G.R. No.
74451 May 25, 1988 have the skidders paid by way of a domestic letter of credit
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
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.
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 Violago Motor Sales Corporation, or order and as such, [e] the drawee is
HUNDRED THIRTY EIGHT & 201/100 ONLY named or indicated with certainty. 9
(P58,138.20) Philippine currency, which amount includes interest at
14%  per annum based on the diminishing balance, the said principal It was negotiated by indorsement in writing on the instrument itself payable to
sum, to be payable, without need of notice or demand, in the Order of Filinvest Finance and Leasing Corporation 10 and it is an
installments of the amounts following and at the dates hereinafter set indorsement of the entire instrument. 11
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 Under the circumstances, there appears to be no question that Filinvest is a
inclusive of February 21, 1983. P_________ monthly for ______ holder in due course, having taken the instrument under the following
months due and payable on the ______ day of each month starting conditions: [a] it is complete and regular upon its face; [b] it became the
_____198__ thru and inclusive of _____, 198________ provided that holder thereof before it was overdue, and without notice that it had previously
interest at 14% per annum  shall be added on each unpaid been dishonored; [c] it took the same in good faith and for value; and [d]
installment from maturity hereof until fully paid. 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
x x x           x x x          x x x
Accordingly, respondent corporation holds the instrument free from any
Maker; Co-Maker: 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
(SIGNED) JUANITA SALAS _________________ amount thereof. 13 This being so, petitioner cannot set up against respondent
the defense of nullity of the contract of sale between her and VMS.
Address:
Even assuming for the sake of argument that there is an iota of truth in
____________________ ____________________ petitioner's allegation that there was in fact deception made upon her in that
the vehicle she purchased was different from that actually delivered to her,
this matter cannot be passed upon in the case before us, where the VMS
WITNESSES
was never impleaded as a party.
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
Whatever issue is raised or claim presented against VMS must be resolved
TAN # TAN #
in the "breach of contract" case.
PAY TO THE ORDER OF
Hence, we reach a similar opinion as did respondent court when it held:
FILINVEST FINANCE AND LEASING CORPORATION

We can only extend our sympathies to the defendant (herein

VIOLAGO MOTOR SALES CORPORATION
petitioner) in this unfortunate incident. Indeed, there is nothing We
BY: (SIGNED) GENEVEVA V. BALTAZAR
can do as far as the Violago Motor Sales Corporation is concerned
Cash Manager 8
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
A careful study of the questioned promissory note shows that it is a transaction in question would amount, to denial of due process,
negotiable instrument, having complied with the requisites under the law as hence, improper and unconstitutional. She should have impleaded
follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it Violago Motor Sales.14
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
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED.
for 36 months due and payable on the 21 st day of each month starting
With costs against petitioner.
March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to

SO ORDERED.
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.
x x x           x x x          x x x
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. 8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
G.R. No. 97753 August 10, 1992 9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
CALTEX (PHILIPPINES), INC., petitioner,
Total 280 P1,120,000
vs.
===== ========
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
2. Angel dela Cruz delivered the said certificates of time
(CTDs) to herein plaintiff in connection with his purchased of
Bito, Lozada, Ortega & Castillo for petitioners.
fuel products from the latter (Original Record, p. 208).
Nepomuceno, Hofileña & Guingona for private.
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
REGALADO, J.: Affidavit of Loss, as required by defendant bank's procedure,
if he desired replacement of said lost CTDs (TSN, February
This petition for review on certiorari impugns and seeks the reversal of the 9, 1987, pp. 48-50).
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 4. On March 18, 1982, Angel dela Cruz executed and
Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed delivered to defendant bank the required Affidavit of Loss
therein by herein petitioner against respondent bank. (Defendant's Exhibit 281). On the basis of said affidavit of
loss, 280 replacement CTDs were issued in favor of said
The undisputed background of this case, as found by the court a quo and depositor (Defendant's Exhibits 282-561).
adopted by respondent court, appears of record:
5. On March 25, 1982, Angel dela Cruz negotiated and
1. On various dates, defendant, a commercial banking obtained a loan from defendant bank in the amount of Eight
institution, through its Sucat Branch issued 280 certificates of Hundred Seventy Five Thousand Pesos (P875,000.00). On
time deposit (CTDs) in favor of one Angel dela Cruz who the same date, said depositor executed a notarized Deed of
deposited with herein defendant the aggregate amount of Assignment of Time Deposit (Exhibit 562) which stated,
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts among others, that he (de la Cruz) surrenders to defendant
and Statement of Issues, Original Records, p. 207; bank "full control of the indicated time deposits from and
Defendant's Exhibits 1 to 280); after date" of the assignment and further authorizes said
bank to pre-terminate, set-off and "apply the said time
CTD CTD deposits to the payment of whatever amount or amounts
Dates Serial Nos. Quantity Amount may be due" on the loan upon its maturity (TSN, February 9,
1987, pp. 60-62).
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000 6. Sometime in November, 1982, Mr. Aranas, Credit
2 Mar. 82 74701 to 74740 40 160,000 Manager of plaintiff Caltex (Phils.) Inc., went to the
4 Mar. 82 90127 to 90146 20 80,000 defendant bank's Sucat branch and presented for verification
5 Mar. 82 74797 to 94800 4 16,000 the CTDs declared lost by Angel dela Cruz alleging that the
5 Mar. 82 89965 to 89986 22 88,000 same were delivered to herein plaintiff "as security for
5 Mar. 82 70147 to 90150 4 16,000
 purchases made with Caltex Philippines, Inc." by said The instant petition is bereft of merit.
depositor (TSN, February 9, 1987, pp. 54-68).
A sample text of the certificates of time deposit is reproduced below to
7. On November 26, 1982, defendant received a letter provide a better understanding of the issues involved in this recourse.
(Defendant's Exhibit 563) from herein plaintiff formally
informing it of its possession of the CTDs in question and of SECURITY BANK
its decision to pre-terminate the same. AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
8. On December 8, 1982, plaintiff was requested by herein Metro Manila, Philippines
defendant to furnish the former "a copy of the document SUCAT OFFICEP 4,000.00
evidencing the guarantee agreement with Mr. Angel dela CERTIFICATE OF DEPOSIT
Cruz" as well as "the details of Mr. Angel dela Cruz" Rate 16%
obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564). Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____
9. No copy of the requested documents was furnished herein
defendant. This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
10. Accordingly, defendant bank rejected the plaintiff's FOUR THOUSAND ONLY, SECURITY
demand and claim for payment of the value of the CTDs in a BANK SUCAT OFFICE P4,000 & 00
letter dated February 7, 1983 (Defendant's Exhibit 566). CTS Pesos, Philippine Currency, repayable
to said depositor 731 days. after date, upon
11. In April 1983, the loan of Angel dela Cruz with the presentation and surrender of this certificate,
defendant bank matured and fell due and on August 5, 1983, with interest at the rate of 16% per cent per
the latter set-off and applied the time deposits in question to annum.
the payment of the matured loan (TSN, February 9, 1987,
pp. 130-131). (Sgd. Illegible) (Sgd. Illegible)

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 AUTHORIZED SIGNATURES 5
P1,120,000.00 plus accrued interest and compounded
interest therein at 16%  per annum, moral and exemplary Respondent court ruled that the CTDs in question are non-negotiable
damages as well as attorney's fees. instruments, nationalizing as follows:

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
. . . 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.
x x x           x x x          x x x
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
x x x           x x x          x x x
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.)
x x x           x x x          x x x
The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558
of the Code of Commerce, on which petitioner seeks to anchor respondent
bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument
so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance a
duplicate or replacement instrument sans  compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 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.
x x x           x x x          x x x
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.
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?

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank A Yes, sir. This CBCI is an investment of
Circular 769, and its requirements. An entity which deals with corporate Filriters required by the Insurance
agents within circumstances showing that the agents are acting in excess of Commission as legal reserve of the
corporate authority, may not hold the corporation liable. 22 This is only fair, as company.
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 Q Legal reserve for the purpose of what?

The transfer made by Filriters to Philfinance did not conform to the said. A Well, you see, the Insurance companies
Central Bank Circular, which for all intents, is considered part of the law. As are required to put up legal reserves under
found by the courts a quo, Alfredo O. Banaria, who had signed the deed of Section 213 of the Insurance Code
assignment from Filriters to Philfinance, purportedly for and in favor of equivalent to 40 percent of the premiums
Filriters, did not have the necessary written authorization from the Board of receipt and further, the Insurance
Directors of Filriters to act for the latter. As it is, the sale from Filriters to Commission requires this reserve to be
Philfinance was fictitious, and therefore void and inexistent, as there was no invested preferably in government securities
consideration for the same. This is fatal to the petitioner's cause, for then, or government binds. This is how this CBCI
Philfinance had no title over the subject certificate to convey the Traders 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.
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 Decision1 of the Court of Appeals (CA) which affirmed with
modification that of the Regional Trial Court (RTC). 2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City.
They maintained savings and demand/checking accounts, namely, PNBig
Demand Deposits (Checking/Current Account No. 810624-6 under the
account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name
Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their
business, they had a discounting 3 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 x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection
even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified
payees. It is unrefuted that the 69 checks were payable to specific persons.
Likewise, it is uncontroverted that the payees were actual, existing, and living
persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons,
were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must show
that the makers did not intend for the named payees to be part of the
transaction involving the checks. At most, the bank’s thesis shows that the
payees did not have knowledge of the existence of the checks. This lack of
knowledge on the part of the payees, however, was not tantamount to a lack
of intention on the part of respondents-spouses that the payees would not
receive the checks’ proceeds. Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is understandable
that they relied on the information given by the officers of PEMSLA that the
payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because,
as found by both lower courts, PNB failed to present sufficient evidence to
defeat the claim of respondents-spouses that the named payees were the
intended recipients of the checks’ proceeds. The bank failed to satisfy a
requisite condition of a fictitious-payee situation – that the maker of the check
intended for the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader
sense, the fictitious-payee rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee bank bears the loss. 20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact
that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears
stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its
operations.21 This Court has recognized the unique public interest possessed
by the banking industry and the need for the people to have full trust and
confidence in their banks.22 For this reason, banks are minded to treat their
customer’s accounts with utmost care, confidence, and honesty. 23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer’s instructions, i.e., to the named payee in the
check. It should charge to the drawer’s accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the
drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors. The
checks were drawn against respondents-spouses’ accounts. PNB, as the
drawee bank, had the responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks in
strict accordance with the instructions of the drawers. Petitioner miserably
failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The facts
clearly show that the bank did not pay the checks in strict accordance with
the instructions of the drawers, respondents-spouses. Instead, it paid the
values of the checks not to the named payees or their order, but to PEMSLA,
a third party to the transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to be
extra vigilant in the management and supervision of their employees. In Bank
of the Philippine Islands v. Court of Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary
clerks and employees. For obvious reasons, the banks are expected to
exercise the highest degree of diligence in the selection and supervision of
their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. Indeed,
when it is the gross negligence of the bank employees that caused the loss,
the bank should be held liable.27
PNB’s argument that there is no loss to compensate since no demand for
payment has been made by the payees must also fail. Damage was caused
to respondents-spouses when the PEMSLA checks they deposited were
returned for the reason "Account Closed." These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not
encash the PEMSLA 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.
G.R. No. 157943               September 4, 2013
PEOPLE OF THE PHILIPPINES, PLAINTIFF-APPELLEE,
vs.
GILBERT REYES WAGAS, ACCUSED-APPELLANT.
DECISION
BERSAMIN, J.:
The Bill of Rights guarantees the right of an accused to be presumed
innocent until the contrary is proved. In order to overcome the presumption of
innocence, the Prosecution is required to adduce against him nothing less
than proof beyond reasonable doubt. Such proof is not only in relation to the
elements of the offense, but also in relation to the identity of the offender. If
the Prosecution fails to discharge its heavy burden, then it is not only the
right of the accused to be freed, it becomes the Court’s constitutional duty to
acquit him.
The Case
Gilbert R. Wagas appeals his conviction for estafa under the decision
rendered on July 11, 2002 by the Regional Trial Court, Branch 58, in Cebu
City (RTC), meting on him the indeterminate penalty of 12 years of prision
mayor, as minimum, to 30 years of reclusion perpetua, as maximum.
Antecedents
Wagas was charged with estafa under the information that reads:
That on or about the 30th day of April, 1997, and for sometime prior and
subsequent thereto, in the City of Cebu, Philippines, and within the
jurisdiction of this Honorable Court, the said accused, with deliberate intent,
with intent to gain and by means of false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud, to wit:
knowing that he did not have sufficient funds deposited with the Bank of
Philippine Islands, and without informing Alberto Ligaray of that
circumstance, with intent to defraud the latter, did then and there issue Bank
of the Philippine Islands Check No. 0011003, dated May 08, 1997 in the
amount of ₱200,000.00, which check was issued in payment of an obligation,
but which check when presented for encashment with the bank, was
dishonored for the reason "drawn against insufficient funds" and inspite of
notice and several demands made upon said accused to make good said
check or replace the same with cash, he had failed and refused and up to the
present time still fails and refuses to do so, to the damage and prejudice of
Alberto Ligaray in the amount aforestated.
CONTRARY TO LAW.1
After Wagas entered a plea of not guilty, 2 the pre-trial was held, during which
the Defense admitted that the check alleged in the information had been
dishonored due to insufficient funds. 3 On its part, the Prosecution made no
admission.4
At the trial, the Prosecution presented complainant Alberto Ligaray as its lone
witness. Ligaray testified that on April 30, 1997, Wagas placed an order for
200 bags of rice over the telephone; that he and his wife would not agree at
first to the proposed payment of the order by postdated check, but because
of Wagas’ assurance that he would not disappoint them and that he had the
means to pay them because he had a lending business and money in the
bank, they relented and accepted the order; that he released the goods to
Wagas on April 30, 1997 and at the same time received Bank of the
Philippine Islands (BPI) Check No. 0011003 for ₱200,000.00 payable to cash
and postdated May 8, 1997; that he later deposited the check with Solid
Bank, his depository bank, but the check was dishonored due to insufficiency
of funds;5 that he called Wagas about the matter, and the latter told him that
he would pay upon his return to Cebu; and that despite repeated demands,
Wagas did not pay him.6
On cross-examination, Ligaray admitted that he did not personally meet
Wagas because they transacted through telephone only; that he released the
200 bags of rice directly to Robert Cañada, the brother-in-law of Wagas, who
signed the delivery receipt upon receiving the rice.7
After Ligaray testified, the Prosecution formally offered the following: (a) BPI
Check No. 0011003 in the amount of ₱200,000.00 payable to "cash;" (b) the
return slip dated May 13, 1997 issued by Solid Bank; (c) Ligaray’s affidavit;
and (d) the delivery receipt signed by Cañada. After the RTC admitted the
exhibits, the Prosecution then rested its case.8
In his defense, Wagas himself testified. He admitted having issued BPI
Check No. 0011003 to Cañada, his brother-in-law, not to Ligaray. He denied
having any telephone conversation or any dealings with Ligaray. He
explained that the check was intended as payment for a portion of Cañada’s
property that he wanted to buy, but when the sale did not push through, he
did not anymore fund the check.9
On cross-examination, the Prosecution confronted Wagas with a letter dated
July 3, 1997 apparently signed by him and addressed to Ligaray’s counsel,
wherein he admitted owing Ligaray ₱200,000.00 for goods received, to wit:
This is to acknowledge receipt of your letter dated June 23, 1997 which is
self-explanatory. It is worthy also to discuss with you the environmental facts
of the case for your consideration, to wit:
It is true that I obtained goods from your client worth ₱200,000.00 and I
promised to settle the same last May 10, 1997, but to no avail. On this point,
let me inform you that I sold my real property to a buyer in Manila, and
promised to pay the consideration on the same date as I promised with your
client. Unfortunately, said buyer likewise failed to make good with such
obligation. Hence, I failed to fulfill my promise resultant thereof. (sic)
Again, I made another promise to settle said obligation on or before June 15,
1997, but still to no avail attributable to the same reason as aforementioned.
(sic)
To arrest this problem, we decided to source some funds using the subject
property as collateral. This other means is resorted to for the purpose of
settling the herein obligation. And as to its status, said funds will be
rele[a]sed within thirty (30) days from today.
In view of the foregoing, it is my sincere request and promise to settle said
obligation on or before August 15, 1997.
Lastly, I would like to manifest that it is not my intention to shy away from any
financial obligation.
xxxx
Respectfully yours,
(SGD.)
GILBERT R. WAGAS10
Wagas admitted the letter, but insisted that it was Cañada who had
transacted with Ligaray, and that he had signed the letter only because his
sister and her husband (Cañada) had begged him to assume the
responsibility.11 On redirect examination, Wagas declared that Cañada, a
seafarer, was then out of the country; that he signed the letter only to
accommodate the pleas of his sister and Cañada, and to avoid jeopardizing
Cañada’s application for overseas employment. 12 The Prosecution
subsequently offered and the RTC admitted the letter as rebuttal evidence. 13
Decision of the RTC
As stated, the RTC convicted Wagas of estafa on July 11, 2002, viz:
WHEREFORE, premises considered, the Court finds the accused GUILTY
beyond reasonable doubt as charged and he is hereby sentenced as follows:
To suffer an indeterminate penalty of from twelve (12) years of pris[i]on
mayor, as minimum, to thirty (30) years of reclusion perpetua as maximum;
To indemnify the complainant, Albert[o] Ligaray in the sum of ₱200,000.00;
To pay said complainant the sum of ₱30,000.00 by way of attorney’s fees;
and the costs of suit.
SO ORDERED.14
The RTC held that the Prosecution had proved beyond reasonable doubt all
the elements constituting the crime of estafa, namely: (a) that Wagas issued
the postdated check as payment for an obligation contracted at the time the
check was issued; (b) that he failed to deposit an amount sufficient to cover
the check despite having been informed that the check had been dishonored;
and (c) that Ligaray released the goods upon receipt of the postdated check
and upon Wagas’ assurance that the check would be funded on its date.
Wagas filed a motion for new trial and/or reconsideration, 15 arguing that the
Prosecution did not establish that it was he who had transacted with Ligaray
and who had negotiated the check to the latter; that the records showed that
Ligaray did not meet him at any time; and that Ligaray’s testimony on their
alleged telephone conversation was not reliable because it was not shown
that Ligaray had been familiar with his voice. Wagas also sought the
reopening of the case based on newly discovered evidence, specifically: (a)
the testimony of Cañada who could not testify during the trial because he
was then out of the country, and (b) Ligaray’s testimony given against Wagas
in another criminal case for violation of Batas Pambansa Blg. 22.
On October 21, 2002, the RTC denied the motion for new trial and/or
reconsideration, opining that the evidence Wagas desired to present at a new
trial did not qualify as newly discovered, and that there was no compelling
ground to reverse its decision.16
Wagas appealed directly to this Court by notice of appeal. 17
Prior to the elevation of the records to the Court, Wagas filed a petition for
admission to bail pending appeal. The RTC granted the petition and fixed
Wagas’ bond at ₱40,000.00.18 Wagas then posted bail for his provisional
liberty pending appeal.19
The resolution of this appeal was delayed by incidents bearing on the grant
of Wagas’ application for bail. On November 17, 2003, the Court required the
RTC Judge to explain why Wagas was out on bail. 20 On January 15, 2004,
the RTC Judge submitted to the Court a so-called manifestation and
compliance which the Court referred to the Office of the Court Administrator
(OCA) for evaluation, report, and recommendation. 21 On July 5, 2005, the
Court, upon the OCA’s recommendation, directed the filing of an
administrative complaint for simple ignorance of the law against the RTC
Judge.22 On September 12, 2006, the Court directed the OCA to comply with
its July 5, 2005 directive, and to cause the filing of the administrative
complaint against the RTC Judge. The Court also directed Wagas to explain
why his bail should not be cancelled for having been erroneously
granted.23 Finally, in its memorandum dated September 27, 2006, the OCA
manifested to the Court that it had meanwhile filed the administrative
complaint against the RTC Judge.24
Issues
In this appeal, Wagas insists that he and Ligaray were neither friends nor
personally known to one other; that it was highly incredible that Ligaray, a
businessman, would have entered into a transaction with him involving a
huge amount of money only over the telephone; that on the contrary, the
evidence pointed to Cañada as the person with whom Ligaray had
transacted, considering that the delivery receipt, which had been signed by
Cañada, indicated that the goods had been "Ordered by ROBERT
CAÑADA," that the goods had been received by Cañada in good order and
condition, and that there was no showing that Cañada had been acting on
behalf of Wagas; that he had issued the check to Cañada upon a different
transaction; that Cañada had negotiated the check to Ligaray; and that the
element of deceit had not been established because it had not been proved
with certainty that it was him who had transacted with Ligaray over the
telephone.
The circumstances beg the question: did the Prosecution establish beyond
reasonable doubt the existence of all the elements of the crime of estafa as
charged, as well as the identity of the perpetrator of the crime?
Ruling
The appeal is meritorious.
Article 315, paragraph 2(d) of the Revised Penal Code, as amended,
provides:
Article 315. Swindling (estafa). — Any person who shall defraud another by
any of the means mentioned hereinbelow shall be punished by:
xxxx
2. By means of any of the following false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud:
xxxx
(d) By postdating a check, or issuing a check in payment of an obligation
when the offender had no funds in the bank, or his funds deposited therein
were not sufficient to cover the amount of the check. The failure of the drawer
of the check to deposit the amount necessary to cover his check within three
(3) days from receipt of notice from the bank and/or the payee or holder that
said check has been dishonored for lack or insufficiency of funds shall be
prima facie evidence of deceit constituting false pretense or fraudulent act.
In order to constitute estafa under this statutory provision, the act of
postdating or issuing a check in payment of an obligation must be the
efficient cause of the defraudation. This means that the offender must be
able to obtain money or property from the offended party by reason of the
issuance of the check, whether dated or postdated. In other words, the
Prosecution must show that the person to whom the check was delivered
would not have parted with his money or property were it not for the issuance
of the check by the offender.25
The essential elements of the crime charged are that: (a) a check is
postdated or issued in payment of an obligation contracted at the time the
check is issued; (b) lack or insufficiency of funds to cover the check; and (c)
damage to the payee thereof. 26 It is the criminal fraud or deceit in the
issuance of a check that is punishable, not the non-payment of a
debt.27 Prima facie evidence of deceit exists by law upon proof that the
drawer of the check failed to deposit the amount necessary to cover his
check within three days from receipt of the notice of dishonor.
The Prosecution established that Ligaray had released the goods to Cañada
because of the postdated check the latter had given to him; and that the
check was dishonored when presented for payment because of the
insufficiency of funds.
In every criminal prosecution, however, the identity of the offender, like the
crime itself, must be established by proof beyond reasonable doubt. 28 In that
regard, the Prosecution did not establish beyond reasonable doubt that it was
Wagas who had defrauded Ligaray by issuing the check.
Firstly, Ligaray expressly admitted that he did not personally meet the person
with whom he was transacting over the telephone, thus:
Q:
On April 30, 1997, do you remember having a transaction with the accused in
this case?
A:
Yes, sir. He purchased two hundred bags of rice from me.
Q:
How did this purchase of rice transaction started? (sic)
A:
He talked with me over the phone and told me that he would like to purchase
two hundred bags of rice and he will just issue a check. 29
Even after the dishonor of the check, Ligaray did not personally see and
meet whoever he had dealt with and to whom he had made the demand for
payment, and that he had talked with him only over the telephone, to wit:
Q:
After the check was (sic) bounced, what did you do next?
A:
I made a demand on them.
Q:
How did you make a demand?
A:
I called him over the phone.
Q:
Who is that "him" that you are referring to?
A:
Gilbert Wagas.30
Secondly, the check delivered to Ligaray was made payable to cash. Under
the Negotiable Instruments Law, this type of check was payable to the bearer
and could be negotiated by mere delivery without the need of an
indorsement.31 This rendered it highly probable that Wagas had issued the
check not to Ligaray, but to somebody else like Cañada, his brother-in-law,
who then negotiated it to Ligaray.1âwphi1 Relevantly, Ligaray confirmed that
he did not himself see or meet Wagas at the time of the transaction and
thereafter, and expressly stated that the person who signed for and received
the stocks of rice was Cañada.
It bears stressing that the accused, to be guilty of estafa as charged, must
have used the check in order to defraud the complainant. What the law
punishes is the fraud or deceit, not the mere issuance of the worthless check.
Wagas could not be held guilty of estafa simply because he had issued the
check used to defraud Ligaray. The proof of guilt must still clearly show that it
had been Wagas as the drawer who had defrauded Ligaray by means of the
check.
Thirdly, Ligaray admitted that it was Cañada who received the rice from him
and who delivered the check to him. Considering that the records are bereft
of any showing that Cañada was then acting on behalf of Wagas, the RTC
had no factual and legal bases to conclude and find that Cañada had been
acting for Wagas. This lack of factual and legal bases for the RTC to infer so
obtained despite Wagas being Cañada’s brother-in-law.
Finally, Ligaray’s declaration that it was Wagas who had transacted with him Wagas. All that the Prosecution sought to elicit from him was whether he had
over the telephone was not reliable because he did not explain how he known and why he had known Wagas, and he answered as follows:
determined that the person with whom he had the telephone conversation
was really Wagas whom he had not yet met or known before then. We deem Q:
it essential for purposes of reliability and trustworthiness that a telephone
conversation like that one Ligaray supposedly had with the buyer of rice to be Do you know the accused in this case?
first authenticated before it could be received in evidence. Among others, the
person with whom the witness conversed by telephone should be first
satisfactorily identified by voice recognition or any other means. 32 Without the A:
authentication, incriminating another person just by adverting to the
telephone conversation with him would be all too easy. In this respect, an Yes, sir.
identification based on familiarity with the voice of the caller, or because of
clearly recognizable peculiarities of the caller would have sufficed. 33 The Q:
identity of the caller could also be established by the caller’s self-
identification, coupled with additional evidence, like the context and timing of If he is present inside the courtroom […]
the telephone call, the contents of the statement challenged, internal
patterns, and other distinctive characteristics, and disclosure of knowledge of
A:
facts known peculiarly to the caller. 34

No, sir. He is not around.

Verily, it is only fair that the caller be reliably identified first before a telephone
communication is accorded probative weight. The identity of the caller may
be established by direct or circumstantial evidence. According to one ruling of Q:
the Kansas Supreme Court:
Why do you know him?
Communications by telephone are admissible in evidence where they are
relevant to the fact or facts in issue, and admissibility is governed by the A:
same rules of evidence concerning face-to-face conversations except the
party against whom the conversations are sought to be used must ordinarily I know him as a resident of Compostela because he is an ex-mayor of
be identified. It is not necessary that the witness be able, at the time of the Compostela.36
conversation, to identify the person with whom the conversation was had,
provided subsequent identification is proved by direct or circumstantial During cross-examination, Ligaray was allowed another opportunity to show
evidence somewhere in the development of the case. The mere statement of how he had determined that his caller was Wagas, but he still failed to
his identity by the party calling is not in itself sufficient proof of such identity, provide a satisfactory showing, to wit:
in the absence of corroborating circumstances so as to render the
conversation admissible. However, circumstances preceding or following the
conversation may serve to sufficiently identify the caller. The completeness of Q:
the identification goes to the weight of the evidence rather than its
admissibility, and the responsibility lies in the first instance with the district Mr. Witness, you mentioned that you and the accused entered into [a]
court to determine within its sound discretion whether the threshold of transaction of rice selling, particularly with these 200 sacks of rice subject of
admissibility has been met.35 (Bold emphasis supplied) this case, through telephone conversation?

Yet, the Prosecution did not tender any plausible explanation or offer any A:
proof to definitely establish that it had been Wagas whom Ligaray had
conversed with on the telephone. The Prosecution did not show through Yes, sir.
Ligaray during the trial as to how he had determined that his caller was
Q:
But you cannot really ascertain that it was the accused whom you are talking Q:
with?
So, after that phone call[,] you deliver[ed] th[ose] 200 sacks of rice through
A: somebody other than the accused?

I know it was him because I know him. A:

Q: Yes, sir.37

Am I right to say [that] that was the first time that you had a transaction with Ligaray’s statement that he could tell that it was Wagas who had ordered the
the accused through telephone conversation, and as a consequence of that rice because he "know[s]" him was still vague and unreliable for not assuring
alleged conversation with the accused through telephone he issued a check the certainty of the identification, and should not support a finding of Ligaray’s
in your favor? familiarity with Wagas as the caller by his voice. It was evident from Ligaray’s
answers that Wagas was not even an acquaintance of Ligaray’s prior to the
A: transaction. Thus, the RTC’s conclusion that Ligaray had transacted with
Wagas had no factual basis. Without that factual basis, the RTC was
speculating on a matter as decisive as the identification of the buyer to be
No. Before that call I had a talk[ ] with the accused.
Wagas.
Q:
The letter of Wagas did not competently establish that he was the person
who had conversed with Ligaray by telephone to place the order for the rice.
But still through the telephone? The letter was admitted exclusively as the State’s rebuttal evidence to
controvert or impeach the denial of Wagas of entering into any transaction
A: with Ligaray on the rice; hence, it could be considered and appreciated only
for that purpose. Under the law of evidence, the court shall consider evidence
Yes, sir. solely for the purpose for which it is offered, 38 not for any other
purpose.39 Fairness to the adverse party demands such exclusivity.
Q: Moreover, the high plausibility of the explanation of Wagas that he had
signed the letter only because his sister and her husband had pleaded with
him to do so could not be taken for granted.
There was no instant (sic) that the accused went to see you personally
regarding the 200 bags rice transaction?
It is a fundamental rule in criminal procedure that the State carries the onus
probandi in establishing the guilt of the accused beyond a reasonable doubt,
A:
as a consequence of the tenet ei incumbit probation, qui dicit, non qui negat,
which means that he who asserts, not he who denies, must prove, 40 and as a
No. It was through telephone only. means of respecting the presumption of innocence in favor of the man or
woman on the dock for a crime. Accordingly, the State has the burden of
Q: proof to show: (1) the correct identification of the author of a crime, and (2)
the actuality of the commission of the offense with the participation of the
In fact[,] you did not cause the delivery of these 200 bags of rice through the accused. All these facts must be proved by the State beyond reasonable
accused himself? doubt on the strength of its evidence and without solace from the weakness
of the defense. That the defense the accused puts up may be weak is
A: inconsequential if, in the first place, the State has failed to discharge the onus
of his identity and culpability. The presumption of innocence dictates that it is
for the Prosecution to demonstrate the guilt and not for the accused to
Yes. It was through Robert.
establish innocence.41 Indeed, the accused, being presumed innocent,
carries no burden of proof on his or her shoulders. For this reason, the first
duty of the Prosecution is not to prove the crime but to prove the identity of
the criminal. For even if the commission of the crime can be established,
without competent proof of the identity of the accused beyond reasonable
doubt, there can be no conviction.42
There is no question that an identification that does not preclude a
reasonable possibility of mistake cannot be accorded any evidentiary
force.43 Thus, considering that the circumstances of the identification of
Wagas as the person who transacted on the rice did not preclude a
reasonable possibility of mistake, the proof of guilt did not measure up to the
standard of proof beyond reasonable doubt demanded in criminal cases.
Perforce, the accused’s constitutional right of presumption of innocence until
the contrary is proved is not overcome, and he is entitled to an
acquittal,44 even though his innocence may be doubted.45
Nevertheless, an accused, though acquitted of estafa, may still be held civilly
liable where the preponderance of the established facts so
warrants.46 Wagas as the admitted drawer of the check was legally liable to
pay the amount of it to Ligaray, a holder in due course. 47 Consequently, we
pronounce and hold him fully liable to pay the amount of the dishonored
check, plus legal interest of 6% per annum from the finality of this decision.
WHEREFORE, the Court REVERSES and SETS ASIDE the decision
rendered on July 11, 2002 by the Regional Trial Court, Branch 58, in Cebu
City; and ACQUITS Gilbert R. Wagas of the crime of estafa on the ground of
reasonable doubt, but ORDERS him to pay Alberto Ligaray the amount of
₱200,000.00 as actual damages, plus interest of 6% per annum from the
finality of this decision.
No pronouncement on costs of suit.
SO ORDERED.
G.R. No. 166018               June 4, 2014
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari 1 assail the Decision2 and Resolution
dated July 8, 2004 and October 25, 2004, respectively, of the Court of
Appeals in CA-G.R. SP No. 77580, as well as the Decision 3 and Resolution
dated September 2, 2004 and April 4, 2005, respectively, of the Court of
Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said
cases similarly reversed and set aside the decisions of the Court of Tax
Appeals (CTA) in CTA Case Nos. 5951 4 and 6009,5 respectively, and
dismissed the petitions of petitioner Hongkong and Shanghai Banking
Corporation Limited-Philippine Branches (HSBC). The corresponding
Resolutions, on the other hand, denied the respective motions for
reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its investor-
clients, corporate and individual, resident or non-resident of the Philippines,
with respect to their passive investments in the Philippines, particularly
investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent with respect to
dividends and other income derived from its investor-clients’ passive
investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given through
electronic messages. The said instructions are standard forms known in the
banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts and to pay
the purchase price therefor upon receipt of the securities. 7
Pursuant to the electronic messages of its investor-clients, HSBC purchased
and paid Documentary Stamp Tax (DST) from September to December 1997
and also from January to December 1998 amounting to ₱19,572,992.10 and
₱32,904,437.30, respectively, broken down as follows:
A. September to December 1997
September 1997 P 6,981,447.90 Salcedo Village, Makati
Metro Manila
October 1997 6,209,316.60
November 1997 3,978,510.30 Attn: Atty. Tomas C. Toledo
Tax Counsel
December 1997 2,403,717.30
Gentlemen:
Total ₱19,572,992.10
This refers to your letter dated July 26, 1999 requesting on behalf of your
B. January to December 1998 clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to
whether or not the electronic instructions involving the following transactions
January 1998 P 3,328,305.60 of residents and non-residents of the Philippines with respect to their local or
foreign currency accounts are subject to documentary stamp tax under
February 1998 4,566,924.90 Section 181 of the 1997 Tax Code, viz:
March 1998 5,371,797.30
A. Investment purchase transactions:
April 1998 4,197,235.50
An overseas client sends instruction to its bank in the Philippines to either:
May 1998 2,519,587.20
June 1998 2,301,333.00 (i) debit its local or foreign currency account and to pay a
named recipient in the Philippines; or
July 1998 1,586,404.50
August 1998 1,787,359.50 (ii) receive funds from another bank in the Philippines for
deposit into its account and to pay a named recipient in the
September 1998 1,231,828.20 Philippines."
October 1998 1,303,184.40
The foregoing transactions are carried out under instruction from abroad and
November 1998 2,026,379.70 [do] not involve actual fund transfer since the funds are already in the
Philippine accounts. The instructions are in the form of electronic messages
December 1998 2,684,097.50
(i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment is
Total ₱32,904,437.30 against the delivery of investments purchased. The purchase of investments
and the payment comprise one single transaction. DST has already been
paid under Section 176 for the investment purchase.
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect
B. Other transactions:
that instructions or advises from abroad on the management of funds located
in the Philippines which do not involve transfer of funds from abroad are not
subject to DST. BIR Ruling No. 132-99 reads: An overseas client sends an instruction to its bank in the Philippines to either:

Date: August 23, 1999 (i) debit its local or foreign currency account and to pay a
named recipient, who may be another bank, a corporate
entity or an individual in the Philippines; or
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St. (ii) receive funds from another bank in the Philippines for
deposit to its account and to pay a named recipient, who
 may be another bank, a corporate entity or an individual in
the Philippines."
The above instruction is in the form of an electronic message (i.e., SWIFT
MT 100 or MT 202) or tested cable, and may not refer to any particular
transaction.
The opening and maintenance by a non-resident of local or foreign currency
accounts with a bank in the Philippines is permitted by the Bangko Sentral ng
Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax
Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.–
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency. (Underscoring
supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order
for payment purporting to be drawn in a foreign country but payable in the
Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on
the instrument, i.e., a bill of exchange or order for the payment of money,
which purports to draw money from a foreign country but payable in the
Philippines. In the instant case, however, while the payor is residing outside
the Philippines, he maintains a local and foreign currency account in the
Philippines from where he will draw the money intended to pay a named
recipient. The instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently,
there is no negotiable instrument to be made, signed or issued by the payee.
In the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the same do
not involve any transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such instruction
could be considered only as a memorandum and shall be entered as such in
its books of accounts. The actual debiting of the payor’s account, local or
foreign currency account in the Philippines, is the actual transaction that
should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from
a bank deposit, local or foreign currency account, is not subject to DST,
unless the account so maintained is a current or checking account, in which
case, the issuance of the check or bank drafts is subject to the documentary
stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant
case, and subject to the physical impossibility on the part of the payor to be
present and prepare and sign an instrument purporting to pay a certain
obligation, the withdrawal and payment shall be made in cash. In this light,
the withdrawal shall not be subject to documentary stamp tax. The case is
parallel to an automatic bank transfer of local funds from a savings account
to a checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit
to the payee’s account and thereafter upon instruction of the non-resident
depositor-payor, through an electronic message, the depository bank to debit
his account and pay a named recipient shall not be subject to documentary
stamp tax.
It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing
abroad is part of its regular banking transaction which is not subject to
documentary stamp tax. Neither does the receipt of funds makes the
recipient subject to the documentary stamp tax. The funds are deemed to be
part of the deposits of the client once credited to his account, and which,
thereafter can be disposed in the manner he wants. The payor-client’s further
instruction to debit his account and pay a named recipient in the Philippines
does not involve transfer of funds from abroad. Likewise, as stated earlier,
such debit of local or foreign currency account in the Philippines is not
subject to the documentary stamp tax under the aforementioned Section 181
of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made
through an electronic message by non-resident payor-client to debit his local
or foreign currency account maintained in the Philippines and to pay a certain
named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case,
such electronic instruction purporting to draw funds from a local account
intended to be paid to a named recipient in the Philippines is not subject to
documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are different,
this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of ₱19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering
September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim
for the refund of the amount of ₱32,904,437.30 allegedly representing
erroneously paid DST to the BIR for the period covering January to
December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA as CTA Case Nos. 5951 and 6009,
respectively, in order to suspend the running of the two-year prescriptive
period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax
credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75
in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951,
representing erroneously paid DST that have been sufficiently substantiated
with documentary evidence. The CTA ruled that HSBC is entitled to a tax
refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do
not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in the
Philippines and pay a certain named recipient also residing in the Philippines
is not the transaction contemplated in Section 181 of the Code. In this case,
the withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank. The act of debiting the
account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under
Section 180 of the same Code. These electronic message instructions
cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such
in the books of account of the local bank, and the actual debiting of the
payor’s local or foreign currency account in the Philippines is the actual
transaction that should be properly entered as such. 9
The respective dispositive portions of the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or
ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of
₱30,360,570.75 representing erroneous payment of documentary stamp tax
for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby
partially granted. Accordingly, respondent is hereby ORDERED to REFUND,
or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the
petitioner in the reduced amount of ₱16,436,395.83 representing erroneously
paid documentary stamp tax for the months of September 1997 to December
1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled
that the electronic messages of HSBC’s investor-clients are subject to DST.
The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as
regards their passive investments in the Philippines mainly involving shares
of stocks in domestic corporations. These investor-clients maintain Philippine
peso and/or foreign currency accounts with [HSBC]. Should they desire to
purchase shares of stock and other investments securities in the Philippines,
the investor-clients send their instructions and advises via electronic
messages from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or
MT 521 directing the latter to debit their local or foreign currency account and
to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-
2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus
required to pay [DST] based on its acceptance of these electronic messages
– which, as [HSBC] readily admits in its petition filed before the [CTA], were
essentially orders to pay the purchases of securities made by its client-
investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST]
from [HSBC] considering that the said tax was levied against the
acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be subject to tax
is beside the point. As We have already stressed, Section 181 of the law
cited earlier imposes the [DST] not on the bill of exchange or order for
payment of money but on the acceptance or payment of the said bill or order.
The acceptance of a bill or order is the signification by the drawee of its
assent to the order of the drawer to pay a given sum of money while payment
implies not only the assent to the said order of the drawer and a recognition
of the drawer’s obligation to pay such aforesaid sum, but also a compliance
with such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA
693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257
[1992]). What is vital to the valid imposition of the [DST] under Section 181 is
the existence of the requirement of acceptance or payment by the drawee (in
this case, [HSBC]) of the order for payment of money from its investor-clients
and that the said order was drawn from a foreign country and payable in the
Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being
imposed in the case at bar. In Philippine Home Assurance Corporation vs.
Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST
is] levied on the exercise by persons of certain privileges conferred by law for
the creation, revision, or termination of specific legal relationships through the
execution of specific instruments, independently of the legal status of the
transactions giving rise thereto. In the same case, the High Court also
declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction of
the business. It is an excise upon the facilities used in the transaction of the
business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment
made by [HSBC] pursuant to the order made by its client-investors as
embodied in the cited electronic messages, through which the herein parties’
privilege and opportunity to transact business respectively as drawee and
drawers was exercised, separate and apart from the circumstances and
conditions related to such acceptance and subsequent payment of the sum
of money authorized by the concerned drawers. Stated another way, the
[DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-
drawer relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for payment may be
done in writing by the drawee in the bill or order itself, or in a separate
instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was veritably
‘done in writing in a separate instrument’ each time it debited the local or
foreign currency accounts of its client-investors pursuant to the latter’s
instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or
facilities covered by the tax – in this case, the acceptance by [HSBC] of the
order for payment of money sent by the client-investors through electronic
messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to
HSBC, in the absence of abuse or improvident exercise of authority, the
CTA’s ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the review
of tax cases. HSBC further argues that the Commissioner of Internal
Revenue had already settled the issue on the taxability of electronic
messages involved in these cases in BIR Ruling No. 132-99 and reiterated in
BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that
Section 181 of the 1997 Tax Code imposes DST on the acceptance or
payment of a bill of exchange or order for the payment of money. The DST
under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a
privilege which is specifically taxed by law. BIR Ruling No. 132-99 is
inconsistent with prevailing law and long standing administrative practice,
respondent is not barred from questioning his own revenue ruling. Tax
refunds like tax exemptions are strictly construed against the taxpayer. 14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax
Code is levied on the acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable in the Philippines"
and that "a bill of exchange is an unconditional order in writing addressed by
one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future
time a sum certain in money to order or to bearer." A bill of exchange is one
of two general forms of negotiable instruments under the Negotiable
Instruments Law.15
The Court further agrees with the CTA that the electronic messages of
HSBC’s investor-clients containing instructions to debit their respective local
or foreign currency accounts in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction contemplated
under Section 181 of the Tax Code as such instructions are "parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank." The Court favorably adopts
the finding of the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred" and that the said electronic messages are "mere
memoranda" of the transaction consisting of the "actual debiting of the
[investor-client-payor’s] local or foreign currency account in the Philippines"
and "entered as such in the books of account of the local bank," HSBC. 16
More fundamentally, the instructions given through electronic messages that
are subjected to DST in these cases are not negotiable instruments as they
do not comply with the requisites of negotiability under Section 1 of the
Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed
drawers of a bill of exchange; they do not contain an unconditional order to
pay a sum certain in money as the payment is supposed to come from a
specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax
refund for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s
claim for tax refund for DST paid during the period September to December
1997 and subject of G.R. No. 166018, is worded exactly the same as its
counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of any bill
of exchange or order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp
in payment of the tax upon such document in the same manner as is required
in this Act for the stamping of inland bills of exchange or promissory notes,
and no bill of exchange shall be paid nor negotiated until such stamp shall
have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code 19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right, or property incident thereto documentary
taxes for and in respect of the transaction so had or accomplished shall be
paid as hereinafter prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such act is done or
transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippine Islands, on each two hundred
pesos, or fractional part thereof, of the face value of any such bill of
exchange or order, or the Philippine equivalent of such value, if expressed in
foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other
kinds of orders for the payment of money, payable at sight or on demand, or
after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the
payment of money drawn in a foreign country but payable in this country
whether at sight or on demand or after a specified period after sight or from a
stated date, is presented for acceptance or payment, there must be affixed
upon acceptance or payment of documentary stamp equal to P0.02 for each
₱200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939, 21 which
provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code, 22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of thirty
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years.1âwphi1 The identical
text and common history of Section 230 of the 1977 Tax Code, as amended,
and the 1997 Tax Code, as amended, show that the law imposes DST on
either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the
Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto. 23 Under Section 173 of the
1997 Tax Code, the persons primarily liable for the payment of the DST are
those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of such
privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real property. 25
As stated above, Section 230 of the 1977 Tax Code, as amended, now
Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance
or (b) the payment of a foreign bill of exchange or order for the payment of
money that was drawn abroad but payable in the Philippines. In other words,
it levies DST as an excise tax on the privilege of the drawee to accept or pay
a bill of exchange or order for the payment of money, which has been drawn
abroad but payable in the Philippines, and on the corresponding privilege of
the drawer to have acceptance of or payment for the bill of exchange or order
for the payment of money which it has drawn abroad but payable in the
Philippines.
Acceptance applies only to bills of exchange. 26 Acceptance of a bill of
exchange has a very definite meaning in law. 27 In particular, Section 132 of
the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill
[of exchange28] is the signification by the drawee of his assent to the order of
the drawer. The acceptance must be in writing and signed by the drawee. It
must not express that the drawee will perform his promise by any other
means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee’s
consent to the drawer’s order to pay money and the expression of the
drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed
to him and it contemplates an engagement or promise to pay." 29 Once the
drawee accepts, he becomes an acceptor. 30 As acceptor, he engages to pay
the bill of exchange according to the tenor of his acceptance. 31
Acceptance is made upon presentment of the bill of exchange, or within 24
hours after such presentment. 32 Presentment for acceptance is the
production or exhibition of the bill of exchange to the drawee for the purpose
of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law
requires it.34 In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to
presentment for payment.
Presentment for payment is the presentation of the instrument to the person
primarily liable for the purpose of demanding and obtaining payment
thereof.35
Thus, whether it be presentment for acceptance or presentment for payment,
the negotiable instrument has to be produced and shown to the drawee for
acceptance or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of
bills of exchange or orders for the payment of money that have been drawn
abroad but payable in the Philippines) that is subjected to DST under Section
181 of the 1997 Tax Code is done after presentment for acceptance or
presentment for payment, respectively. In other words, the acceptance or
payment of the subject bill of exchange or order for the payment of money is
done when there is presentment either for acceptance or for payment of the
bill of exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these cases,
the electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter's local and foreign currency accounts
and to pay the purchase price of shares of stock or investment in securities
do not properly qualify as either presentment for acceptance or presentment
for payment. There being neither presentment for acceptance nor
presentment for payment, then there was no acceptance or payment that
could have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the
payment of money on the part of HSBC. To reiterate, there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines. Thus, there was no acceptance as the electronic messages
did not constitute the written and signed manifestation of HSBC to a drawer's
order to pay money. As HSBC could not have been an acceptor, then it could
not have made any payment of a bill of exchange or order for the payment of
money drawn abroad but payable here in the Philippines. In other words,
HSBC could not have been held liable for DST under Section 230 of the 1977
Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a
person making, signing, issuing, accepting, or, transferring" the taxable
instruments under the said provision. Thus, HSBC erroneously paid DST on
the said electronic messages for which it is entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated
May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A
Case No. 5951 of the Court of Tax Appeals are REINSTATED.
SO ORDERED.
G.R. No. 156903             November 24, 2006
SPOUSES CARLOS and TERESITA RUSTIA, Petitioners,
vs.
EMERITA RIVERA, Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule
45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision1 of the Court of Appeals, dated August 29, 2002, in CA-G.R. SP No.
63265.
In September 1995, Emerita Rivera, respondent, filed with the Metropolitan
Trial Court (MeTC), Branch 36, Quezon City, a complaint for sum of money
against spouses Carlos and Teresita Rustia, petitioners, and Rosemarie F.
Rocha. The complaint was docketed as Civil Case No. 0206. Respondent
alleged therein that petitioners obtained from her a loan of ₱130,000.00,
payable within thirty (30) days without need of prior demand. As security for
the loan, petitioners executed a promissory note, with Rosemarie Rocha as
their co-maker. The loan bears an interest of five percent (5%) per month.
Petitioners paid the interest corresponding to the period from January 1991
to March 1994. Thereafter, despite respondent’s written demands, they failed
to pay any interest or the principal obligation. Respondent then prayed that
judgment be rendered ordering petitioners to pay the loan, the accrued
interest thereon, and attorney’s fees.
After the court’s denial of their motion to dismiss the complaint, petitioners
filed their answer admitting that respondent extended to them a loan of
₱130,000.00. However, they denied having agreed to pay interest thereon.
While they paid respondent ₱6,500.00 every month, however, it was for the
settlement of the principal obligation. In fact, they overpaid ₱123,500.00.
They prayed that the case be dismissed and that respondent be ordered to
refund to them their overpayment plus damages, attorney’s fees, and
litigation expenses.
During the hearing, respondent offered in evidence petitioners’ promissory
note and petitioner Teresita Rustia’s letter addressed to respondent agreeing
to pay 5% monthly interest.
Teresita denied having borrowed ₱130,000.00 from respondent; that
respondent delivered the said amount to petitioners as investment in the
latter’s business; and that the monthly payment of ₱6,500.00 they tendered
to respondent corresponds to her share in the profits.
On June 11, 1999, the trial court rendered its Decision, 2 the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, as follows:
1. Ordering the defendants to pay, jointly and severally, the plaintiff
the sum of ₱130,000.00 plus accrued interest of 5% per month to be
reckoned from April 1994 until the same is fully paid;
2. Ordering the defendants to pay, jointly and severally, the sum of
₱10,000.oo as and for attorney’s fees;
3. Ordering the defendants to pay the costs of suit.
SO ORDERED.
On appeal by petitioners, the Regional Trial Court (RTC), Branch 77, Quezon
City affirmed the MeTC’s Decision in toto.
Petitioners filed a motion for reconsideration but it was denied by the RTC as
it does not contain a notice of the time and place of hearing required by
Sections 4 and 5, Rule 15 of the 1997 Rules of Civil Procedure, as amended.
Petitioners filed with the Court of Appeals a petition for review, docketed as
CA-G.R. SP No. 63265, but it was denied in a Decision dated August 29,
2002. Their motion for reconsideration was likewise denied.
Hence, the instant petition raising the following issues:
1. Whether the Court of Appeals erred in holding that the motion for
reconsideration filed with the RTC by petitioners is but a mere scrap
of paper for lack of notice of hearing;
2. Whether the Court of Appeals erred when it failed to apply Article
1956 of the Civil Code providing that no interest shall be due unless
it has been expressly stipulated in writing;
On the first issue, Sections 4 and 5, Rule 15 of the 1997 Rules of Civil
Procedure, as amended, provide:
SEC. 4. Hearing of motion. – Except for motions which the court may act
upon without prejudicing the rights of the adverse party, every written motion
shall be set for hearing by the applicant.
Every written motion required to be heard and the notice of the
hearing thereof shall be served in such a manner as to ensure its receipt by
the other party at least three (3) days before the date of hearing, unless the
court for good cause sets the hearing on shorter notice.
SEC. 5. Notice of hearing. – The notice of hearing shall be addressed to all
parties concerned, and shall specify the time and date of the
hearing which must not be later than ten (10) days after the filing of the
motion.
Section 4 lays the general rule that all written motions shall be set for hearing
by the movant, except the non-litigated motions or those which may be acted
upon by the court without prejudicing the rights of the adverse party.
These ex parte motions include a motion for extension of time to file
pleadings,3 motion for extension of time to file an answer, 4 and a motion for
extension of time to file a record on appeal. 5 In Manila Surety and Fidelity
Co., Inc. v. Bath Construction and Company,6 we ruled that a notice of time
and place of hearing is mandatory for motions for new trial or motion
for reconsideration, as in this case. We have reiterated this doctrine
in Magno v. Ortiz,7 Calero v. Yaptichay,8 Vda. de Azarias v. Maddela,9 Phil.
Advertising Counselors, Inc. v. Revilla,10 Sacdalan v. Bautista,11 New Japan
Motors, Inc. v. Perucho,12 Firme v. Reyes, et al.,13 and others. More recently,
in National Commercial Bank of Saudi Arabia v. Court of Appeals,14 we
reaffirmed the rule that the requirement of notice under Sections 4 and 5,
Rule 15 is mandatory and the lack thereof is fatal to a motion for
reconsideration.1âwphi1
We thus hold that the Court of Appeals did not err when it affirmed the RTC
ruling that petitioners’ motion for reconsideration is but a mere scrap of paper
because it does not comply with Sections 4 and 5, Rule 15.
Anent the second issue, contrary to petitioners’ contention, the trial court
found that petitioner Teresita Rustia sent respondent a letter begging the
latter’s indulgence regarding her difficulty and that of her husband in paying
the 5% monthly interest on their ₱130,000.00 loan. This finding by the trial
court was upheld by the RTC and the Court of Appeals. Indeed, such letter
proves that petitioners agreed to pay interest. It is basic that findings of fact
by the trial court, when affirmed by the Court of Appeals, are binding and
conclusive upon this Court.15 Verily, the Court of Appeals did not err when it
sustained the lower court’s finding that respondent is entitled to the payment
of interests on the subject loan.

WHEREFORE, we DENY the petition. The challenged Decision of the Court

of Appeals dated August 29, 2002 in CA-G.R. SP No. 63265
is AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.