretary of the Navy has taken that amount out
of Mr. Powell's retirement pay each month and
paid it directly to Mrs. Powell. In their divorce
trial, the jury awarded Mrs. Powell $480.00 per
month of Mr. Powell's naval retirement pay, which
constituted forty percent of that pay. Eugene
Powell and Joyce Powell, who were married
during nineteen of Mr. Powell's twenty-four years
of military service, were divorced in a Georgia trial
court in 1993 after almost thirty-seven years of
marriage.
Nor did Mr. Powell seek review of the trial court's
judgment before the Georgia appellate court, the
Georgia Supreme Court, or the United States
Supreme Court. Mr. Powell never raised in the
Georgia trial court any issue about the FSPA
being unconstitutional as applied to him.
In his complaint, Mr. Powell claimed that the
FSPA is unconstitutional as applied to him
because it amounts to an unconstitutional taking
of his property. Instead, Mr. Powell filed this
action in the federal district court against the
defendants, Mrs. Powell and the Secretary of the
Navy. 2 The Secretary argued alternatively that
even if the district court had jurisdiction, there was
no unconstitutional taking. Mrs. Powell filed an
answer to the complaint, and the Secretary
moved to dismiss the complaint on the grounds
that the district court was without jurisdiction
under three theories:  (1) Younger abstention;  (2)
Barber abstention;  and (3) Rooker-Feldman. Mr.
Powell sought to enjoin the Secretary from
distributing his naval retirement pay to Mrs.
Powell, and to have the FSPA declared
unconstitutional as applied to him and others
similarly situated.
Mr. Powell filed this appeal. The court did not
address the Secretary's Rooker-Feldman
defense. In the alternative, the district court held
that Mr. Powell's claim was barred under
principles of res judicata. The district court
treated the Secretary's motion to dismiss as one
for summary judgment, see Fed.R.Civ.P. 12(c),
and granted summary judgment in favor of the
defendants, holding that the FSPA was not
unconstitutional as applied to Mr. Powell.
DISCUSSION II.
That inquiry requires us to decide if, as the
Secretary contends, the Rooker-Feldman doctrine
bars Mr. Powell's claim from federal court.
However, before reaching either of those issues,
we first address whether the district court had
subject matter jurisdiction over Mr. Powell's claim.
Mr. Powell argues that his claim is not barred
under principles of res judicata, and that the
FSPA is unconstitutional as applied to him.
Id. In that situation, we consider that the federal
claim was not “inextricably intertwined” with the
state court's judgment. Wood v. Orange County,
715 F.2d 1543, 1547 (11th Cir.1983), cert. denied,
467 U.S. 1210, 104 S.Ct. 2398, 81 L.Ed.2d 355
(1984). This Court has recognized an “important
limitation” on the Rooker-Feldman doctrine when
the plaintiff had no “reasonable opportunity to
raise his federal claim in state proceedings.”
Feldman, 460 at 482 n. 16, 103 S.Ct. at 1315 n.
16. The doctrine applies not only to claims
actually raised in the state court, but also to
claims that were not raised in the state court but
are “inextricably intertwined” with the state court's
judgment. See Rooker v. Fidelity Trust Co., 263
U.S. 413, 415-16, 44 S.Ct. 149, 150, 68 L.Ed. 362
(1923). 1331, which provides that federal district
courts are courts of original jurisdiction. 1257,
which limits federal review of state court
proceedings to the United States Supreme Court,
and (2) 28 U.S.C. § The doctrine has two
statutory bases:  (1) 28 U.S.C. § District of
Columbia Court of Appeals v. Feldman, 460 U.S.
462, 482, 103 S.Ct. 1303, 1315, 75 L.Ed.2d 206
(1983). Review of such judgments may be had
only in [the United States Supreme Court].”
According to the Rooker-Feldman doctrine, “a
United States District Court has no authority to
review final judgments of a state court in judicial
proceedings.
The result would be that the state court's
judgment, insofar as it pertains to money to be
received by Mrs. Powell, would be collaterally
reviewed and reversed in federal court, which is
precisely what the Rooker-Feldman doctrine
exists to prevent. See Liedel v. Juvenile Court of
Madison County, 891 F.2d 1542, 1545 (11th
Cir.1990);  see also Stern v. Nix, 840 F.2d 208,
211-12 (3rd Cir.), cert. denied, 488 U.S. 826, 109
S.Ct. 77, 102 L.Ed.2d 53 (1988) (holding that
because district court holding would “effectively
reverse the state court judgment,” the federal
claim was “inextricably intertwined” with the state
court judgment). If a federal district court were
now to hold in Mr. Powell's favor on his federal
claim, that holding would “effectively nullify” the
state court's judgment that Mrs. Powell is to
receive a portion of his naval retirement pay. Mr.
Powell's present federal claim that the FSPA is
unconstitutional as applied to him is “inextricably
intertwined” with the issue of whether the state
court could award Mrs. Powell part of his naval
retirement pay. The court made that award
pursuant to authorization contained in the FSPA.
In this case, the state trial court, in accordance
with Georgia principles of equitable division,
awarded $480.00 of Mr. Powell's naval retirement
pay, or forty percent of it, to Mrs. Powell.
A litigant may not escape application of the
doctrine by merely electing not to appeal an
adverse state trial court judgment. Moreover, the
doctrine is not limited to state appellate court
judgments. Lockhart v. Fretwell, 506 U.S. 364,
376, 113 S.Ct. 838, 846, 122 L.Ed.2d 180 (1993)
(Thomas, J., concurring). “In our federal system,
a state trial court's interpretation of federal law is
no less authoritative than that of the federal court
of appeals in whose circuit the trial court is
located.” It still applies for reasons that go to the
heart of our system of federalism-the dual dignity
of state and federal court decisions interpreting
federal law. Even if the federal court collateral
attack on the state court judgment is premised on
the unconstitutionality of a federal statute, the
Rooker-Feldman doctrine still applies. Neither
this Court nor the Supreme Court has limited the
scope of the Rooker-Feldman doctrine to state
court judgments based solely on state law. We
disagree. Mr. Powell maintains that the Rooker-
Feldman doctrine only “concerns subject matter
jurisdiction in cases where direct review is sought
of a state appellate court's decision involving state
law.” First, he argues that the doctrine does not
apply here because he seeks to challenge the
constitutionality of a federal, not a state, statute.
Mr. Powell contends that the Rooker-Feldman
doctrine is inapplicable for several reasons.
Mr. Powell also contends that the Rooker-
Feldman doctrine does not apply because he did
not have a “reasonable opportunity” to bring his
claim in If he had raised the issue before the
state trial court, Mr. Powell could have appealed
any adverse judgment pertaining to the division of
his naval retirement pay to the Georgia Court of
Appeals, the Georgia Supreme Court, or the
United States Supreme Court. Or, after the jury's
verdict, he could have moved for modification of
the jury's award, insofar as it divided his naval
retirement pay. Mr. Powell could have raised
that claim in the state trial court, and he could
have requested that court, if it agreed with his
claim, to instruct the jury not to award any of his
naval retirement pay to Mrs. Powell. There is no
reason that he could not have challenged the
constitutionality of the FSPA as applied to him in
the state court proceeding. Mr. Powell's
argument is without merit. He argues that such
an opportunity was lacking because:  (1) the
Secretary was not, and could not have been, a
party to that proceeding, and (2) even if the
Secretary had been a party to that proceeding,
the state court could not have enjoined the
Secretary from making the payments to Mrs.
Powell. the state court proceeding.
If Mr. Powell had prevailed on his claim, the state
court would not have awarded any of the naval
retirement pay to Mrs. Powell, and the Secretary's
absence would have been immaterial. The
absence of the Secretary from the state court
proceeding did not deprive Mr. Powell of an
opportunity to press his claim.
Just as the plaintiff in Mansell had a “reasonable
opportunity” to raise that retirement pay claim in
state court in the absence of the Secretary, so too
did Mr. Powell have a reasonable opportunity to
raise his federal claim regarding the FSPA in the
state court proceeding. The Secretary of the Air
Force was not a party to that case, and at no time
did the Supreme Court, or any of the state courts
that reviewed the case, suggest that the Secretary
was a necessary party. Id. at 583, 109 S.Ct. at
2025. The Court had to “decide whether state
courts, consistent with the [FSPA], may treat as
property divisible upon divorce military retirement
pay waived by the retiree in order to receive
veterans' disability benefits.” In Mansell v.
Mansell, 490 U.S. 581, 109 S.Ct. 2023, 104
L.Ed.2d 675 (1989), the Supreme Court reviewed
on direct appeal a similar state court judgment, in
a case in which the plaintiff challenged the
payment of Air Force retirement pay to a former
spouse. 3
That claim could, and should, have been raised
in the state court, not in a federal court in what
amounts to a collateral attack on the state court
judgment. Accordingly, we hold that under the
Rooker-Feldman doctrine the district court lacked
jurisdiction over Mr. Powell's claim that the FSPA
is unconstitutional as applied to him.
CONCLUSION III.
We VACATE the judgment of the district court,
and REMAND to that court with instructions to
dismiss the complaint.
FOOTNOTES
1Because of our Rooker-Feldman holding, we
need not address the other issues raised on
appeal. .
2Although Mr. Powell made several other claims
in his complaint before the district court, he did
not appeal the district court's judgment rejecting
those other claims, and we do not address them
here. .
3 However, the essence of Mr. Powell's claim is
that the FSPA is unconstitutional as applied to
him, which clearly is a particularized challenge to
the Georgia state trial court's judgment. Mr.
Powell also seems to suggest that this case is
distinguishable from Feldman because it, unlike
Feldman, involves a general challenge to a
statute, instead of a particularized challenge. .
CARNES, Circuit Judge:
 Powell & Powell v. Greenleaf & Currier

104 vt 480, 162 Atl. 377

October 18, 1932

B. Unconditional Order or Promise to Pay: When Unconditional

FACTS: This petition is to recover the balance due on two (2)

instruments in writing that were dated July 6, 1922 and June 7, 1923.

The instruments are both alike in wording and form except for the date.

The said instruments has in its introduction a statement “For and in

consideration of a contract and agreement entered into this day with us

Arthur A. Bishop & Co. of Boston, Mass”—such that said instrument is

dependent upon a contract.

ISSUE/S: Whether these instruments are negotiable in order for

plaintiffs to maintain this suit in their own names.

HELD: Yes, the instruments are negotiable. An instrument, in order to

be negotiable, must contain an unconditional promise to order to pay a

sum certain in money. These instruments can be determined as

negotiable upon the language unaided by an inspection of the extrinsic

agreement. The general rule is that whenever a bill of exchange or

promissory note contains a reference to some extrinsic contract to make

it a subject to the terms of that contract, the negotiability of the paper is

destroyed. In order to destroy negotiability the reference to a collateral

contract must show the obligation to pay is burdened with the conditions

of that contract. When the promise to pay is made the subject of some

other contract then the negotiability is conditional and it is destroyed.

While using words “as per terms of contract, “value received” in a

promissory note was held not to affect its negotiability. The same way

the same is not destroyed by a statement that the note is part of a

 contract of a certain date, or statements such as “for payment under

contract of even date”; “in one machinery as per contract; “for value

received”. The instrument before this case contain two (2) references to

the extrinsic agreement and it is not apparent how the negotiability of

these instruments is affected by either these references. The promise to

pay is not “subject to” the extrinsic agreement nor does it destroy the

negotiability of the said instruments.

 EN BANC

[G.R. No. L-2516. September 25, 1950.]

ANG TEK LIAN, Petitioner, v. THE COURT OF

APPEALS, Respondent.

Laurel, Sabido, Almario & Laurel,

for Petitioner.

Solicitor General Felix Bautista Angelo and

Solicitor Manuel Tomacruz, for Respondent.

SYLLABUS
 1. CRIMINAL LAW; ESTAFA" ; ISSUING CHECK
WITH INSUFFICIENT BANK DEPOSIT TO COVER
THE SAME. — One who issues a check payable to
cash to accomplish deceit and knows that at the
time had no sufficient deposit with the bank to
cover the amount of the check and without
informing the payee of such circumstances, is
guilty of estafa as provided by article 315,
paragraph (d), subsection 2 of the Revised Penal
Code.

2. NEGOTIABLE INSTRUMENTS; CHECK DRAWN

PAYABLE TO THE ORDER OF "CASH" ;
INDORSEMENT. — A check payable to the order
of "cash to the person presenting it for payment
without the drawer’s indorsement.

DECISION

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian

was convicted of estafa in the Court of First
Instance of Manila. The Court of Appeals affirmed
the verdict.
It appears that, knowing he had no funds
therefor, Ang Tek Lian drew on Saturday,
November 16, 1946, the check Exhibit A upon the
China Banking Corporation for the sum of P4,000,
payable to the order of "cash." He delivered it to
Lee Hua Hong in exchange for money which the
latter handed in the act. On November 18, 1946,
the next business day, the check was presented
by Lee Hua Hong to the drawee bank for
payment, but it was dishonored for insufficiency
of funds, the balance of the deposit of Ang Tek
Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee

Huan Hong who testified that "on November 16,
1946, appellant went to his (complainant’s)
office, at 1217 Herran, Paco, Manila, and asked
him to exchange Exhibit A — which he (appellant)
then brought with him — with cash alleging that
he needed badly the sum of P4,000 represented
by the check, but could not withdraw it from the
bank, it being then already closed; that in view of
this request and relying upon appellant’s
assurance that he had sufficient funds in the bank
to meet Exhibit A, and because they used to
borrow money from each other, even before the
war, and appellant owns a hotel and restaurant
known as the North Bay Hotel, said complainant
delivered to him, on the same date, the sum of
P4,000 in cash; that despite repeated efforts to
notify him that the check had been dishonored by
the bank, appellant could not be located any-
where, until he was summoned in the City Fiscal’s
Office in view of the complaint for estafa filed in
connection therewith; and that appellant has not
paid as yet the amount of the check, or any part
thereof."
cra law virt ua1aw li bra ry

Inasmuch as the findings of fact of the Court of

Appeals are final, the only question of law for
decision is whether under the facts found, estafa
had been accomplished.

Article 315, paragraph (d), subsection 2 of the

Revised Penal Code, punishes swindling
committed "By post-dating a check, or issuing
such check in payment of an obligation the
offender knowing that at the time he had no
funds in the bank, or the funds deposited by him
in the bank were not sufficient to cover the
amount of the check, and without informing the
payee of such circumstances"

We believe that under this provision of law Ang

Tek Lian was properly held liable. In this
connection, it must be stated that, as explained
in People v. Fernandez (59 Phil., 615), estafa is
committed by issuing either a postdated check or
an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been

made payable to "cash" and had not been
endorsed by Ang Tek Lian, the defendant is not
guilty of the offense charged. Based on the
proposition that "by uniform practice of all banks
in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is
advanced in support of the argument: jg c:chan robl es.com.ph

". . . When, therefore, he (the offended party)

accepted the check (Exhibit A) from the
appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that
sense, the appellant could not be said to have
acted fraudulently because the complainant, in so
accepting the check as it was drawn, must be
considered, by every rational consideration, to
have done so fully aware of the risk he was
running thereby." (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such

practice. Instances have undoubtedly occurred
wherein the Bank required the indorsement of the
drawer before honoring a check payable to
"cash." But cases there are too, where no such
requirement had been made. It depends upon the
circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9

[d], a check drawn payable to the order of "cash"
is a check payable to bearer, and the bank may
pay it to the person presenting it for payment
without the drawer’s indorsement.

"A check payable to the order of cash is a bearer

instrument. Bacal v. National City Bank of New
York (1933), 146 Misc., 732; 262 N. Y. S., 839;
Cleary v. Da Beck Plate Glass Co. (1907), 54
Misc., 537; 104 N. Y. S., 831; Massachusetts
Bonding & Insurance Co. v. Pittsburgh Pipe &
Supply Co. (Tex. Civ. App., 1939), 135 S. W.
(2d), 818. See also H. Cook & Son v. Moody
(1916), 17 Ga. App., 465; 87 S. E., 713."cralaw vi rtua1aw lib rary

"Where a check is made payable to the order of

’cash’, the word cash ’does not purport to be the
name of any person’, and hence the instrument is
payable to bearer. The drawee bank need not
obtain any indorsement of the check, but may
pay it to the person presenting it without any
indorsement. . . ." (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer’s
identity or financial solvency, it has the right to
demand identification and/or assurance against
possible complications, — for instance, (a)
forgery of drawer’s signature, (b) loss of the
check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore
require, for its protection, that the indorsement of
the drawer — or of some other person known to
it — be obtained. But where the Bank is satisfied
of the identity and/or the economic standing of
the bearer who tenders the check for collection, it
will pay the instrument without further question;
and it would incur no liability to the drawer in
thus acting.

"A check payable to bearer is authority for

payment to the holder. Where a check is in the
ordinary form, and is payable to bearer, so that
no indorsement is required, a bank, to which it is
presented for payment, need not have the holder
identified, and is not negligent in failing to do so.
. . ." (Michie on Banks and Banking, Permanent
Edition, Vol. 5, p. 343.)

". . . Consequently, a drawee bank to which a

bearer check is presented for payment need not
necessarily have the holder identified and
ordinarily may not be charged with negligence in
failing to do so. See Opinions 6C:2 and 6C:3. If
the bank has no reasonable cause for suspecting
any irregularity, it will be protected in paying a
bearer check, ’no matter what facts unknown to it
may have occurred prior to the presentment.’ 1
Morse, Banks and Banking, sec. 393.

"Although a bank is entitled to pay the amount of

a bearer check without further inquiry, it is
entirely reasonable for the bank to insist that the
holder give satisfactory proof of his identity . . . ."
(Paton’s Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the

form of the check Exhibit A was totally
unconnected with its dishonor. The Court of
Appeals declared that it was returned unsatisfied
because the drawer had insufficient funds — not
because the drawer’s indorsement was lacking.

Wherefore, there being no question as to the

correctness of the penalty imposed on the
appellant, the writ of certiorari is denied and the
decision of the Court of Appeals is hereby
affirmed, with costs.
Moran, C.J., Ozaeta, Paras, Pablo, Tuason, and
Reyes, JJ., concur.
 G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, vs. MANILA

OIL REFINING & BY-PRODUCTS COMPANY, INC., Defendant-
Appellant.

Antonio Gonzalez for appellant.

Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs,
Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence;
Francis B. Mahoney, and Jose A. Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the

validity in this jurisdiction of a provision in a promissory note
whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon for
the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property
exceptions.chanroblesvi rtual awlib rary cha nrob les vi rtua l law lib rary

On May 8, 1920, the manager and the treasurer of the Manila Oil
Refining & By-Products Company, Inc., executed and delivered to
the Philippine National Bank, a written instrument reading as
follows:

RENEWAL.
P61,000.00

MANILA, P.I., May 8, 1920. chanrobles vi rtual law lib rary

On demand after date we promise to pay to the order of the

Philippine National Bank sixty-one thousand only pesos at Philippine
National Bank, Manila, P.I. chanrob lesvi rtua lawlib rary cha nrob les vi rtua l law lib rary

Without defalcation, value received; and to hereby authorize any

attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the
above sum with interest, cost of suit and attorney's fees of ten (10)
per cent for collection, a release of all errors and waiver of all rights
to inquisition and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received. No.
____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,

Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,

Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay
the promissory note on demand. The Philippine National Bank
brought action in the Court of First Instance of Manila, to recover
P61,000, the amount of the note, together with interest and costs.
Mr. Elias N. Rector, an attorney associated with the Philippine
National Bank, entered his appearance in representation of the
defendant, and filed a motion confessing judgment. The defendant,
however, in a sworn declaration, objected strongly to the unsolicited
representation of attorney Recto. Later, attorney Antonio Gonzalez
appeared for the defendant and filed a demurrer, and when this was
overruled, presented an answer. The trial judge rendered judgment
on the motion of attorney Recto in the terms of the complaint. chanroblesvi rtua lawlib rary cha nrob les vi rtua l law lib rary

The foregoing facts, and appellant's three assignments of error,

raise squarely the question which was suggested in the beginning of
this opinion. In view of the importance of the subject to the
business community, the advice of prominent attorneys-at-law with
banking connections, was solicited. These members of the bar
responded promptly to the request of the court, and their
memoranda have proved highly useful in the solution of the
question. It is to the credit of the bar that although the sanction of
judgement notes in the Philippines might prove of immediate value
to clients, every one of the attorneys has looked upon the matter in
a big way, with the result that out of their independent
investigations has come a practically unanimous protest against the
recognition in this jurisdiction of judgment notes. 1 chanroble s virtu al law lib rary

Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly
called a judgment note. On the contrary, the provisions of the Code
of Civil Procedure, in relation to constitutional safeguards relating to
the right to take a man's property only after a day in court and after
due process of law, contemplate that all defendants shall have an
opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment
notes, especially as the Code provides that in case the defendant or
his assignee omits to set up a counterclaim, he cannot afterwards
maintain an action against the plaintiff therefor. (Secs. 95, 96, 97.)
At least one provision of the substantive law, namely, that the
validity and fulfillment of contracts cannot be left to the will of one
of the contracting parties (Civil Code, art. 1356), constitutes
another indication of fundamental legal purposes. chanroblesv irt ualawli bra ry chan robles virtua l law lib rary

The attorney for the appellee contends that the Negotiable

Instruments Law (Act No. 2031) expressly recognizes judgment
notes, and that they are enforcible under the regular procedure. The
Negotiable Instruments Law, in section 5, provides that "The
negotiable character of an instrument otherwise negotiable is not
affected by a provision which ". . . ( b) Authorizes a confession of
judgment if the instrument be not paid at maturity." We do not
believe, however, that this provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law
which merely provides that, in jurisdiction where judgment notes
are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the
Negotiable Instruments. Law concludes with these words: "But
nothing in this section shall validate any provision or stipulation
otherwise illegal."chanrob les vi rtual law lib rary

The court is thus put in the position of having to determine the

validity in the absence of statute of a provision in a note authorizing
an attorney to appear and confess judgment against the maker.
This situation, in reality, has its advantages for it permits us to
reach that solution which is best grounded in the solid principles of
the law, and which will best advance the public interest. chanroblesvi rt ualawlib ra ry chanrobles vi rt ual law li bra ry

The practice of entering judgments in debt on warrants of attorney

is of ancient origin. In the course of time a warrant of attorney to
confess judgement became a familiar common law security. At
common law, there were two kinds of judgments by confession; the
one a judgment by cognovit actionem, and the other by
confession relicta verificatione. A number of jurisdictions in the
United States have accepted the common law view of judgments by
confession, while still other jurisdictions have refused to sanction
them. In some States, statutes have been passed which have either
expressly authorized confession of judgment on warrant of attorney,
without antecedent process, or have forbidden judgments of this
character. In the absence of statute, there is a conflict of authority
as to the validity of a warrant of attorney for the confession of
judgement. The weight of opinion is that, unless authorized by
statute, warrants of attorney to confess judgment are void, as
against public policy.
chanroblesv irt ualawli bra ry chan roble s virtual law l ibra ry

Possibly the leading case on the subject is First National Bank of

Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889;
120 S. W., 36; 132 Am. St. Rep., 612). The record in this case
discloses that on October 4, 1990, the defendant executed and
delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the
note at any time after the note became due in any court of record in
the State of Missouri, or elsewhere, to waive the issuing and service
of process, and to confess judgement in favor of the First National
Bank of Kansas City for the amount that might then be due thereon,
with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and
release all errors in said proceedings and judgment, and all
proceedings, appeals, or writs of error thereon. Plaintiff filed a
petition in the Circuit Court to which was attached the above-
mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgement be
rendered in favor of the plaintiff as prayed in the petition. After the
Circuit Court had entered a judgement, the defendants, through
counsel, appeared specially and filed a motion to set it aside. The
Supreme Court of Missouri, speaking through Mr. Justice Graves, in
part said:

But going beyond the mere technical question in our preceding

paragraph discussed, we come to a question urged which goes to
the very root of this case, and whilst new and novel in this state, we
do not feel that the case should be disposed of without discussing
and passing upon that question.

xxx xxx xxx chanrobles vi rt ual law li bra ry

And if this instrument be considered as security for a debt, as it was

by the common law, it has never so found recognition in this state.
The policy of our law has been against such hidden securities for
debt. Our Recorder's Act is such that instruments intended as
security for debt should find a place in the public records, and if not,
they have often been viewed with suspicion, and their bona fides
often questioned. chanroblesvirtualawl ibra ry chan roble s virtual law lib rary

Nor do we thing that the policy of our law is such as to thus place a
debtor in the absolute power of his creditor. The field for fraud is
too far enlarged by such an instrument. Oppression and tyranny
would follow the footsteps of such a diversion in the way of security
for debt. Such instruments procured by duress could shortly be
placed in judgment in a foreign court and much distress result
therefrom. chanroblesvi rtua lawlib rary c hanro bles vi rtua l law li bra ry

Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse
judgment is rendered, and this statutory right is by the instrument
stricken down. True it is that such right is not claimed in this case,
but it is a part of the bond and we hardly know why this pound of
flesh has not been demanded. Courts guard with jealous eye any
contract innovations upon their jurisdiction. The instrument before
us, considered in the light of a contract, actually reduces the courts
to mere clerks to enter and record the judgment called for therein.
By our statute (Rev. St. 1899, sec. 645) a party to a written
instrument of this character has the right to show a failure of
consideration, but this right is brushed to the wind by this
instrument and the jurisdiction of the court to hear that controversy
is by the whose object is to oust the jurisdiction of the courts are
contrary to public policy and will not be enforced. Thus it is held
that any stipulation between parties to a contract distinguishing
between the different courts of the country is contrary to public
policy. The principle has also been applied to a stipulation in a
contract that a party who breaks it may not be sued, to an
agreement designating a person to be sued for its breach who is
nowise liable and prohibiting action against any but him, to a
provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his
part, without giving the notice and demand for possession and filing
the complaint required by statute, to a by-law of a benefit
association that the decisions of its officers on claim shall be final
and conclusive, and to many other agreements of a similar
tendency. In some courts, any agreement as to the time for suing
different from time allowed by the statute of limitations within which
suit shall be brought or the right to sue be barred is held void.

xxx xxx xxx chanrobles vi rt ual law li bra ry

We shall not pursue this question further. This contract, in so far as

it goes beyond the usual provisions of a note, is void as against the
public policy of the state, as such public policy is found expressed in
our laws and decisions. Such agreements are iniquitous to the
uttermost and should be promptly condemned by the courts, until
such time as they may receive express statutory recognition, as
they have in some states.

xxx xxx xxx chanrobles vi rt ual law li bra ry

From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738;
40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is
another well-considered authority. The notes referred to in the
record contained waiver of presentment and protest, homestead
and exemption rights real and personal, and other rights, and also
the following material provision: "And we do hereby empower and
authorize the said A. B. Farquhar Co. Limited, or agent, or any
prothonotary or attorney of any Court of Record to appear for us
and in our name to confess judgement against us and in favor of
said A. B. Farquhar Co., Limited, for the above named sum with
costs of suit and release of all errors and without stay of execution
after the maturity of this note." The Supreme Court of West
Virginia, on consideration of the validity of the judgment note above
described, speaking through Mr. Justice Miller, in part said:

As both sides agree the question presented is one of first impression

in this State. We have no statutes, as has Pennsylvania and many
other states, regulating the subject. In the decision we are called
upon to render, we must have recourse to the rules and principles
of the common law, in force here, and to our statute law,
applicable, and to such judicial decisions and practices in Virginia, in
force at the time of the separation, as are properly binding on us. It
is pertinent to remark in this connection, that after nearly fifty years
of judicial history this question, strong evidence, we think, that such
notes, if at all, have never been in very general use in this
commonwealth. And in most states where they are current the use
of them has grown up under statutes authorizing them, and
regulating the practice of employing them in commercial
transactions.

xxx xxx xxx chanrobles vi rt ual law li bra ry

It is contended, however, that the old legal maxim, qui facit per
alium, facit per se, is as applicable here as in other cases. We do
not think so. Strong reasons exist, as we have shown, for denying
its application, when holders of contracts of this character seek the
aid of the courts and of their execution process to enforce them,
defendant having had no day in court or opportunity to be heard.
We need not say in this case that a debtor may not, by proper
power of attorney duly executed, authorize another to appear in
court, and by proper endorsement upon the writ waive service of
process, and confess judgement. But we do not wish to be
understood as approving or intending to countenance the practice
employing in this state commercial paper of the character here
involved. Such paper has heretofore had little if any currency here.
If the practice is adopted into this state it ought to be, we think, by
act of the Legislature, with all proper safeguards thrown around it,
to prevent fraud and imposition. The policy of our law is, that no
man shall suffer judgment at the hands of our courts without proper
process and a day to be heard. To give currency to such paper by
judicial pronouncement would be to open the door to fraud and
imposition, and to subject the people to wrongs and injuries not
heretofore contemplated. This we are unwilling to do.

A case typical of those authorities which lend support to judgment

notes is First National Bank of Las Cruces vs. Baker ([1919], 180
Pac., 291). The Supreme Court of New Mexico, in a per
curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are

condemned as being against public policy. (Farquhar and Co. vs.
Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann.
Cas. [1914 A]. 640, and First National Bank of Kansas City vs.
White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16
Ann. Cas., 889, are examples of such holding.) By just what course
of reasoning it can be said by the courts that such judgments are
against public policy we are unable to understand. It was a practice
from time immemorial at common law, and the common law comes
down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country
which make the application of the common law undesirable, it is for
the Legislature to so announce, and to prohibit the taking of
judgments can be declared as against the public policy of the state.
We are aware that the argument against them is that they enable
the unconscionable creditor to take advantage of the necessities of
the poor debtor and cut him off from his ordinary day in court. On
the other hand, it may be said in their favor that it frequently
enables a debtor to obtain money which he could by no possibility
otherwise obtain. It strengthens his credit, and may be most highly
beneficial to him at times. In some of the states there judgments
have been condemned by statute and of course in that case are not
allowed.cha nrob lesvi rtua lawlib rary cha nro bles vi rtua l law lib ra ry
Our conclusion in this case is that a warrant of attorney given as
security to a creditor accompanying a promissory note confers a
valid power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note;
that our cognovit statute does not cover the same field as that
occupied by the common-law practice of taking judgments upon
warrant of attorney, and does not impliedly or otherwise abrogate
such practice; and that the practice of taking judgments upon
warrants of attorney as it was pursued in this case is not against
any public policy of the state, as declared by its laws.

With reference to the conclusiveness of the decisions here

mentioned, it may be said that they are based on the practice of the
English-American common law, and that the doctrines of the
common law are binding upon Philippine courts only in so far as
they are founded on sound principles applicable to local
conditions.chanroble svirtualawl ibra ry chan roble s virtual law lib rary

Judgments by confession as appeared at common law were

considered an amicable, easy, and cheap way to settle and secure
debts. They are a quick remedy and serve to save the court's time.
They also save the time and money of the litigants and the
government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding
the parties to the result as they themselves viewed it. chanro blesvi rt ualawlib ra ry chanrobles vi rt ual law li bra ry

On the other hand, are disadvantages to the commercial world

which outweigh the considerations just mentioned. Such warrants of
attorney are void as against public policy, because they enlarge the
field for fraud, because under these instruments the promissor
bargains away his right to a day in court, and because the effect of
the instrument is to strike down the right of appeal accorded by
statute. The recognition of such a form of obligation would bring
about a complete reorganization of commercial customs and
practices, with reference to short-term obligations. It can readily be
seen that judgement notes, instead of resulting to the advantage of
commercial life in the Philippines might be the source of abuse and
oppression, and make the courts involuntary parties thereto. If the
bank has a meritorious case, the judgement is ultimately certain in
the courts. chanroblesv irt ualawli bra ry chan roble s virt ual law l ibra ry

We are of the opinion that warrants of attorney to confess judgment

are not authorized nor contemplated by our law. We are further of
the opinion that provisions in notes authorizing attorneys to appear
and confess judgments against makers should not be recognized in
this jurisdiction by implication and should only be considered as
valid when given express legislative sanction. chanroblesv irtualawl ibra ry chan roble s virtual law l ibra ry

The judgment appealed from is set aside, and the case is remanded
to the lower court for further proceedings in accordance with this
decision. Without special finding as to costs in this instance, it is so
ordered.

Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and

Romualdez, JJ., concur.

Endnotes:

1
MEMORANDA OF "AMICI CURIAE"

Attorney Thos. L. Hartigan, of Hartigan and Welch, states: chanrobles vi rtual law lib rary

"Though we are attorneys for two of the large banks here and keenly interested in the introduction of any improvements
that would make for simplication of procedure and rapidity of practice, we cannot favor the introduction of confessions of
judgment in the Philippine islands. In our opinion, it would open the doors to fraud to an extent that would more than
counterbalance any advantages of its use. chanroble svirtualawl ibra ry cha nro bles vi rtua l law lib ra ry

"With our lack of system in recording judgments and with the practice of keeping merchants' books in various foreign
languages, there would be ample opportunity for a debtor to make preferences by confessions of judgment which could not
be discovered by the creditors until too late and which would be nearly impossible to set aside even when discovered in
time. chanroblesvi rtualaw lib rary c han robles v irt ual law li bra ry

"Although, as representatives of the banks, we are representing the creditor class, we believe the introduction of
confessions of judgment would ultimately cause much more loss than benefit to that class."

Attorney Clyde A. DeWitt, of Fisher and DeWitt, states: chanroble s virtual law l ibra ry

"There is no statutory sanction in this jurisdiction for such provisions in negotiable instruments. Section 5 (b) of the
Negotiable Instruments Law does not constitute such sanction because (1) it merely provides that such clauses will not
affect the negotiable character of the instrument, and (2) it concludes with language showing that the Legislature did not
intend thereby to validate any provision otherwise unlawful. The language is: 'But nothing in this section shall validate any
provision or stipulation otherwise illegal.' chanrobles vi rt ual law li bra ry
"The question then is whether or not, in the absence of express legislative sanction, such warrants of attorney are valid.
There are not many American cases in which this precise question has been considered, and in those cases in which the
question has been raised, the reasoning of the courts has been colored by the fact that the commercial use of these
warrants of attorney as security for debt was sanctioned at common law, and the procedural statutes are held to be merely
cumulative and not in derogation of the common law remedies. We, of course, have no such situation here. chanroblesvi rtua lawlib rary chan roble s virtual law l ibra ry

"The cases are collected in a note to First National Bank vs. White (220 Mo., 717), found in 16 Ann. Cas., 893, and it is
there shown that in Missouri and Kansas such provisions are held to be void as against the public policy of the State as
expressed in its laws and the decisions of its courts, while in Colorado and Illinois their validity was upheld as a familiar
common-law security not affected by the procedural statutes. Yet it is there pointed out that in Kahn vs. Lesser (97 Wis.,
217, 72 N.W., 739), the court, in referring to a judgment by confession under warrant of attorney in a promissory note,
said:

"'The judgment in this case must stand, if at all, by the authority of the statute. The proceeding by which it was entered
was outside and in derogation of the common-law practice of courts; and the statute, as well as the proceedings under it,
must be strictly construed.'"

"In Iowa, in an early case, McClish vs. Manning (3 Green, 233), the validity of these warrants of attorney was upheld,
referring to a statute authorizing any person to confess a judgment, by himself or his attorney. In a later decision,
Hamilton vs. Schoenberger (47 Ilowa, 385), it was expressly held that such a provision, in a note could not be enforced in
the courts of that State, and was not authorized or contemplated by its laws. And in Tolman vs. Jansen (106 Iowa, 455), it
was held that such a provision, being void, would not affect the negotiability of a note, even though its effect would be to
make uncertain the time of payment. chanroblesvi rt ualawlib ra ry chan roble s virtual law lib rary

"The reasoning in First National Bank vs. White, supra, is persuasive. The court there held that these warrants of attorney
are void as against the public policy of the state on the ground, first, that their effect is to enlarge the field for fraud;
second, that under such an instrument the promissor bargains away his right to his day in court; third, that the effect of
the instrument is to strike down the right to appeal accorded by statute, and, fourth, that there was no provision for the
public recording of such an instrument if regarded as a security for a debt. chanroblesvi rtualaw lib rary c han robles v irt ual law li bra ry

"It seems to me that on the precise grounds stated in the White case, these warrants of attorney should be held void as
against public policy in this jurisdiction. If given effect, they bargain away the jurisdiction of the courts to try and
determine the liability of the maker of the note on its merits. To uphold them would be to facilitate the operations of
usurers, the collection of gambling debts, and would make difficult, if not impossible under our procedure, the setting aside
of judgments entered in virtue thereof where the execution of the instrument was obtained by fraud, duress, or where
there had been an entire failure of consideration. I can think of no advantage which would result to the commercial world
from upholding these warrants of attorney which would outweigh the foregoing considerations."

Attorney e. Arthur Perkins, of Perkins and Kincaid, states: chanrobles vi rtual law lib rary

"Leaving aside entirely the legal considerations involved, I feel that there is only one answer to your inquiry, and that is,
that the best interests of the commercial life of the Philippines require the non-recognition of such a form of judgment
note. Feeling that you would want to know the reasons which impell me to adopt such a conclusion, I will say briefly that if
the Supreme Court should, by a decision, recognize such a judgment note and thereby place the stamp of approval upon
transactions of such a nature, the entire business population of the Philippine Islands would be justified in their future
transactions with debtors in requiring, in all instances, the execution of notes of a similar tenor, with the consequence that
the debtor would thereby be deprived, to all intents and purposes, upon ignorant debtors. It will prove a serious drawback
to the campaign being now waged against usury. chanroblesv irt ualawli bra ry cha nrob les vi rtua l law lib rary

"There is the further fear that the banks and money lenders having accounts now outstanding will immediately require
every debtor to execute that form of note and to refuse further extensions of credit unless sit is done, which the debtor
under the stress of circumstances will be compelled to accept, amounting in effect to duress. chanroblesvi rtua l awlibra ry cha nrob les vi rtual law lib rary

"The recognition of such a form of obligation would be so revolutionary in character as to bring about a complete
reorganization of commercial customs and practices with reference to short-term obligations. chanroblesv irtualaw libra ry cha nrob les vi rtua l law lib rary

"Having in mind that the Philippine National Bank is practically the only institution which can assist the farmers and
agriculturists, the practice of requiring a judgment note would place the latter wholly at the mercy of the bank, and this is
stated without any reflection on the bank, but merely to point out one of the consequent evils which will necessarily follow
if the practice should receive the high judicial sanction which a judgment of the Supreme Court would necessarily give to
it.
chanroblesvi rtualaw lib rary c han robles v irt ual law li bra ry

"Another feature which occurs to me is that where any new enterprise is being launched, it is universally the custom for
such company to arrange with some banking institution for credit facilities, over and above the capital with which it brings
business. Should it become the custom here to require the execution of so-called judgment notes, organizers of
corporations, partnerships and the like, who have in mind to secure additional working capital or credit facilities from
banks, will be very reluctant to put their funds into any enterprises which could be destroyed without warning by the
creditor exercising the rights which that form of transaction would give him. This is would act therefore as a deterrent to
new enterprises and the development of industry through individual initiative and with private funds. chanroble svirtualawl ibra ry c hanro bles vi rtua l law lib ra ry

"Let us take a very simple illustration of his. Suppose that you and I should form a partnership, with a capital of P50,000
to buy hemp and , in connection with our business, we went to some banking institution for the purpose of securing credit
facilities, as is customary, in the conduct of our business. Let us then suppose that the bank, taking into consideration the
capital which we ourselves had furnished and our standing in the community, was willing to allow us a credit in the further
sum of P50,000 upon our signing a so-called judgment note. Would not you and I consider a long time before we would so
far obligate ourselves as to place it in the power of the bank to send their attorney over to court, upon the least
provocation or at the first unfavorable rumor, and to confess judgment in our names, which would permit the sheriff to
close us out without even an opportunity to be heard?

"The sum and substance of the whole proposition is that such a practice is contrary to good morals."

Attorney David C. Johnson, of Gibbs, McDonough and Johnson, states: chanrobles vi rtual law lib rary

"It seems that under the common law a confession of judgment was only allowable by the defendant himself, either before
or after appearance and answer. The confession of judgment by warrant of attorney is a statutory development (15 R.C.L.,
656, 657; 17 Am. and Eng. Encyc. of Law [2d ed.], 765; Pl. and Pr., 973-975; Masson vs. Ward, 80 Vt., 290; 130 A. S. R.,
987,988). chanroble svirtualawl ibra ry cha nro bles vi rtua l law lib ra ry

"The procedure contemplated in the note quoted in your letter is contrary to that contemplated in our code of procedure,
which gives to all defendants an opportunity at least to be heard. An action on the note in question could be so presented
that the defendant would never be summoned or notified, since an appearance and confession of judgment might be filed
simultaneously. We believe that this procedure should not be recognized in this jurisdiction by implication, but should have
legislative sanction with the rights of the defendant amply safeguarded. We believe that section 5 of Act No. 2031 does not
of itself sanction any of the acts mentioned in that section, but is only a statement regarding the negotiable character of
the instrument. Subsection A of section 5 states that the authority to sell collateral security does not affect negotiability. As
we understand the decision of the Supreme Court in the case of Mahoney vs. Tuason(39 Phil., 952), the creditor in this
jurisdiction is not authorized by law to sell collateral security except in the manner provided in section 14 of Act No. 1508.
This would seem to reinforce our opinion. chanroblesvi rtua lawlib rary c han robles v irt ual law l ibra ry

"There are some favorable features of a judgment note or warrant for confession of judgment, but we believe that there
are many objections which outweigh any of the advantages. Forgery and usury are more prevalent in these Islands than in
the United States. The sanctioning of this procedure would add an additional weapon to the money lender who desires to
overreach his debtor. chanroblesvi rtua lawlib rary chan roble s virtual law l ibra ry

"We have delayed answering your letter in order that we might consult our Mr. Gibbs, who returned from Baguio
yesterday.

"The foregoing is the consensus of opinion of the member of this firm."

Attorney Julian Wolfson states:

"It is assumed that the only question propounded is : chanroble s virtual law lib rary

"'Admitting that there may be some doubt, as to a correct solution, which solution, the recognition of a confession of
judgment, or a non-recognition of a confession of judgment, would be for the best interest of the commercial life of the
Philippines? and that no opinion is required upon the incidental questions previously asked, as same have already been
determined by an examination of such authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6 (Notes
35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37); and such leading textbooks as 'Brannan's Negotiable
Instruments Law' and 'Selover on Negotiable Instruments.' "Everyone is entitled to 'his day in court.' This right may be
waved after an opportunity has been given to exercise the right, but must not and cannot be taken away before an
opportunity has been given to exercise the right. chanroble svi rtualaw lib rary c hanrobles vi rt ual law li bra ry

"The ordinary ship's bill of lading and the ordinary fire and marine insurance policy are generally printed on forms prepared
by the carrier and the insurer respectively, and generally contain a clause making it a condition precedent to the institution
of an action to first submit the matter to a board of arbitration. The Supreme Court has never recognized this clause. The
reasons are stated in the opinions. Once submitted to arbitration, then another question is raised. chanroblesvi rt ualawlib ra ry chan roble s virtual law lib rary
"Special defenses to written instruments are common. Need we do more than cite the following cases: Maulini vs. Serrano
(28 Phil., 640); Henry W. Peabody and Co. vs. Bromfield and Ross (38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39
Phil., 970). chanroble svirtualawl ibra ry cha nro bles vi rtua l law lib ra ry

"If the judgment note (this term is used throughout for brevity and as it is the recognized term) is to be recognized, what
chance has defendant of defending as did the defendants in the above cited cases? Non! chanroble s virtual law lib rary

"Often a promissory note is a mere formality taken by a bank as evidence of indebtedness, while the real indebtedness
may be for a superior or inferior amount incurred by way of overdraft, letters of credit outstanding, acceptances to mature,
or a thousand other forms of banking credit. Such "judgment notes" are generally made payable on demand. In the case
at bar, the note is made payable on demand. The real indebtedness may be partially paid, or the liquidation may be going
along too slow to suit the bank and then use is made of the judgment note. The defendant might have perfect defense
except for the judgment note. Would not article 1269 of the Civil Code here apply? chanroble s virtual law l ibra ry

"The 'judgment notes,' is not once in a thousand times signed at the time of receiving money from the bank. The
indebtedness represented thereby is incurred in prior transactions, the obligation became past due and the bank, as a
forcible measure, produces one of these 'judgment notes,' when the debtor is absolutely helpless, and says 'Sign on the
dotted line' and the debtor has no option, he signs. The minds of the parties never met. The debtor owes the money,
knows that the bank must have evidence of the indebtedness to pass the auditors and the debtor further realizes he must
accept that bank's dictation, because if he declines, he is liable to immediate ruin, or if not that, he will never get further
accommodation from the bank. He does not realize, even if he knows, what is meant by a 'judgment note.' Again, would
not article 1269 of the Civil Code here apply? chanrob les vi rtual law lib rary

"Just a few months ago there was a suit instituted by a local bank for a large sum of money, based on a written instrument
which, on its face, seemed absolute. Special defenses were pleaded, setting up that the instrument did not express the
real understanding of the parties and the real understanding was set up. The special defenses were fully proved and the
lower court dismissed the bank's suit. The bank did not even attempt to appeal to the Supreme Court (See Cause No.
18239 of the Docket of the Court of First Instance of Manila). Suppose the instrument sued on had contained a clause of
confession of judgment, what chance would defendant have had to prove his defense? None! chanroble s vi rtual law lib rary

"Let us go a step further and see where this leads us. A is a dealer in hardware and sells B a bill of goods. A prints a form,
which he has B to sign, in which B acknowledges receipt of the goods and in consideration thereof premises to pay A and
"a confession of judgment" clause is inserted. The goods turn out entirely different from those ordered and invoiced. B
refuses to pay. A sues on his "judgment note." What change has B? None! chanrobles vi rt ual law li bra ry

"Very often a promissory note is only one of a series of documents given as security for the debt. What about considering
the other documents which bear on the transaction? chanroble s virtual law l ibra ry

"A bank may have made certain advances and may have undertaken to make more, but fails to do so, to the damage and
prejudice of debtor. Let us assume that the bank agreed to advance several hundred thousand pesos in installments of
P60,000 each, and had advanced only the first installments, taking a "judgment note" for said first installment, and had
failed to advance further, to the damage of the debtor. What would become of section 97 of the Code of Civil Procedure?
How would debtor be able to exercise his right of counterclaim? Was it ever contemplated at the time of signing the
judgment note that the debtor would not only waive defense, but absolutely shut himself out of court, as he would,
according to section 97 above cited, on his counterclaim? Yet again, would not article 1269 of the Civil Code here apply?
law libra ry
chanroble s virtual

"We dare not attempt to elaborate on what would happen in the provinces of the Philippines should a "judgment note" be
held valid. chanroble svirtualawl ibra ry c hanro bles vi rtua l law li bra ry

"What about the Usury Law? How could a defense be offered there? The usurious rate might not appear on the face of the
"judgment note," but it may be there all the same. chanroble svirtualawl ibra ry c hanro bles vi rtua l law li bra ry

"Examples could be multiplied until the very absurdity of the proposition would be clearly seen, even by a blind man.
law libra ry
chanroblesvi rtua lawlib rary chan roble s virtual

"Of what possible benefit would the recognition of a "judgment note" serve "the best interest of the commercial life of the
Philippines? None! An honest creditor is willing to let his debtor have his day in court and is willing to prove to the court his
case. It might take slightly longer to go through with a trial, but that cannot be considered a set-back. But, on the other
hand, a dishonest creditor would take unfair advantage of a "judgment note" and would use it to the utmost to harass and
take advantage of the poor and helpless debtor. The real consequences likely, in fact sure, to arise from such recognition
are horrible beyond words to contemplate. chanroble svi rtualawl ib rary c hanro bles vi rt ual law li bra ry

"There can be but one answer to the proposition and that is: The non-recognition of a confession of judgment would be for
the best interests of the commercial life of the Philippines."
 Attorney J. G. Lawrence, of Ross and Lawrence, states: chanrobles vi rtual law lib rary

"We are aware of no expression of our Legislature or courts which would indicate that confessions of judgment under
powers given in a promissory note are contrary to public policy. This action was regularly brought in accordance with the
provisions of the Code of Civil Procedure and the defendant served with process. The answer, confessing judgment, was
filed in strict accordance with the powers contained in the note - a power coupled with an interest which defendant would
be estopped of denying. We think that no express legal sanction is necessary to legalize such a proceeding. chanroblesvi rt ualawlib ra ry chan roble s virtual law lib rary

"On the question of what ought to be the public policy of the Philippines, we hold quite a different opinion. While the use of
judgment notes might in some cases expedite the collection of just debts, we believe that under conditions as exist here,
their use should be discouraged. The lend themselves easily to fraud in the hands of friends of a dishonest debtor, and to
extortion in the hands of usurers who are already too well equipped with the pacto de retro. chanroblesvi rtual awlib rary c hanrob les vi rtua l law lib rary

"While we believe that the position of the bank is sound legally, we should be very glad to be proven mistaken."

Attorney Francis B. Mahoney, of the Philippine Trust Company, states: chanrobles vi rtual law lib rary

"I have not gone into the law and cases, except to take a glance at the subject of judgments in Volume 15 of Ruling Case
Law. However, the reasons indicated on page 651 thereof are significant. chanroblesvi rtua lawlib rary chan roble s virtual law l ibra ry

"Unquestionably, if our Legislature provided in unmistakable terms for confession of judgment as herein indicated, the
validity and constitutionality of the enactment might be questioned as failing to provide those constitutional safeguards of
taking a man's property only after a day in court and after the due process of law. chanroblesvi rtua lawlib rary chan roble s virtual law l ibra ry

"This conclusion is stronger - a fortiori - where the enacting provision - if such section 5 of Act. No. 2031 may be called - is
of a lefthanded nature, apparently relating only to negotiability - incidentally thus answering here your first inquiry.
Whatever legal principles there might be in favor of recognizing a confession of judgment - for example, the matter of
expediency - stronger and more vital principles oppose such recognition. chanroblesvi rtua lawlib rary c han robles v irt ual law l ibra ry

"By refusing to recognize confession of judgment under existing statutes or under general legal principles, at the worst
phase from the point of view of the plaintiff bank, there would result only possible delay, costs and attorney's fees, which,
after all, are only passed on to the clients of the bank in the shape of interests, charges. etc. If the bank has a meritorious
case, the judgment is ultimately certain as courts. chanroblesv irt ualawli bra ry chan rob les vi rtual law lib rary

"If the defendant debtor has any defense of merit, he is given an opportunity to present it, as, for example, in the matter
of usury so common, so difficult to uncover an such an unscrupulous rival of legitimate banking, the courts may keep their
doors open to the equities of each individual case. Whereas, if defendant, who theoretically may allege fraud an who
practically has great difficulty in proving it, must rely upon a defense of fraud, he has little chance and the doors of the
court are closed to any other defense. chanroble svirtualawl ibra ry cha nro bles vi rtua l law lib ra ry

"In the final analysis, the matter simmers down to: 1. Possible delay in judgment with costs, etc. 2. Certain justice in the
end. 3. The eyes and doors of courts open to the equities of each individual case. 4. Equality before the law,

or chanrob les vi rtual law lib rary

( a) Expediting judgment. ( b) Defendant debtor practically kept out of court by additional expense and difficulty in
securing a hearing. ( c) Putting a strong weapon in the hands of unscrupulous persons and taking the strength necessary
to wield this weapon from the courts. chanroblesv irt ualawli bra ry cha nrob les vi rtual law lib rary

"At first glance, if a debtor signs a document throwing away his right to be heard, the average man has a feeling such
debtor deserves to suffer the consequences. If that were the entire story, probably he should. But what man, needing
money badly enough - facing strenuous necessity - will not in the circumstances be inclined to look on the cheerful side-to
sign and get the money, letting the future take care of itself? Such is the frailty of human nature. Then, as the usual thing,
the rich and powerful can take care of themselves, and it is usually others who have need of courts, just laws and liberal
interpretation of them.chanroble svirtualawl ibra ry c hanro bles vi rtua l law lib ra ry

"No doubt, banks would favor expediting judgments against their debtors, other things being equal. And no doubt,
additional delay in courts and the incidental costs thereof will be borne by the clients of the bank. But sound banking is not
established and enhanced by harsh law which put strong weapons in powerful hands. Contented peoples, safe laws and
sound banking usually go hand in hand."

Professor Jose A. Espiritu, of the University of the Philippines, states: chanroble s virtual law l ibra ry
"Permit me to cite first of all the authorities that I have gathered concerning the principal question at issue in the case
mentioned in your letter, namely, 'The Effect and Validity of Confession of Judgement in the Philippines.'

"1. Confession of judgment has been defined as "a voluntary submission to the jurisdiction of the court, giving by consent
and without the service of process, what could otherwise be obtained by summons and complaint, and other formal
proceedings, an acknowledgment of indebtedness, upon which it is contemplated that a judgment may and will be
rendered." (8 Cyc., pp. 563, 564.) chanrobles vi rtua l law lib ra ry

"2. As to the general effects of confession of judgment, the following statements may be mentioned: 'A warrant to confess
judgment does not destroy the negotiability of the note. Such a note is commonly called a "judgement note." Decisions to
the contrary in the States where the Negotiable Instruments Law is now in force are abrogated thereby, since it expressly
provides that the negotiable character of an instrument otherwise negotiable is not affected by a provision which
authorizes a confession of judgment, if the instrument is not paid at maturity. However, this statutory provision does not
apply to stipulations for the confession of judgment "prior" to maturity.' (8 C.J., p. 128, sec. 222.) chanrobles vi rtua l law lib ra ry

"3. Nature of Requisites. "A judgment may be rendered upon the confession of defendant, either in an action regularly
commenced against him by the issuance and service of process, in which case the confession may be made by his attorney
of record, or, without the institution of a suit, upon a confession by defendant in person or by his attorney in fact. It
implies something more than a mere admission of a debt to plaintiff; in addition, it is defendant's consent that a judgment
shall be entered against him. . . . ." (23 cyc., 699.) chanrobles vi rtua l law lib ra ry

"4. Statutory Provisions, "Statutes regulating the confession of judgments without action, or otherwise than according to
the course of the common law, are strictly construed, and a strict compliance with their provisions must be shown in order
to sustain the validity of the judgment." (Chapin vs. Tompson, 20 Cla., 681.) "And this applies also to statutory restriction
upon the right to confess judgment, as that authority to confess judgment shall not be given in the same instrument which
contains the promise or obligation to pay the debt, or that such confession shall not be authorized by any instrument
executed prior to suit brought." (23 Cyc., 699, 700.) chanrobles vi rtua l law lib rary

"5. Warrant or Power of Attorney - Validity and Necessity. 'A judgment by confession may be entered upon a written
authority, called a warrant or letter of attorney, by which the debtor empowers an attorney to enter an appearance for
him, waive process, and confess judgment against him for a designated sum, except where this method of proceeding is
prohibited by statute. The warrant as the basis of judgment is generally required to be placed on file in the clerk's office,
and no judgment can be so entered until it is so filed.' (23 Cyc., 703.) chanroble s virtual law l ibra ry

"6. Requisites and Sufficiency. 'A warrant or power of attorney to confess judgement should be in writing and should
conform to the requirements of the statute in force at the time of its execution, although in the absence of specific
statutory directions it is sufficient, without much regard to its form, if it contains the essential of a good power and clearly
states its purpose. It must be signed by the person against whom the judgment is to be entered . . . .' (23 Cyc., 704.)

"The above quoted authorities are among the various authorities I found bearing on the question at issue. As it can be
readily seen none of them decides squarely and definitely the questions propounded in your letter. One thing, however,
seems to be clear, from the very provision of section 5 ( b) of the Negotiable Instruments Law and from the quotation No.
2 of this letter, that a provision in a note or bill of exchange authorizing a confession of judgment in default of payment at
its maturity has particular reference, in so far as Act No. 2031 is concerned, only to the negotiable character of an
instrument. I do not believe that the Legislature had the intention in passing the said Act No. 2031 to introduce in the
Philippines a new practice in our Remedial Law, namely, that of confession of judgment, which is purely procedural in
nature. chanroblesvi rt ualawlib ra ry chan roble s virtual law lib rary

"Now as to the second question, to wit: 'Does the silence of the Code of Civil Procedure on the subject mean that a
confession of judgement cannot be recognized in this jurisdiction, or can a judgment by confession be imported into the
Philippines under general legal principles?' Before answering this question attention is respectfully called to the quotation
No. 4 of this letter, which expressly provides that statutes regulating confession of judgments must be strictly construed
and their provisions strictly complied with to sustain the validity of judgments rendered under such statutes. Now it being
admitted that there is no express provision in our Code of Civil Procedure authorizing or sanctioning this mode of practice
in this jurisdiction, and consequently there are no regulations provided to be followed in this particular remedy, I am
therefore of the opinion that confession of judgment should not be deemed as imported in the Philippines under the
general legal principles. The remedy itself is a most summary one, and when the defendant-debtor, instead of admitting or
allowing a judgment be taken against him, presents his appearance and answers the complaint filed against him, it seems
that the trial court should not render a judgement without first hearing the evidence that the parties may wish to submit
before him, for it may happen that the defendant-debtor may have some valid or good defenses against the plaintiff-
creditor. This is especially true in the case of a counterclaim that the defendant may have against the plaintiff as provided
in sections 95 and 96 of the Code of Civil Procedure. The same Code provides that in case of an omission to set up his
counterclaim, the defendant or his assignee loses all his right to bring further suit on such claim. (Sec. 97, Act No. 190.)
virtua l law lib rary
chanrobles

"In answer to the last question, namely: "Admitting that there may be some doubt, as to the correct solution, which
solution, the recognition of a confession of judgement, or the non-recognition of a confession of judgment, would be for
the best interests of the commercial life of the Philippines?" I wish first of all to state that a confession of judgment is a
quick remedy. It saves time and money as far as the parties to the suit are concerned if the same is properly and legally
brought. It saves the court's time and the government the expense that a long litigation entails. As to its disadvantages we
may say among other things the following: 1. It may be abused in the same way as the usurious rates of interest on loans
are now in the Philippines, because a borrower who is in great need of money might be induced, if not actually compelled,
to sign such a burdensome obligation; 2. It deprives the defendant of his day in court, and as a consequence it will prevent
him to set up and prove before the court his just claims and other lawful defenses against the plaintiff; 3. It will create
multiplicity of actions in this jurisdiction, for if the confession of judgment has been wrongfully or unjustly entered, the
judgment debtor may start another litigation on the same subject-matter that might have been brought before the court in
case a proper trial was formally held before the rendition of such a judgment; and 4. It does not really hold the plaintiff
who has a good cause of action against the defendant as his proofs will surely establish his claims and consequently a
judgment must necessarily be rendered in his favor. chanroblesvi rtualaw lib rary c han robles v irt ual law l ibra ry

"From the above statements, I am of the opinion that unless proper regulations are first duly introduced and incorporated
in our remedial law, confession of judgments, instead of resulting advantageous to our commercial life in the Philippines,
might be the sources of abuse and oppression. The very fact that confession of judgement is almost summary and in fact a
violent remedy, it should first of all be properly regulated by statute, and those regulations must be strictly complied with,
before the court should concede to such a remedy."

ATIONAL BANK V. MANILA

OIL REFINING
43 PHIL 444

FACTS:
Manila Oil has issued a promissory note in favor of
National Bank which included a provision on a confession of
judgment in case of failure to pay obligation. Indeed, Manila
Oil has failed to pay on demand. This prompted the bank to
file a case in court, wherein an attorney associated with them
entered his appearance for the defendant. To this the
defendant objected.

HELD:
 Warrants of attorney to confess judgment aren’t
authorized nor contemplated by our law. Provisions in
notes authorizing attorneys to appear and confess
judgments against makers should not be recognized in our
jurisdiction by implication and should only be considered as
valid when given express legislative sanction.