FIRST DIVISION Jr., until delivered to him.
He further claimed that, as
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of
Mandaue City and in his personal capacity as
garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC,
Br. XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages
against Assistant City Fiscals Bienvenido N. Mabanto,
Jr., and Dario D. Rama, Jr., before the Regional Trial
Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the
plaintiff, private respondent herein. The decision
having become final and executory, on motion of the
latter, the trial court ordered its execution. This order
was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of
execution was issued.
On 4 February 1992 a notice of garnishment was
served on petitioner Loreto D. de la Victoria as City
Fiscal of Mandaue City where defendant Mabanto, Jr.,
was then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the
salary checks or other checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law. 1 On
10 March 1992 private respondent filed a motion
before the trial court for examination of the
garnishees.
On 25 May 1992 the petition pending before the Court
of Appeals was dismissed. Thus the trial court, finding
no more legal obstacle to act on the motion for
examination of the garnishees, directed petitioner on
4 November 1992 to submit his report showing the
amount of the garnished salaries of Mabanto, Jr.,
within fifteen (15) days from receipt 2 taking into
consideration the provisions of Sec. 12, pars. (f) and
(i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a
motion to require petitioner to explain why he should
not be cited in contempt of court for failing to comply
with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner
moved to quash the notice of garnishment claiming
that he was not in possession of any money, funds,
credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but
that said checks were not yet properties of Mabanto,
such, they were still public funds which could not be
subject to garnishment.
On 9 March 1993 the trial court denied both motions
and ordered petitioner to immediately comply with its
order of 4 November 1992. 3 It opined that the checks
of Mabanto, Jr., had already been released through
petitioner by the Department of Justice duly signed by
the officer concerned. Upon service of the writ of
garnishment, petitioner as custodian of the checks
was under obligation to hold them for the judgment
creditor. Petitioner became a virtual party to, or a
forced intervenor in, the case and the trial court
thereby acquired jurisdiction to bind him to its orders
and processes with a view to the complete
satisfaction of the judgment. Additionally, there was
no sufficient reason for petitioner to hold the checks
because they were no longer government funds and
presumably delivered to the payee, conformably with
the last sentence of Sec. 16 of the Negotiable
Instruments Law.
With regard to the contempt charge, the trial court
was not morally convinced of petitioner's guilt. For,
while his explanation suffered from procedural
infirmities nevertheless he took pains in enlightening
the court by sending a written explanation dated 22
July 1992 requesting for the lifting of the notice of
garnishment on the ground that the notice should
have been sent to the Finance Officer of the
Department of Justice. Petitioner insists that he had
no authority to segregate a portion of the salary of
Mabanto, Jr. The explanation however was not
submitted to the trial court for action since the
stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was
denied. The trial court explained that it was not the
duty of the garnishee to inquire or judge for himself
whether the issuance of the order of execution, writ of
execution and notice of garnishment was justified. His
only duty was to turn over the garnished checks to the
trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1)
whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
before physical delivery to the latter: and, (2) whether
the salary check of a government official or employee
funded with public funds can be subject to
garnishment.
Petitioner reiterates his position that the salary checks
were not owned by Mabanto, Jr., because they were
not yet delivered to him, and that petitioner as
garnishee has no legal obligation to hold and deliver
them to the trial court to be applied to Mabanto, Jr.'s
judgment debt. The thesis of petitioner is that the
salary checks still formed part of public funds and
therefore beyond the reach of garnishment
proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of
attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging
to the judgment debtor" since it is the focal point in
resolving the issues raised.
As Assistant City Fiscal, the source of the salary of
Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal
of Mandaue City and head of office. Under Sec. 16 of
the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of
giving effect thereto. As ordinarily understood,
delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to
transfer title to the payee and recognize him as the
holder thereof.7
According to the trial court, the checks of Mabanto,
Jr., were already released by the Department of
Justice duly signed by the officer concerned through
petitioner and upon service of the writ of garnishment
by the sheriff petitioner was under obligation to hold
them for the judgment creditor. It recognized the role
of petitioner as custodian  of the checks. At the same
time however it considered the checks as no longer
government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the
Negotiable Instruments Law which states: "And where
the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and
intentional delivery by him is presumed." Yet, the
presumption is not conclusive because the last portion
of the provision says "until the contrary is proved."
However this phrase was deleted by the trial court for
no apparent reason. Proof to the contrary is its own
finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to
him and still had the character of public funds. In Tiro
v.  Hontanosas  8 we ruled that —
The salary check of a government
officer or employee such as a teacher does
not belong to him before it is physically
delivered to him. Until that time the check
belongs to the government. Accordingly,
before there is actual delivery of the check,
the payee has no power over it; he cannot
assign it without the consent of the
Government.
As a necessary consequence of being public fund, the
checks may not be garnished to satisfy the
judgment. 9 The rationale behind this doctrine is
obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways
v. San Diego  10 that —
The functions and public services
rendered by the State cannot be allowed to
be paralyzed or disrupted by the diversion of
public funds from their legitimate and specific
objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the
trial court expressed the additional ratiocination that it
was not the duty of the garnishee to inquire or judge
for himself whether the issuance of the order of
execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling
in Philippine Commercial Industrial Bank v. Court of
Appeals. 11 Our precise ruling in that case was that
"[I]t is not incumbent upon the garnishee to inquire or
to judge for itself whether or not the order for the
advance execution of a judgment is valid." But that is
invoking only the general rule. We have also
established therein the compelling reasons, as
exceptions thereto, which were not taken into account
by the trial court, e.g., a defect on the face of the writ
or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to
note that the ruling referred to the validity of advance
execution of judgments, but a careful scrutiny of that
case and similar cases reveals that it was applicable
to a notice of garnishment as well. In the case at
bench, it was incumbent upon petitioner to inquire into
the validity of the notice of garnishment as he had
actual knowledge of the non-entitlement of private
respondent to the checks in question. Consequently,
we find no difficulty concluding that the trial court
exceeded its jurisdiction in issuing the notice of
garnishment concerning the salary checks of
Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders
of 9 March 1993 and 20 April 1993 of the Regional
Trial Court of Cebu City, Br. 17, subject of the petition
are SET ASIDE. The notice of garnishment served on
petitioner dated 3 February 1992 is ordered
DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
DAVIDE, JR., J.,  concurring and dissenting:
This Court may take judicial notice of the fact that
checks for salaries of employees of various
Departments all over the country are prepared in
Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees
concerned not later than the end of the payroll period.
As to the employees in the provinces or cities, the
checks are sent through the heads of the
corresponding offices of the Departments. Thus, in
the case of Prosecutors and Assistant Prosecutors of
the Department of Justice, the checks are sent
through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then
deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the
City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks
were sent to Mabanto thru the petitioner who was
then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period
covered by the salary check and the month to which
the RATA check corresponds.
I respectfully submit that if these salary and RATA
checks corresponded, respectively, to a payroll period
and to a month which had already lapsed at the time
the notice of garnishment was served, the
garnishment would be valid, as the checks would then
cease to be property of the Government and would
become property of Mabanto. Upon the expiration of
such period and month, the sums indicated therein
were deemed automatically segregated from the
budgetary allocations for the Department of Justice
under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of
Commerce and Industry vs.  Concepcion 1 where the
core issue was whether or not the salary due from the
Government to a public officer or employee can, by
garnishment, be seized before being paid to him and
appropriated to the payment of his judgment debts,
this Court held:
A rule, which has never been
seriously questioned, is that money in the
hands of public officers, although it may be
due government employees, is not liable to
the creditors of these employees in the
process of garnishment. One reason is, that
the State, by virtue of its sovereignty, may
not be sued in its own courts except by
express authorization by the Legislature, and
to subject its officers to garnishment would
be to permit indirectly what is prohibited
directly.  Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
The United States Supreme Court,
in the leading case of Buchanan vs.
Alexander ([1846], 4 How., 19), in
speaking of the right of creditors of
seamen, by process of attachment,
to divert the public money from its
legitimate and appropriate object,
said:
To state such a
principle is to refute it. No
government can sanction
it. At all times it would be
found embarrassing, and
under some circumstances
it might be fatal to the
public service. . . . So long
as money remains in the
hands of a disbursing
officer, it is as much the
money of the United
States, as if it had not
been drawn from the
treasury. Until paid over
by the agent of the
government to the person
entitled to it, the fund
cannot, in any legal sense,
be considered a part of his
effects." (See, further, 12
R.C.L., p. 841; Keene vs.
Smith [1904], 44 Ore., 525;
Wild vs. Ferguson [1871],
23 La. Ann., 752; Bank of
Tennessee vs. Dibrell
[1855], 3 Sneed [Tenn.],
379). (emphasis supplied)
The authorities cited in the  ponencia are inapplicable.
Garnished or levied on therein were public funds, to
wit: (a) the pump irrigation trust fund deposited with
the Philippine National Bank (PNB) in the account of
the Irrigation Service Unit in Republic vs. Palacio; 2 (b)
the deposits of the National Media Production Center
in Traders Royal Bank vs. Intermediate Appellate
Court; 3 and (c) the deposits of the Bureau of Public
Highways with the PNB under a current account,
which may be expended only for their legitimate
object as authorized by the corresponding legislative
appropriation in Commissioner of Public Highways vs.
Diego. 4
Neither is Tiro vs. Hontanosas  5 squarely in point. The
said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public
Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or
other persons who may be authorized under a power
of attorney or other forms of authority to collect the
salary of an employee, except when the persons so
designated and authorized is an immediate member
of the family of the employee concerned, and in all
other cases except upon proper authorization of the
Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of
the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to
public school teachers in Cebu City and obtained from
the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary
checks from the Division Office in Cebu City of the
Bureau of Public Schools, sought, inter alia, to nullify
the Circular. It is clear that the teachers had in fact
assigned to or waived in favor of Zafra their future
salaries which were still public funds. That assignment
or waiver was contrary to public policy.
I would therefore vote to grant the petition only if the
salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month,
respectively.
Padilla, J., concurs.
 
Separate Opinions
DAVIDE, JR., J.,  concurring and dissenting:
This Court may take judicial notice of the fact that
checks for salaries of employees of various
Departments all over the country are prepared in
Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees
concerned not later than the end of the payroll period.
As to the employees in the provinces or cities, the
checks are sent through the heads of the
corresponding offices of the Departments. Thus, in
the case of Prosecutors and Assistant Prosecutors of
the Department of Justice, the checks are sent
through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then
deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the
City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks
were sent to Mabanto thru the petitioner who was
then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period
covered by the salary check and the month to which
the RATA check corresponds.
I respectfully submit that if these salary and RATA
checks corresponded, respectively, to a payroll period
and to a month which had already lapsed at the time
the notice of garnishment was served, the
garnishment would be valid, as the checks would then
cease to be property of the Government and would
become property of Mabanto. Upon the expiration of
such period and month, the sums indicated therein
were deemed automatically segregated from the
budgetary allocations for the Department of Justice
under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of
Commerce and Industry vs.  Concepcion 1 where the
core issue was whether or not the salary due from the
Government to a public officer or employee can, by
garnishment, be seized before being paid to him and
appropriated to the payment of his judgment debts,
this Court held:
A rule, which has never been
seriously questioned, is that money in the
hands of public officers, although it may be
due government employees, is not liable to
the creditors of these employees in the
process of garnishment. One reason is, that
the State, by virtue of its sovereignty, may
not be sued in its own courts except by
express authorization by the Legislature, and
to subject its officers to garnishment would
be to permit indirectly what is prohibited
directly.  Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
The United States Supreme Court,
in the leading case of Buchanan vs.
Alexander ([1846], 4 How., 19), in
speaking of the right of creditors of
seamen, by process of attachment,
to divert the public money from its
 legitimate and appropriate object, public school teachers in Cebu City and obtained from
said: the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary
To state such a checks from the Division Office in Cebu City of the
principle is to refute it. No Bureau of Public Schools, sought, inter alia, to nullify
government can sanction the Circular. It is clear that the teachers had in fact
it. At all times it would be assigned to or waived in favor of Zafra their future
found embarrassing, and salaries which were still public funds. That assignment
under some circumstances or waiver was contrary to public policy.
it might be fatal to the
public service. . . . So long I would therefore vote to grant the petition only if the
as money remains in the salary and RATA checks garnished corresponds to an
hands of a disbursing unexpired payroll period and RATA month,
officer, it is as much the respectively.
money of the United
States, as if it had not Padilla, J., concurs.
been drawn from the
treasury. Until paid over
by the agent of the
government to the person
entitled to it, the fund
cannot, in any legal sense,
be considered a part of his
effects." (See, further, 12
R.C.L., p. 841; Keene vs.
Smith [1904], 44 Ore., 525;
Wild vs. Ferguson [1871],
23 La. Ann., 752; Bank of
Tennessee vs. Dibrell
[1855], 3 Sneed [Tenn.],
379). (emphasis supplied)

The authorities cited in the  ponencia are inapplicable.

Garnished or levied on therein were public funds, to
wit: (a) the pump irrigation trust fund deposited with
the Philippine National Bank (PNB) in the account of
the Irrigation Service Unit in Republic vs. Palacio; 2 (b)
the deposits of the National Media Production Center
in Traders Royal Bank vs. Intermediate Appellate
Court; 3 and (c) the deposits of the Bureau of Public
Highways with the PNB under a current account,
which may be expended only for their legitimate
object as authorized by the corresponding legislative
appropriation in Commissioner of Public Highways vs.
Diego. 4

Neither is Tiro vs. Hontanosas  5 squarely in point. The

said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public
Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or
other persons who may be authorized under a power
of attorney or other forms of authority to collect the
salary of an employee, except when the persons so
designated and authorized is an immediate member
of the family of the employee concerned, and in all
other cases except upon proper authorization of the
Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of
the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to
 SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC.,
HENRY WEE, and RODOLFO T.
VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the
Rules of Court which assails on questions of law a
decision of the Intermediate Appellate Court in AC-
G.R. CV No. 68609 dated July 17, 1985, as well as its
resolution dated October 17, 1985, denying the
motion for reconsideration.
The antecedent facts culled from the petition are as
follows:
The petitioner is a corporation engaged in the logging
business. It had for its program of logging activities for
the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of
said roads, in its logging concession area at Baganga,
Manay, and Caraga, Davao Oriental. For this
purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and
purpose, Atlantic Gulf & Pacific Company of Manila,
through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a
corporation dealing in tractors and other heavy
equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one
(1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the
tractors were to be exposed, (t.s.n., May 28, 1980, p.
44) and to determine the capability of the "Used"
tractors being offered, petitioner-corporation
requested the seller-assignor to inspect the job site.
After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for
the job, and gave the corresponding warranty of
ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the
seller-assignor's skill and judgment, petitioner-
corporation through petitioners Wee and Vergara,
president and vice- president, respectively, agreed to
purchase on installment said two (2) units of "Used"
Allis Crawler Tractors. It also paid the down payment
of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales
invoice for the two 2) units of tractors (Exh. "3-A"). At
the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale
with chattel mortgage with promissory note, the seller-
assignor, by means of a deed of assignment (E exh. "
1 "), assigned its rights and interest in the chattel
mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered
said two (2) units of "Used" tractors to the petitioner-
corporation's job site and as agreed, the seller-
assignor stationed its own mechanics to supervise the
operations of the machines.
Barely fourteen (14) days had elapsed after their
delivery when one of the tractors broke down and
after another nine (9) days, the other tractor likewise
broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara
formally advised the seller-assignor of the fact that the
tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty
(E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo
T. Vergara, Exhibit "5," the seller-assignor sent to the
job site its mechanics to conduct the necessary
repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D,"
and "6-E"), but the tractors did not come out to be
what they should be after the repairs were undertaken
because the units were no longer serviceable (t. s. n.,
May 28, 1980, p. 78).
Because of the breaking down of the tractors, the
road building and simultaneous logging operations of
petitioner-corporation were delayed and petitioner
Vergara advised the seller-assignor that the payments
of the installments as listed in the promissory note
would likewise be delayed until the seller-assignor
completely fulfills its obligation under its warranty
(t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April
7, 1979, petitioner Wee asked the seller-assignor to
pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to
be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the
reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by
the petitioner-corporation and despite several follow-
up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed
by the respondent against the petitioners, the
corporation, Wee, and Vergara.
The complaint was filed by the respondent against the
petitioners for the recovery of the principal sum of
One Million Ninety Three Thousand Seven Hundred
Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued
interest of One Hundred Fifty One Thousand Six
Hundred Eighteen Pesos & 86/100 (P151,618.86) as
of August 15, 1979, accruing interest thereafter at the
rate of twelve (12%) percent per annum, attorney's
fees of Two Hundred Forty Nine Thousand Eighty
One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for
the dismissal of the complaint and asking the trial
court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the
court, Twenty Thousand Pesos (P20,000.00) as and
for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as
would be just under the premises.
In a decision dated April 20, 1981, the trial court
rendered the following judgment:
WHEREFORE, judgment is hereby
rendered:
1. ordering defendants to pay jointly
and severally in their official and
personal capacities the principal
sum of ONE MILLION NINETY
THREE THOUSAND SEVEN
HUNDRED NINETY EIGHT PESOS
& 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED
FIFTY ONE THOUSAND SIX
HUNDRED EIGHTEEN PESOS &
86/100 (P151,618.,86) as of August
15, 1979 and accruing interest
thereafter at the rate of 12% per
annum;
2. ordering defendants to pay jointly
and severally attorney's fees
equivalent to ten percent (10%) of
the principal and to pay the costs of
the suit.
Defendants' counterclaim is
disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order
denying the motion for reconsideration filed by the
petitioners.
Thus, the petitioners appealed to the Intermediate
Appellate Court and assigned therein the following
errors:
I
THAT THE LOWER COURT ERRED IN FINDING
THAT THE SELLER ATLANTIC GULF AND PACIFIC
COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF
WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING
THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE
COURSE OF THE PROMISSORY NOTE AND SUED
UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.
On July 17, 1985, the Intermediate Appellate Court
issued the challenged decision affirming in toto the
decision of the trial court. The pertinent portions of the
decision are as follows:
xxx xxx xxx
From the evidence presented by the
parties on the issue of warranty, We
are of the considered opinion that
aside from the fact that no provision
of warranty appears or is provided
in the Deed of Sale of the tractors
and even admitting that in a
contract of sale unless a contrary
intention appears, there is an
implied warranty, the defense of
breach of warranty, if there is any,
as in this case, does not lie in favor
of the appellants and against the
plaintiff-appellee who is the
assignee of the promissory note
and a holder of the same in due
course. Warranty lies in this case
only between Industrial Products
Marketing and Consolidated
Plywood Industries, Inc. The
plaintiff-appellant herein upon
application by appellant corporation
granted financing for the purchase
of the questioned units of Fiat-Allis
Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if
any, is not a defense available to
appellants either to withdraw from
the contract and/or demand a
proportionate reduction of the price
with damages in either case (Art.
1567, New Civil Code). We now
come to the issue as to whether the
plaintiff-appellee is a holder in due
course of the promissory note.
To begin with, it is beyond
arguments that the plaintiff-appellee
is a financing corporation engaged
in financing and receivable
discounting extending credit
facilities to consumers and
industrial, commercial or agricultural
enterprises by discounting or
factoring commercial papers or
accounts receivable duly authorized
pursuant to R.A. 5980 otherwise
known as the Financing Act.
A study of the questioned
promissory note reveals that it is a
negotiable instrument which was
discounted or sold to the IFC
Leasing and Acceptance
Corporation for P800,000.00 (Exh.
"A") considering the following. it is
in writing and signed by the maker;
it contains an unconditional promise
to pay a certain sum of money
payable at a fixed or determinable
future time; it is payable to order
(Sec. 1, NIL); the promissory note
was negotiated when it was
transferred and delivered by IPM to
the appellee and duly endorsed to
the latter (Sec. 30, NIL); it was
taken in the conditions that the note
was complete and regular upon its
face before the same was overdue
and without notice, that it had been
previously dishonored and that the
note is in good faith and for value
without notice of any infirmity or
defect in the title of IPM (Sec. 52,
NIL); that IFC Leasing and
Acceptance Corporation held the
instrument free from any defect of
title of prior parties and free from
defenses available to prior parties
among themselves and may
enforce payment of the instrument
for the full amount thereof against
all parties liable thereon (Sec. 57,
NIL); the appellants engaged that
they would pay the note according
to its tenor, and admit the existence
of the payee IPM and its capacity to
endorse (Sec. 60, NIL).
In view of the essential elements
found in the questioned promissory
note, We opine that the same is
legally and conclusively enforceable
against the defendants-appellants.
WHEREFORE, finding the decision
appealed from according to law and
evidence, We find the appeal
without merit and thus affirm the
decision in toto. With costs against
the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the
decision of July 17, 1985 was denied by the
Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by
the petitioners on October 21, 1985.
Hence, this petition was filed on the following
grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS
CLEARLY NOT A NEGOTIABLE INSTRUMENT AS
DEFINED UNDER THE LAW SINCE IT IS NEITHER
PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE
COURSE: AT BEST, IT IS A MERE ASSIGNEE OF
THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-
NEGOTIABLE INSTRUMENT AND THE TRANSFER
OF RIGHTS WAS THROUGH A MERE
ASSIGNMENT, THE PETITIONERS MAY RAISE
AGAINST THE RESPONDENT ALL DEFENSES
THAT ARE AVAILABLE TO IT AS AGAINST THE
SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE
PAYMENT OF THE PROMISSORY NOTE
BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF
BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER
ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE
BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE
OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED
OR USED IN EVIDENCE IN ANY COURT BECAUSE
THE REQUISITE DOCUMENTARY STAMPS HAVE
NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered
setting aside the decision dated July 17, 1985, as well
as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its
comment to the petition filed on February 20, 1986,
contended that the petition was filed out of time; that
the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is
not liable for any breach of warranty; and finally, that
the promissory note is admissible in evidence.
The core issue herein is whether or not the
promissory note in question is a negotiable instrument
so as to bar completely all the available defenses of
the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that
we consider the instant petition to have been filed on
time because the petitioners' motion for
reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor
breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first
tractor broke down and 9 days, thereafter, the second
tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a
warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be
responsible for warranty against the
hidden defects which the thing sold
may have, should they render it
unfit for the use for which it is
intended, or should they diminish its
fitness for such use to such an
extent that, had the vendee been
aware thereof, he would not have
acquired it or would have given a
lower price for it; but said vendor
shall not be answerable for patent
defects or those which may be
visible, or for those which are not
visible if the vendee is an expert
who, by reason of his trade or
profession, should have known
them.
ART. 1562. In a sale of goods,
there is an implied warranty or
condition as to the quality or fitness
of the goods, as follows:
(1) Where the buyer, expressly or
by implication makes known to the
seller the particular purpose for
which the goods are acquired, and
it appears that the buyer relies on
the sellers skill or judge judgment
(whether he be the grower or
manufacturer or not), there is an
implied warranty that the goods
shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or
condition as to the quality or fitness
for a particular purpose may be
annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is
responsible to the vendee for any
hidden faults or defects in the thing
sold even though he was not aware
thereof.
This provision shall not apply if the
contrary has been stipulated, and
the vendor was not aware of the
hidden faults or defects in the thing
sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its
breach of warranty against the petitioner. This liability
as a general rule, extends to the corporation to whom
it assigned its rights and interests unless the assignee
is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which
case the latter's rights are based on the negotiable
instrument and assuming further that the petitioner's
defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as
the tractors broke down, the petitioner-corporation
notified the seller-assignor's sister company, AG & P,
about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter
complied by sending its mechanics. However, due to
the seller-assignor's delay and its failure to comply
with its warranty, the tractors became totally
unserviceable and useless for the purpose for which
they were purchased.
Thirdly, the petitioner-corporation, thereafter,
unilaterally rescinded its contract with the seller-
assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind
obligations is implied in reciprocal ones, in
case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose
between the fulfillment and the rescission of
the obligation with the payment of damages
in either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles
1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from
the contract and demanding a proportionate
reduction of the price, with damages in either
case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially
rescinded its contract with the seller-assignor,
necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor
sues it because of the rescission.
In the case of the University of the Philippines v. De
los Angeles (35 SCRA 102) we held:
In other words, the party who
deems the contract violated may consider it
resolved or rescinded, and act
accordingly, without previous court action,
but it proceeds at its own risk. For it is only
the final judgment of the corresponding court
that will conclusively and finally settle
whether the action taken was or was not
correct in law. But the law definitely does not
require that the contracting party who
believes itself injured must first file suit and
wait for adjudgement before taking
extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's
breach will have to passively sit and watch
its damages accumulate during the
pendency of the suit until the final judgment
of rescission is rendered when the law itself
requires that he should exercise due
diligence to minimize its own damages (Civil
Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the
promissory note in question is not a negotiable
instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we
jointly and severally promise to pay
to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE
MILLION NINETY THREE
THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100
only (P 1,093,789.71), Philippine
Currency, the said principal sum, to
be payable in 24 monthly
installments starting July 15, 1978
and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the
Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer,
" it cannot be denied that the promissory note in
question is not a negotiable instrument.
The instrument in order to be
considered negotiablility-i.e. must contain the
so-called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words
serve as an expression of consent that the
instrument may be transferred. This consent
is indispensable since a maker assumes
greater risk under a negotiable instrument
than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to
order.
 SEC. 8. WHEN PAYABLE TO
ORDER. — The instrument is payable to
order where it is drawn payable to the order
of a specified person or to him or his
order. . . .
xxx xxx xxx
These are the only two ways by
which an instrument may be made payable
to order. There must always be a specified
person named in the instrument. It means
that the bill or note is to be paid to the person
designated in the instrument or to any
person to whom he has indorsed and
delivered the same. Without the words "or
order" or"to the order of, "the instrument is
payable only to the person designated
therein and is therefore non-negotiable. Any
subsequent purchaser thereof will not enjoy
the advantages of being a holder of a
negotiable instrument but will merely "step
into the shoes" of the person designated in
the instrument and will thus be open to all
defenses available against the latter."
(Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third
Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory
note is not a negotiable instrument, it follows that the
respondent can never be a holder in due course but
remains a mere assignee of the note in question.
Thus, the petitioner may raise against the respondent
all defenses available to it as against the seller-
assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to
implied the seller-assignor when it was sued by the
respondent-assignee because the petitioner's
defenses apply to both or either of either of
them. Actually, the records show that even the
respondent itself admitted to being a mere assignee
of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel
that what is being assigned is the Deed of
Sale with Chattel Mortgage with the
promissory note which is as testified to by
the witness was indorsed? (Counsel for
Plaintiff nodding his head.) Then we have no
further questions on cross,
COURT:
You confirm his manifestation? You
are nodding your head? Do you confirm
that?
ATTY. ILAGAN:
The Deed of Sale cannot be
assigned. A deed of sale is a transaction
between two persons; what is assigned are
rights, the rights of the mortgagee were
assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-
deed of sale and chattel mortgage were
assigned; . . . you want to make a distinction,
one is an assignment of mortgage right and
the other one is indorsement of the
promissory note. What counsel for
defendants wants is that you stipulate that it
is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single
transaction. (pp. 27-29, TSN., February 13,
1980).
Secondly, even conceding for purposes of discussion
that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due
course for a more significant reason.
The evidence presented in the instant case shows
that prior to the sale on installment of the tractors,
there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the
respondent whereby the latter would pay the seller-
assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the
price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel
Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit
Transaction shows that said documents evidencing
the sale on installment of the tractors were all
executed on the same day by and among the buyer,
which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the
Industrial Products Marketing; and the assignee-
financing company, which is the respondent.
Therefore, the respondent had actual knowledge of
the fact that the seller-assignor's right to collect the
purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not
defective. The respondent knew that when the
tractors turned out to be defective, it would be subject
to the defense of failure of consideration and cannot
recover the purchase price from the petitioners. Even
assuming for the sake of argument that the
promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing
facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course.
As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-
assignor. Any other interpretation would be most
inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a
lawsuit from the assignee for the entire purchase price
and all its incidents without being able to raise valid
defenses available as against the assignor.
Lastly, the respondent failed to present any evidence
to prove that it had no knowledge of any fact, which
would justify its act of taking the promissory note as
not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law
provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A
HOLDER IN DUE COURSE. — A holder in
due course is a holder who has taken the
instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and
for value
(d) That the time it was negotiated
by him he had no notice of any infirmity in
the instrument of deffect in the title of the
person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES
NOTICE OF DEFFECT. — To constitute
notice of an infirmity in the instrument or
defect in the title of the person negotiating
the same, the person to whom it is
negotiated must have had actual knowledge
of the infirmity or defect, or knowledge of
such facts that his action in taking the
instrument amounts to bad faith. (Emphasis
supplied)
We subscribe to the view of Campos and
Campos that a financing company is not a holder in
good faith as to the buyer, to wit:
In installment sales, the buyer
usually issues a note payable to the seller to
cover the purchase price. Many times, in
pursuance of a previous arrangement with
the seller, a finance company pays the full
price and the note is indorsed to it,
subrogating it to the right to collect the price
from the buyer, with interest. With the
increasing frequency of installment buying in
this country, it is most probable that the
tendency of the courts in the United States to
protect the buyer against the finance
company will , the finance company will be
subject to the defense of failure of
consideration and cannot recover the
purchase price from the buyer. As against
the argument that such a rule would
seriously affect "a certain mode of
transacting business adopted throughout the
State," a court in one case stated:
It may be that our holding
here will require some changes in
business methods and will impose a
greater burden on the finance
companies. We think the buyer-Mr.
& Mrs. General Public-should have
some protection somewhere along
the line. We believe the finance
company is better able to bear the
risk of the dealer's insolvency than
the buyer and in a far better position
to protect his interests against
unscrupulous and insolvent dealers.
...
If this opinion imposes
great burdens on finance
companies it is a potent argument
in favor of a rule which win afford
public protection to the general
buying public against unscrupulous
dealers in personal property. . . .
(Mutual Finance Co. v. Martin, 63
So. 2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes and
Selected Cases on Negotiable
Instruments Law, Third Edition, p.
128).
In the case of Commercial
Credit Corporation v. Orange
Country Machine Works (34 Cal. 2d
766) involving similar facts, it was
held that in a very real sense, the
finance company was a moving
force in the transaction from its very
 inception and acted as a party to it.
When a finance company actively
participates in a transaction of this
type from its inception, it cannot be
regarded as a holder in due course
of the note given in the transaction.

In like manner, therefore, even assuming that the

subject promissory note is negotiable, the respondent,
a financing company which actively participated in the
sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due
course of said note. It follows that the respondent's
rights under the promissory note involved in this case
are subject to all defenses that the petitioners have
against the seller-assignor, Industrial Products
Marketing. For Section 58 of the Negotiable
Instruments Law provides that "in the hands of any
holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it
were non-negotiable. ... "

Prescinding from the foregoing and setting aside other

peripheral issues, we find that both the trial and
respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and
respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable
contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no
obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the
rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision

of the respondent appellate court dated July 17, 1985,
as well as its resolution dated October 17, 1986, are
hereby ANNULLED and SET ASIDE. The complaint
against the petitioner before the trial court is
DISMISSED.
 SECOND DIVISION
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY
ASSURANCE CORPORATION and CENTRAL
BANK of the PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the
Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer
of Central Bank Certificate of Indebtedness (CBCI)
No. D891,2 with a face value of P500,000.00, from the
Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank
(TRB), under a Repurchase Agreement3 dated
February 4, 1981, and a Detached 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 Interpleader6 thereby
calling to fore the respondent Filriters Guaranty
Assurance Corporation (Filriters), the registered
owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses
the following:
11. Respondent is the registered
owner of CBCI No. 891;
12. The CBCI constitutes part of the
reserve investment against liabilities
required of respondent as an
insurance company under the
Insurance Code;
13. Without any consideration or
benefit whatsoever to Filriters, in
violation of law and the trust fund
doctrine and to the prejudice of
policyholders and to all who have
present or future claim against
policies issued by Filriters, Alfredo
Banaria, then Senior Vice-
President-Treasury of Filriters,
without any board resolution,
knowledge or consent of the board
of directors of Filriters, and without
any clearance or authorization from
the Insurance Commissioner,
executed a detached assignment
purportedly assigning CBCI No. 891
to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella,
Senior Vice-President-Comptroller
are Pilar Jacobe, Vice-President-
Treasury of Filriters (both of whom
were holding the same positions in
Philfinance), without any
consideration or benefit redounding
to Filriters and to the grave
prejudice of Filriters, its policy
holders and all who have present or
future claims against its policies,
executed similar detached
assignment forms transferring the
CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is
patently void and inoperative
because the assignment is without
the knowledge and consent of
directors of Filriters, and not duly
authorized in writing by the Board,
as requiring by Article V, Section 3
of CB Circular No. 769;
16. The assignment of the CBCI to
Philfinance is a personal act of
Alfredo Banaria and not the
corporate act of Filriters and such
null and void;
a) The assignment was executed
without consideration and for that
reason, the assignment is void from
the beginning (Article 1409, Civil
Code);
b) The assignment was executed
without any knowledge and consent
of the board of directors of Filriters;
c) The CBCI constitutes reserve
investment of Filriters against
liabilities, which is a requirement
under the Insurance Code for its
existence as an insurance company
and the pursuit of its business
operations. The assignment of the
CBCI is illegal act in the sense
of malum in se or  malum
prohibitum, for anyone to make,
either as corporate or personal act;
d) The transfer of dimunition of
reserve investments of Filriters is
expressly prohibited by law, is
immoral and against public policy;
e) The assignment of the CBCI has
resulted in the capital impairment
and in the solvency deficiency of
Filriters (and has in fact helped in
placing Filriters under
conservatorship), an inevitable
result known to the officer who
executed assignment.
17. Plaintiff had acted in bad faith
and with knowledge of the illegality
and invalidity of the assignment.
a) The CBCI No. 891 is not a
negotiable instrument and as a
certificate of indebtedness is not
payable to bearer but is a registered
in the name of Filriters;
b) The provision on transfer of the
CBCIs provides that the Central
Bank shall treat the registered
owner as the absolute owner and
that the value of the registered
certificates shall be payable only to
the registered owner; a sufficient
notice to plaintiff that the
assignments do not give them the
registered owner's right as absolute
owner of the CBCI's;
c) CB Circular 769, Series of 1980
(Rules and Regulations Governing
CBCIs) provides that the registered
certificates are payable only to the
registered owner (Article II, Section
1).
18. Plaintiff knew full well that the
assignment by Philfinance of CBCI
No. 891 by Filriters is not a regular
transaction made in the usual of
ordinary course of business;
a) The CBCI constitutes part of the
reserve investments of Filriters
against liabilities requires by the
Insurance Code and its assignment
or transfer is expressly prohibited
by law. There was no attempt to get
any clearance or authorization from
the Insurance Commissioner;
b) The assignment by Filriters of the
CBCI is clearly not a transaction in
the usual or regular course of its
business;
c) The CBCI involved substantial
amount and its assignment clearly
constitutes disposition of "all or
substantially all" of the assets of
Filriters, which requires the
affirmative action of the
stockholders (Section 40,
Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional
Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance,
and the subsequent assignment of the same CBCI by
Philfinance in favor of Traders Royal Bank null and
void and of no force and effect. The dispositive portion
of the decision reads:
ACCORDINGLY, judgment is
hereby rendered in favor of the
respondent Filriters Guaranty
Assurance Corporation and against
the plaintiff Traders Royal Bank:
(a) Declaring the assignment of
CBCI No. 891 in favor of
PhilFinance, and the subsequent
assignment of CBCI by PhilFinance
in favor of the plaintiff Traders
Royal Bank as null and void and of
no force and effect;
(b) Ordering the respondent Central
Bank of the Philippines to disregard
the said assignment and to pay the
value of the proceeds of the CBCI
No. D891 to the Filriters Guaranty
Assurance Corporation;
 (c) Ordering the plaintiff Traders
Royal Bank to pay respondent
Filriters Guaranty Assurance Corp.
The sum of P10,000 as attorney's
fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in
the Court of Appeals 10, but their appeals likewise
failed. The findings of the fact of the said court are
hereby reproduced:
The records reveal that defendant
Filriters is the registered owner of
CBCI No. D891. Under a deed of
assignment dated November 27,
1971, Filriters transferred CBCI No.
D891 to Philippine Underwriters
Finance Corporation (Philfinance).
Subsequently, Philfinance
transferred CBCI No. D891, which
was still registered in the name of
Filriters, to appellant Traders Royal
Bank (TRB). The transfer was made
under a repurchase agreement
dated February 4, 1981, granting
Philfinance the right to repurchase
the instrument on or before April 27,
1981. When Philfinance failed to
buy back the note on maturity date,
it executed a deed of assignment,
dated April 27, 1981, conveying to
appellant TRB all its right and the
title to CBCI No. D891.
Armed with the deed of assignment,
TRB then sought the transfer and
registration of CBCI No. D891 in its
name before the Security and
Servicing Department of the Central
Bank (CB). Central Bank, however,
refused to effect the transfer and
registration in view of an adverse
claim filed by defendant Filriters.
Left with no other recourse, TRB
filed a special civil action
for mandamus against the Central
Bank in the Regional Trial Court of
Manila. The suit, however, was
subsequently treated by the lower
court as a case of interpleader
when CB prayed in its amended
answer that Filriters be impleaded
as a respondent and the court
adjudge which of them is entitled to
the ownership of CBCI No. D891.
Failing to get a favorable judgment.
TRB now comes to this Court on
appeal. 11
In the appellate court, petitioner argued that the
subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a
holder in due course, its possession of the same is
thus free fro any defect of title of prior parties and
from any defense available to prior parties among
themselves, and it may thus, enforce payment of the
instrument for the full amount thereof against all
parties liable thereon. 12
In ignoring said argument, the appellate court that the
CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to
Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the
words of negotiability which serve as an expression of
consent that the instrument may be transferred by
negotiation.
Obviously, the assignment of the certificate from
Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central
Bank Circular No. 769, series of 1980, better known
as the "Rules and Regulations Governing Central
Bank Certificates of Indebtedness", which provided
that any "assignment of registered certificates shall
not be valid unless made . . . by the registered owner
thereof in person or by his representative duly
authorized in writing."
Petitioner's claimed interest has no basis, since it was
derived from Philfinance whose interest was
inexistent, having acquired the certificate through
simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister
corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O.
Banaria, who signed the deed of
assignment purportedly for and on
behalf of Filriters, did not have the
necessary written authorization
from the Board of Directors of
Filriters to act for the latter. For lack
of such authority, the assignment
did not therefore bind Filriters and
violated as the same time Central
Bank Circular No. 769 which has
the force and effect of a law,
resulting in the nullity of the transfer
(People v. Que Po Lay, 94 Phil.
640; 3M Philippines, Inc. vs.
Commissioner of Internal Revenue,
165 SCRA 778).
 In sum, Philfinance acquired no title
or rights under CBCI No. D891
which it could assign or transfer to
Traders Royal Bank and which the
latter can register with the Central
Bank.
WHEREFORE, the judgment
appealed from is AFFIRMED, with
costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the
argument that Philfinance owns 90% of Filriters equity
and the two corporations have identical corporate
officers, thus demanding the application of the
doctrine or piercing the veil of corporate fiction, as to
give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the
payment by TRB to Philfinance of CBCI, as actual
payment to Filriters. Thus, there is no merit to the
lower court's ruling that the transfer of the CBCI from
Filriters to Philfinance was null and void for lack of
consideration.
Admittedly, the subject CBCI is not a negotiable
instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law
(Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines
(the Bank) for value received,
hereby promises to pay bearer, of if
this Certificate of indebtedness be
registered, to FILRITERS
GUARANTY ASSURANCE
CORPORATION, the registered
owner hereof, the principal sum of
FIVE HUNDRED THOUSAND
PESOS.
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 Insurance Commission as legal reserve of
the registered owner. the company.

Petitioner, being a commercial bank, cannot feign
ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate
agents within circumstances showing that the agents
are acting in excess of corporate authority, may not
hold the corporation liable. 22 This is only fair, as
everyone must, in the exercise of his rights and in the
performance of his duties, act with justice, give
everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not
conform to the said. Central Bank Circular, which for
all intents, is considered part of the law. As found by
the courts a quo, Alfredo O. Banaria, who had signed
the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have
the necessary written authorization from the Board of
Directors of Filriters to act for the latter. As it is, the
sale from Filriters to Philfinance was fictitious, and
therefore void and inexistent, as there was no
consideration for the same. This is fatal to the
petitioner's cause, for then, Philfinance had no title
over the subject certificate to convey the Traders
Royal Bank. Nemo potest nisi quod de jure potest —
no man can do anything except what he can do
lawfully.
Concededly, the subject CBCI was acquired by
Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a
mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his
testimony given before the court on May 30, 1986.
Q Legal reserve for the purpose of
what?
A Well, you see, the Insurance
companies are required to put up legal
reserves under Section 213 of the Insurance
Code equivalent to 40 percent of the
premiums receipt and further, the Insurance
Commission requires this reserve to be
invested preferably in government securities
or government binds. This is how this CBCI
came to be purchased by the company.
It cannot, therefore, be taken out of the said funds,
without violating the requirements of the law. Thus,
the anauthorized use or distribution of the same by a
corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of
Directors, and the maintenance of the required
reserve fund.
Consequently, the title of Filriters over the subject
certificate of indebtedness must be upheld over the
claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the
decision appealed from dated January 29, 1990 is
hereby AFFIRMED.
SO ORDERED.

Q Do you know this Central Bank

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

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the

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

Q Let me take you back further

before 1981. Did you have the knowledge of
this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an

investment of Filriters required by the
 FIRST DIVISION  were delivered on the same day at their place of
G.R. No. 107898 December 19, 1995
MANUEL LIM and ROSITA LIM, petitioners,
vs.
COURT OF APPEALS and PEOPLE OF THE
PHILIPPINES, respondents.
BELLOSILLO, J.:
MANUEL LIM and ROSITA LIM, spouses, were
charged before the Regional Trial Court of Malabon
with estafa on three (3) counts under Art. 315, par. 2
(d), of The Revised Penal Code, docketed as Crim.
Cases Nos. 1696-MN to 1698-MN. The Informations
substantially alleged that Manuel and Rosita,
conspiring together, purchased goods from Linton
Commercial Company, Inc. (LINTON), and with deceit
issued seven Consolidated Bank and Trust Company
(SOLIDBANK) checks simultaneously with the
delivery as payment therefor. When presented to the
drawee bank for payment the checks were dishonored
as payment on the checks had been stopped and/or
for insufficiency of funds to cover the amounts.
Despite repeated notice and demand the Lim spouses
failed and refused to pay the checks or the value of
the goods.
On the basis of the same checks, Manuel and Rosita
Lim were also charged with seven (7) counts of
violation of B.P. Blg. 22, otherwise known as
the Bouncing Checks Law, docketed as Crim. Cases
Nos. 1699-MN to 1705-MN. In substance, the
Informations alleged that the Lims issued the checks
with knowledge that they did not have sufficient funds
or credit with the drawee bank for payment in full of
such checks upon presentment. When presented for
payment within ninety (90) days from date thereof the
checks were dishonored by the drawee bank for
insufficiency of funds. Despite receipt of notices of
such dishonor the Lims failed to pay the amounts of
the checks or to make arrangements for full payment
within five (5) banking days.
Manuel Lim and Rosita Lim are the president and
treasurer, respectively, of Rigi Bilt Industries, Inc.
(RIGI). RIGI had been transacting business with
LINTON for years, the latter supplying the former with
steel plates, steel bars, flat bars and purlin sticks
which it uses in the fabrication, installation and
building of steel structures. As officers of RIGI the Lim
spouses were allowed 30, 60 and sometimes even up
to 90 days credit.
On 27 May 1983 the Lims ordered 100 pieces of mild
steel plates worth P51,815.00 from LINTON which
business at 666 7th Avenue, 8th Street, Kalookan
City. To pay LINTON for the delivery the Lims issued
SOLIDBANK Check No. 027700 postdated 3
September 1983 in the amount of P51,800.00.1
On 30 May 1983 the Lims ordered another 65 pieces
of mild steel plates worth P63,455.00 from LINTON
which were delivered at their place of business on the
same day. They issued as payment SOLIDBANK
Check No. 027699 in the amount of P63,455.00
postdated 20 August 1983.2
The Lim spouses also ordered 2,600 "Z" purlins worth
P241,800.00 which were delivered to them on various
dates, to wit: 15 and 22 April 1983; 11, 14, 20, 23, 25,
28 and 30 May 1983; and, 2 and 9 June 1983. To pay
for the deliveries, they issued seven SOLIDBANK
checks, five of which were —
Check No. Date of Issue Amount
027683 16 July
1983 P27,900.003
027684 23 July
1983 P27,900.004
027719 6 Aug.
1983 P32,550.005
027720 13 Aug.
1983 P27,900.006
027721 27 Aug.
1983 P37,200.007
William Yu Bin, Vice President and Sales Manager of
LINTON, testified that when those seven (7) checks
were deposited with the Rizal Commercial Banking
Corporation they were dishonored for "insufficiency of
funds" with the additional notation "payment stopped"
stamped thereon. Despite demand Manuel and Rosita
refused to make good the checks or pay the value of
the deliveries.
Salvador Alfonso, signature verifier of SOLIDBANK,
Grace Park Branch, Kalookan City, where the Lim
spouses maintained an account, testified on the
following transactions with respect to the seven (7)
checks:
CHECK NO.  DATE PRESENTED
REASON FOR DISHONOR
027683 22 July 1983 Payment
Stopped (PS)8
027684 23 July 1983 PS and Drawn
Against
Insufficient Fund (DAIF)9
027699 24 Aug. 1983 PS and
DAIF10
027700 5 Sept. 1983 PS and
 DAIF11
027719 9 Aug. 1983 DAIF 12
027720 16 Aug. 1983 PS and
DAIF13
027721 30 Aug. 1983 PS and
DAIF14
Manuel Lim admitted having issued the seven (7)
checks in question to pay for deliveries made by
LINTON but denied that his company's account had
insufficient funds to cover the amounts of the checks.
He presented the bank ledger showing a balance of
P65,752.75. Also, he claimed that he ordered
SOLIDBANK to stop payment because the supplies
delivered by LINTON were not in accordance with the
specifications in the purchase orders.
Rosita Lim was not presented to testify because her
statements would only be corroborative.
On the basis of the evidence thus presented the trial
court held both accused guilty of estafa and violation
of B.P. Blg. 22 in its decision dated 25 January 1989.
In Crim. Case No. 1696-MN they were sentenced to
an indeterminate penalty of six (6) years and one (1)
day of prision mayor as minimum to twelve (12) years
and one (1) day of reclusion temporal as maximum
plus one (1) year for each additional P10,000.00 with
all the accessory penalties provided for by law, and to
pay the costs. They were also ordered to indemnify
LINTON in the amount of P241,800.00. Similarly
sentences were imposed in Crim. Cases Nos. 1697-
MN and 1698-MN except as to the indemnities
awarded, which were P63,455.00 and P51,800.00,
respectively.
In Crim. Case No. 1699-MN the trial court sentenced
both accused to a straight penalty of one (1) year
imprisonment with all the accessory penalties
provided for by law and to pay the costs. In addition,
they were ordered to indemnify LINTON in the amount
of P27,900.00. Again, similar sentences were
imposed in Crim. Cases Nos. 1700-MN to 1705-MN
except for the indemnities awarded, which were
P32,550.00, P27,900.00, P27,900.00, P63,455.00,
P51,800.00 and P37,200.00 respectively.15
On appeal, the accused assailed the decision as they
imputed error to the trial court as follows: (a) the
regional Trial Court of malabon had no jurisdiction
over the cases because the offenses charged ere
committed outside its territory; (b) they could not be
held liable for estafa because the seven (7) checks
were issued by them several weeks after the
deliveries of the goods; and, (c) neither could they be
held liable for violating B.P. Blg. 22 as they ordered
payment of the checks to be stopped because the
goods delivered were not those specified by them,
besides they had sufficient funds to pay the checks.
In the decision of 18 September 199216 respondent
Court of Appeals acquitted accused-appellants of
estafa on the ground that indeed the checks were not
made in payment of an obligation contracted at the
time of their issuance. However it affirmed the finding
of the trial court that they were guilty of having
violated B.P. Blg. 22.17 On 6 November 1992 their
motion for reconsideration was denied.18
In the case at bench petitioners maintain that the
prosecution failed to prove that any of the essential
elements of the crime punishable under B.P. Blg. 22
was committed within the jurisdiction of the Regional
Trial Court of Malabon. They claim that what was
proved was that all the elements of the offense were
committed in Kalookan City. The checks were issued
at their place of business, received by a collector of
LINTON, and dishonored by the drawee bank, all in
Kalookan City. Furthermore, no evidence whatsoever
supports the proposition that they knew that their
checks were insufficiently funded. In fact, some of the
checks were funded at the time of presentment but
dishonored nonetheless upon their instruction to the
bank to stop payment. In fine, considering that the
checks were all issued, delivered, and dishonored in
Kalookan City, the trial court of Malabon exceeded its
jurisdiction when it tried the case and rendered
judgment thereon.
The petition has no merit. Section 1, par. 1, of B.P.
Blg. 22 punishes "[a]ny person who makes or draws
and issues any check to apply on account or for
value, knowing at the time of issue that he does not
have sufficient funds in or credit with the drawee bank
for the payment of such check in full upon its
presentment, which check is subsequently dishonored
by the drawee bank for insufficiency of funds or credit
or would have been dishonored for the same reason
had not the drawer, without any valid reason, ordered
the bank to stop payment . . ." The gravamen of the
offense is knowingly issuing a worthless
check.19 Thus, a fundamental element
is knowledge on the part of the drawer of the
insufficiency of his funds in20 or credit with the drawee
bank for the payment of such check in full upon
presentment. Another essential element is
subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or would have been
dishonored for the same reason had not the drawer,
without any valid reason, ordered the bank to stop
payment.21
It is settled that venue in criminal cases is a vital
ingredient of jurisdiction.22 Section 14, par. (a), Rule
110, of the Revised Rules of Court, which has been
carried over in Sec. 15, par. (a), Rule 110 of the 1985
Rules on Criminal Procedure, specifically provides:
Sec. 14. Place where action is to be
instituted. — (a) In all criminal
prosecutions the action shall be
 instituted and tried in the court of
the municipality or province wherein
the offense was committed or
anyone of the essential ingredients
thereof took place.
If all the acts material and essential to the crime and
requisite of its consummation occurred in one
municipality or territory, the court therein has the sole
jurisdiction to try the case.23 There are certain crimes
in which some acts material and essential to the
crimes and requisite to their consummation occur in
one municipality or territory and some in another, in
which event, the court of either has jurisdiction to try
the cases, it being understood that the first court
taking cognizance of the case excludes the
other.24 These are the so-called transitory or
continuing crimes under which violation of B.P. Blg.
22 is categorized. In other words, a person charged
with a transitory crime may be validly tried in any
municipality or territory where the offense was in part
committed.25
In determining proper venue in these cases, the
following acts material and essential to each crime
and requisite to its consummation must be
considered: (a) the seven (7) checks were issued to
LINTON at its place of business in Balut, Navotas; b)
they were delivered to LINTON at the same place; (c)
they were dishonored in Kalookan City; and, (d)
petitioners had knowledge of the insufficiency of their
funds in SOLIDBANK at the time the checks were
issued. Since there is no dispute that the checks were
dishonored in Kalookan City, it is no longer necessary
to discuss where the checks were dishonored.
Under Sec. 191 of the Negotiable Instruments Law
the term "issue" means the first delivery of the
instrument complete in form to a person who takes it
as a holder. On the other hand, the term "holder"
refers to the payee or indorsee of a bill or note who is
in possession of it or the bearer thereof. In People
v. Yabut26 this Court explained —
. . . The place where the bills were
written, signed, or dated does not
necessarily fix or determine the
place where they were executed.
What is of decisive importance is
the delivery thereof. The delivery of
the instrument is the final
act essential to
its consummation as an obligation.
An undelivered bill or note is
inoperative. Until delivery, the
contract is revocable. And the
issuance as well as the delivery of
the check must be to a person who
takes it as a holder, which means
"(t)he  payee or indorsee of a bill or
note, who is in possession of it, or
the bearer thereof." Delivery of the
check signifies transfer of
possession, whether actual or
constructive, from one person to
another with intent to transfer
title thereto . . .
Although LINTON sent a collector who received the
checks from petitioners at their place of business in
Kalookan City, they were actually issued and
delivered to LINTON at its place of business in Balut,
Navotas. The receipt of the checks by the collector of
LINTON is not the issuance and delivery to the payee
in contemplation of law. The collector was not the
person who could take the checks as a holder, i.e., as
a payee or indorsee thereof, with the intent to transfer
title thereto. Neither could the collector be deemed an
agent of LINTON with respect to the checks because
he was a mere employee. As this Court further
explained in People v. Yabut27 —
Modesto Yambao's receipt of the
bad checks from Cecilia Que Yabut
or Geminiano Yabut, Jr., in
Caloocan City cannot, contrary to
the holding of the respondent
Judges, be licitly taken as delivery
of the checks to the complainant
Alicia P. Andan at Caloocan City to
fix the venue there. He did not take
delivery of the checks as
holder, i.e., as "payee" or
"indorsee." And there appears to be
no contract of agency between
Yambao and Andan so as to bind
the latter for the acts of the former.
Alicia P. Andan declared in that
sworn testimony before the
investigating fiscal that Yambao is
but her "messenger" or "part-time
employee." There was no  special
fiduciary relationship that
permeated their dealings. For a
contract of agency to exist, the
consent of both parties is essential.
The principal consents that the
other party, the agent, shall act on
his behalf, and the agent consents
so as to act. It must exist as a fact.
The law makes no presumption
thereof. The person alleging it has
the burden of proof to show, not
only the fact of its existence, but
also its nature and extent . . .
Section 2 of B.P. Blg. 22 establishes a  prima
facie  evidence of knowledge of insufficient funds as
follows —
The making, drawing and issuance
of a check payment of which is
 refused by the bank because of
insufficient funds in or credit with
such bank, when presented within
ninety (90) days from the date of
the check, shall be prima
facie  evidence of knowledge of
such insufficiency of funds or credit
unless such maker or drawer pays
the holder thereof the amount due
thereon, or makes arrangement for
payment in full by the drawee of
such check within five (5) banking
days after receiving notice that such
check has not been paid by the
drawee.
The  prima facie  evidence has not been overcome by
petitioners in the cases before us because they did
not pay LINTON the amounts due on the checks;
neither did they make arrangements for payment in
full by the drawee bank within five (5) banking days
after receiving notices that the checks had not been
paid by the drawee bank. In People v. Grospe28 citing
People v. Manzanilla29 we held that ". . . knowledge on
the part of the maker or drawer of the check of the
insufficiency of his funds is by itself a continuing
eventuality, whether the accused be within one
territory or another."
Consequently, venue or jurisdiction lies either in the
Regional Trial Court of Kalookan City or Malabon.
Moreover, we ruled in the
same Grospe and Manzanilla cases as reiterated
in Lim v. Rodrigo30 that venue or jurisdiction is
determined by the allegations in the Information. The
Informations in the cases under consideration allege
that the offenses were committed in the Municipality
of Navotas which is controlling and sufficient to vest
jurisdiction upon the Regional Trial Court of
Malabon.31
We therefore sustain likewise the conviction of
petitioners by the Regional Trial Court of Malabon for
violation of B.P. Blg. 22 thus —
Accused-appellants claim that they
ordered payment of the checks to
be stopped because the goods
delivered were not those specified
by them. They maintain that they
had sufficient funds to cover the
amount of the checks. The records
of the bank, however, reveal
otherwise. The two letters (Exhs. 21
and 22) dated July 23, and August
10, 1983 which they claim they sent
to Linton Commercial, complaining
against the quality of the goods
delivered by the latter, did not refer
to the delivery of mild steel plates
(6mm x 4 x 8) and "Z" purlins (16 x
7 x 2-1/2 mts) for which the checks
in question were issued. Rather, the
letters referred to B.1. Lally columns
(Sch. #20), which were the subject
of other purchase orders.
It is true, as accused-appellants
point out, that in a case brought by
them against the complainant in the
Regional Trial Court of Kalookan
City (Civil Case No. C-10921) the
complainant was held liable for
actual damages because of the
delivery of goods of inferior quality
(Exh. 23). But the supplies involved
in that case were those of B.I.
pipes, while the purchases made by
accused-appellants, for which they
issued the checks in question, were
purchases of mild steel plates and
"Z" purlins.
Indeed, the only question here is
whether accused-appellants
maintained funds sufficient to cover
the amounts of their checks at the
time of issuance and presentment
of such checks. Section 3 of B.P.
Blg. 22 provides that
"notwithstanding receipt of an order
to stop payment, the drawee bank
shall state in the notice of dishonor
that there were no sufficient funds
in or credit with such bank for the
payment in full of the check, if such
be the fact."
The purpose of this provision is
precisely to preclude the maker or
drawer of a worthless check from
ordering the payment of the check
to be stopped as a pretext for the
lack of sufficient funds to cover the
check.
In the case at bar, the notice of
dishonor issued by the drawee
bank, indicates not only that
payment of the check was stopped
but also that the reason for such
order was that the maker or drawer
did not have sufficient funds with
which to cover the checks. . . .
Moreover, the bank ledger of
accused-appellants' account in
Consolidated Bank shows that at
the time the checks were presented
for encashment, the balance of
accused-appellants' account was
inadequate to cover the amounts of
the checks.32 . . .
WHEREFORE, the decision of the Court of Appeals In CA-G.R CR No. 07282 (RTC
dated 18 September 1992 affirming the conviction of Crim. Case No. 1704-MN) both
petitioners Manuel Lim and Rosita Lim — accused-appellants are hereby
ordered to indemnify the offended
In CA-G.R. CR No. 07277 (RTC party in the sum of P51,800.00, and
Crim. Case No. 1699-MN); CA-G.R.
CR No. 07278 (RTC Crim. Case In CA-G.R. CR No. 07283 (RTC
No. 1700-MN); CA-G.R. CR No. Crim. Case No. 1705-MN) both
07279 (RTC Crim. Case No. 1701- accused-appellants are hereby
MN); CA-G.R. CR No. 07280 (RTC ordered to indemnify the offended
Crim. Case No. 1702-MN); CA-G.R. party in the sum of P37,200.00 33 —
CR No. 07281 (RTC Crim. Case
No. 1703-MN); CA-G.R. CA No. as well as its resolution of 6 November 1992
07282 (RTC Crim. Case No. 1704- denying reconsideration thereof, is
MN); and CA-G.R. CR No. 07283 AFFIRMED. Costs against petitioners.
(RTC Crim Case No. 1705-MN), the
Court finds the accused-appellants
SO ORDERED.
MANUEL LIM and ROSITA LIM
guilty beyond reasonable doubt of
violation of Batas Pambansa Bilang
22 and are hereby sentenced to
suffer a STRAIGHT PENALTY OF
ONE (1) YEAR IMPRISONMENT in
each case, together with all the
accessory penalties provided by
law, and to pay the costs.

In CA-G.R. CR No. 07277 (RTC

Crim. Case No. 1699-MN), both
accused-appellants are hereby
ordered to indemnify the offended
party in the sum of P27,900.00.

In CA-G.R. CR No. 07278 (RTC

Crim. Case No. 1700-MN) both
accused-appellants are hereby
ordered to indemnify the offended
party in the sum of P32,550.00.

In CA-G.R. CR No. 07278 (RTC

Crim. Case No. 1701-MN) both
accused-appellants are hereby
ordered to indemnify the offended
party in the sum of P27,900.00.

In CA-G.R. CR No. 07280 (RTC

Crim. Case No. 1702-MN) both
accused-appellants are hereby
ordered to indemnify the offended
party in the sum of P27,900.00.

In CA-G.R. CR No. 07281 (RTC

Crim. Case No. 1703-MN) both
accused are hereby ordered to
indemnify the offended party in the
sum of P63,455.00.
 FIRST DIVISION
 
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of
Mandaue City and in his personal capacity as
garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC,
Br. XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages
against Assistant City Fiscals Bienvenido N. Mabanto,
Jr., and Dario D. Rama, Jr., before the Regional Trial
Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the
plaintiff, private respondent herein. The decision
having become final and executory, on motion of the
latter, the trial court ordered its execution. This order
was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of
execution was issued.
On 4 February 1992 a notice of garnishment was
served on petitioner Loreto D. de la Victoria as City
Fiscal of Mandaue City where defendant Mabanto, Jr.,
was then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the
salary checks or other checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law. 1 On
10 March 1992 private respondent filed a motion
before the trial court for examination of the
garnishees.
On 25 May 1992 the petition pending before the Court
of Appeals was dismissed. Thus the trial court, finding
no more legal obstacle to act on the motion for
examination of the garnishees, directed petitioner on
4 November 1992 to submit his report showing the
amount of the garnished salaries of Mabanto, Jr.,
within fifteen (15) days from receipt 2 taking into
consideration the provisions of Sec. 12, pars. (f) and
(i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a
motion to require petitioner to explain why he should
not be cited in contempt of court for failing to comply
with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner
moved to quash the notice of garnishment claiming
that he was not in possession of any money, funds,
credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but
that said checks were not yet properties of Mabanto,
Jr., until delivered to him. He further claimed that, as
such, they were still public funds which could not be
subject to garnishment.
On 9 March 1993 the trial court denied both motions
and ordered petitioner to immediately comply with its
order of 4 November 1992. 3 It opined that the checks
of Mabanto, Jr., had already been released through
petitioner by the Department of Justice duly signed by
the officer concerned. Upon service of the writ of
garnishment, petitioner as custodian of the checks
was under obligation to hold them for the judgment
creditor. Petitioner became a virtual party to, or a
forced intervenor in, the case and the trial court
thereby acquired jurisdiction to bind him to its orders
and processes with a view to the complete
satisfaction of the judgment. Additionally, there was
no sufficient reason for petitioner to hold the checks
because they were no longer government funds and
presumably delivered to the payee, conformably with
the last sentence of Sec. 16 of the Negotiable
Instruments Law.
With regard to the contempt charge, the trial court
was not morally convinced of petitioner's guilt. For,
while his explanation suffered from procedural
infirmities nevertheless he took pains in enlightening
the court by sending a written explanation dated 22
July 1992 requesting for the lifting of the notice of
garnishment on the ground that the notice should
have been sent to the Finance Officer of the
Department of Justice. Petitioner insists that he had
no authority to segregate a portion of the salary of
Mabanto, Jr. The explanation however was not
submitted to the trial court for action since the
stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was
denied. The trial court explained that it was not the
duty of the garnishee to inquire or judge for himself
whether the issuance of the order of execution, writ of
execution and notice of garnishment was justified. His
only duty was to turn over the garnished checks to the
trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1)
whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
before physical delivery to the latter: and, (2) whether
the salary check of a government official or employee
funded with public funds can be subject to
garnishment.
Petitioner reiterates his position that the salary checks
were not owned by Mabanto, Jr., because they were
not yet delivered to him, and that petitioner as
garnishee has no legal obligation to hold and deliver
them to the trial court to be applied to Mabanto, Jr.'s
judgment debt. The thesis of petitioner is that the
salary checks still formed part of public funds and
therefore beyond the reach of garnishment
proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of
attachment for reaching credits belonging to the
judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging
to the judgment debtor" since it is the focal point in
resolving the issues raised.
As Assistant City Fiscal, the source of the salary of
Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal
of Mandaue City and head of office. Under Sec. 16 of
the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of
giving effect thereto. As ordinarily understood,
delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to
transfer title to the payee and recognize him as the
holder thereof.7
According to the trial court, the checks of Mabanto,
Jr., were already released by the Department of
Justice duly signed by the officer concerned through
petitioner and upon service of the writ of garnishment
by the sheriff petitioner was under obligation to hold
them for the judgment creditor. It recognized the role
of petitioner as custodian  of the checks. At the same
time however it considered the checks as no longer
government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the
Negotiable Instruments Law which states: "And where
the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and
intentional delivery by him is presumed." Yet, the
presumption is not conclusive because the last portion
of the provision says "until the contrary is proved."
However this phrase was deleted by the trial court for
no apparent reason. Proof to the contrary is its own
finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to
him and still had the character of public funds. In Tiro
v.  Hontanosas  8 we ruled that —
The salary check of a government
officer or employee such as a
teacher does not belong to him
before it is physically delivered to
him. Until that time the check
belongs to the government.
Accordingly, before there is actual
delivery of the check, the payee has
no power over it; he cannot assign it
without the consent of the
Government.
As a necessary consequence of being public fund, the
checks may not be garnished to satisfy the
judgment. 9 The rationale behind this doctrine is
obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways
v. San Diego  10 that —
The functions and public services
rendered by the State cannot be
allowed to be paralyzed or
disrupted by the diversion of public
funds from their legitimate and
specific objects, as appropriated by
law.
In denying petitioner's motion for reconsideration, the
trial court expressed the additional ratiocination that it
was not the duty of the garnishee to inquire or judge
for himself whether the issuance of the order of
execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling
in Philippine Commercial Industrial Bank v. Court of
Appeals. 11 Our precise ruling in that case was that
"[I]t is not incumbent upon the garnishee to inquire or
to judge for itself whether or not the order for the
advance execution of a judgment is valid." But that is
invoking only the general rule. We have also
established therein the compelling reasons, as
exceptions thereto, which were not taken into account
by the trial court, e.g., a defect on the face of the writ
or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to
note that the ruling referred to the validity of advance
execution of judgments, but a careful scrutiny of that
case and similar cases reveals that it was applicable
to a notice of garnishment as well. In the case at
bench, it was incumbent upon petitioner to inquire into
the validity of the notice of garnishment as he had
actual knowledge of the non-entitlement of private
respondent to the checks in question. Consequently,
we find no difficulty concluding that the trial court
exceeded its jurisdiction in issuing the notice of
garnishment concerning the salary checks of
Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders
of 9 March 1993 and 20 April 1993 of the Regional
Trial Court of Cebu City, Br. 17, subject of the petition
are SET ASIDE. The notice of garnishment served on
petitioner dated 3 February 1992 is ordered
DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Separate Opinions
DAVIDE, JR., J.,  concurring and dissenting:
This Court may take judicial notice of the fact that
checks for salaries of employees of various
Departments all over the country are prepared in
Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees
concerned not later than the end of the payroll period.
As to the employees in the provinces or cities, the
checks are sent through the heads of the
corresponding offices of the Departments. Thus, in
the case of Prosecutors and Assistant Prosecutors of
the Department of Justice, the checks are sent
through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then
deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the
City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks
were sent to Mabanto thru the petitioner who was
then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period
covered by the salary check and the month to which
the RATA check corresponds.
I respectfully submit that if these salary and RATA
checks corresponded, respectively, to a payroll period
and to a month which had already lapsed at the time
the notice of garnishment was served, the
garnishment would be valid, as the checks would then
cease to be property of the Government and would
become property of Mabanto. Upon the expiration of
such period and month, the sums indicated therein
were deemed automatically segregated from the
budgetary allocations for the Department of Justice
under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of
Commerce and Industry vs.  Concepcion 1 where the
core issue was whether or not the salary due from the
Government to a public officer or employee can, by
garnishment, be seized before being paid to him and
appropriated to the payment of his judgment debts,
this Court held:
A rule, which has never been
seriously questioned, is that money in the
hands of public officers, although it may be
due government employees, is not liable to
the creditors of these employees in the
process of garnishment. One reason is, that
the State, by virtue of its sovereignty, may
not be sued in its own courts except by
express authorization by the Legislature, and
to subject its officers to garnishment would
be to permit indirectly what is prohibited
directly.  Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
The United States Supreme Court,
in the leading case of Buchanan vs.
Alexander ([1846], 4 How., 19), in speaking
of the right of creditors of seamen, by
process of attachment, to divert the public
money from its legitimate and appropriate
object, said:
To state such a principle is
to refute it. No government can
sanction it. At all times it would be
found embarrassing, and under
some circumstances it might be
fatal to the public service. . . . So
long as money remains in the
hands of a disbursing officer, it is as
much the money of the United
States, as if it had not been drawn
from the treasury. Until paid over
by the agent of the government to
the person entitled to it, the fund
cannot, in any legal sense, be
considered a part of his effects."
(See, further, 12 R.C.L., p. 841;
Keene vs. Smith [1904], 44 Ore.,
525; Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of Tennessee
vs. Dibrell [1855], 3 Sneed [Tenn.],
379). (emphasis supplied)
The authorities cited in
the  ponencia are inapplicable.
Garnished or levied on therein were
public funds, to wit: (a) the pump
irrigation trust fund deposited with
the Philippine National Bank (PNB)
in the account of the Irrigation
Service Unit in Republic vs.
Palacio; 2 (b) the deposits of the
National Media Production Center
in Traders Royal Bank vs.
Intermediate Appellate Court; 3 and
 (c) the deposits of the Bureau of
Public Highways with the PNB
under a current account, which may
be expended only for their
legitimate object as authorized by
the corresponding legislative
appropriation in Commissioner of
Public Highways vs. Diego. 4
Neither is Tiro vs. Hontanosas  5 squarely in point. The
said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public
Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or
other persons who may be authorized under a power
of attorney or other forms of authority to collect the
salary of an employee, except when the persons so
designated and authorized is an immediate member
of the family of the employee concerned, and in all
other cases except upon proper authorization of the
Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of
the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to
public school teachers in Cebu City and obtained from
the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary
checks from the Division Office in Cebu City of the
Bureau of Public Schools, sought, inter alia, to nullify
the Circular. It is clear that the teachers had in fact
assigned to or waived in favor of Zafra their future
salaries which were still public funds. That assignment
or waiver was contrary to public policy.
I would therefore vote to grant the petition only if the
salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month,
respectively.
Padilla, J., concurs.
 
Separate Opinions
DAVIDE, JR., J.,  concurring and dissenting:
This Court may take judicial notice of the fact that
checks for salaries of employees of various
Departments all over the country are prepared in
Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees
concerned not later than the end of the payroll period.
As to the employees in the provinces or cities, the
checks are sent through the heads of the
corresponding offices of the Departments. Thus, in
the case of Prosecutors and Assistant Prosecutors of
the Department of Justice, the checks are sent
through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then
deliver the checks to the payees.
Involved in the instant case are the salary and RATA
checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the
City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks
were sent to Mabanto thru the petitioner who was
then the City Fiscal of Mandaue City.
The ponencia failed to indicate the payroll period
covered by the salary check and the month to which
the RATA check corresponds.
I respectfully submit that if these salary and RATA
checks corresponded, respectively, to a payroll period
and to a month which had already lapsed at the time
the notice of garnishment was served, the
garnishment would be valid, as the checks would then
cease to be property of the Government and would
become property of Mabanto. Upon the expiration of
such period and month, the sums indicated therein
were deemed automatically segregated from the
budgetary allocations for the Department of Justice
under the General Appropriations Act.
It must be recalled that the public policy against
execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of
Commerce and Industry vs.  Concepcion 1 where the
core issue was whether or not the salary due from the
Government to a public officer or employee can, by
garnishment, be seized before being paid to him and
appropriated to the payment of his judgment debts,
this Court held:
A rule, which has never been
seriously questioned, is that money in the
hands of public officers, although it may be
due government employees, is not liable to
the creditors of these employees in the
process of garnishment. One reason is, that
the State, by virtue of its sovereignty, may
not be sued in its own courts except by
express authorization by the Legislature, and
to subject its officers to garnishment would
be to permit indirectly what is prohibited
directly.  Another reason is that moneys
sought to be garnished, as long as they
remain in the hands of the disbursing officer
of the Government, belong to the latter,
although the defendant in garnishment may
be entitled to a specific portion thereof. And
still another reason which covers both of the
foregoing is that every consideration of
public policy forbids it.
 The United States Supreme Court,
in the leading case of Buchanan vs.
Alexander ([1846], 4 How., 19), in speaking
of the right of creditors of seamen, by
process of attachment, to divert the public
money from its legitimate and appropriate
object, said:
To state such a principle is
to refute it. No government can
sanction it. At all times it would be
found embarrassing, and under
some circumstances it might be
fatal to the public service. . . . So
long as money remains in the
hands of a disbursing officer, it is as
much the money of the United
States, as if it had not been drawn
from the treasury. Until paid over
by the agent of the government to
the person entitled to it, the fund
cannot, in any legal sense, be
considered a part of his effects."
(See, further, 12 R.C.L., p. 841;
Keene vs. Smith [1904], 44 Ore.,
525; Wild vs. Ferguson [1871], 23
La. Ann., 752; Bank of Tennessee
vs. Dibrell [1855], 3 Sneed [Tenn.],
379). (emphasis supplied)
other cases except upon proper authorization of the
Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of
the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to
public school teachers in Cebu City and obtained from
the latter promissory notes and special powers of
attorney authorizing it to take and collect their salary
checks from the Division Office in Cebu City of the
Bureau of Public Schools, sought, inter alia, to nullify
the Circular. It is clear that the teachers had in fact
assigned to or waived in favor of Zafra their future
salaries which were still public funds. That assignment
or waiver was contrary to public policy.
I would therefore vote to grant the petition only if the
salary and RATA checks garnished corresponds to an
unexpired payroll period and RATA month,
respectively.
Padilla, J., concurs.

The authorities cited in

the  ponencia are inapplicable.
Garnished or levied on therein were
public funds, to wit: (a) the pump
irrigation trust fund deposited with
the Philippine National Bank (PNB)
in the account of the Irrigation
Service Unit in Republic vs.
Palacio; 2 (b) the deposits of the
National Media Production Center
in Traders Royal Bank vs.
Intermediate Appellate Court; 3 and
(c) the deposits of the Bureau of
Public Highways with the PNB
under a current account, which may
be expended only for their
legitimate object as authorized by
the corresponding legislative
appropriation in Commissioner of
Public Highways vs. Diego. 4

Neither is Tiro vs. Hontanosas  5 squarely in point. The

said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public
Schools which directed that "henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or
other persons who may be authorized under a power
of attorney or other forms of authority to collect the
salary of an employee, except when the persons so
designated and authorized is an immediate member
of the family of the employee concerned, and in all

SECOND DIVISION
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-
Petitioner, vs. SIMA WEI and/or LEE KIAN
HUAT, MARY CHENG UY, SAMSON TUNG,
ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF
THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.chanrobles
virtual law library
Henry A. Reyes & Associates for Samso Tung &
Asian Industrial Plastic Corporation.chanrobles
virtual law library
Eduardo G. Castelo for Sima Wei.chanrobles
virtual law library
Monsod, Tamargo & Associates for Producers
Bank.chanrobles virtual law library
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of
Rizal (petitioner Bank for brevity) filed a
complaint for a sum of money against
respondents Sima Wei and/or Lee Kian Huat,
Mary Cheng Uy, Samson Tung, Asian Industrial
Plastic Corporation (Plastic Corporation for
short) and the Producers Bank of the
Philippines, on two causes of action:
(1) To enforce payment of the balance of
P1,032,450.02 on a promissory note executed
by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks
executed by Sima Wei, payable to petitioner,
and drawn against the China Banking
Corporation, to pay the balance due on the
promissory note.
Except for Lee Kian Huat, defendants filed their
separate Motions to Dismiss alleging a common
ground that the complaint states no cause of
action. The trial court granted the defendants'
Motions to Dismiss. The Court of Appeals
affirmed this decision, * to which the petitioner
Bank, represented by its Legal Liquidator, filed
this Petition for Review by Certiorari, assigning
the following as the alleged errors of the Court
of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN
HOLDING THAT THE PLAINTIFF-PETITIONER
HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN
HOLDING THAT SECTION 13, RULE 3 OF THE
REVISED RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN
DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as
follows:
In consideration for a loan extended by
petitioner Bank to respondent Sima Wei, the
latter executed and delivered to the former a
promissory note, engaging to pay the
petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with
interest at 32% per annum. Sima Wei made
partial payments on the note, leaving a
balance of P1,032,450.02. On November 18,
1983, Sima Wei issued two crossed checks
payable to petitioner Bank drawn against China
Banking Corporation, bearing respectively the
serial numbers 384934, for the amount of
P550,000.00 and 384935, for the amount of
P500,000.00. The said checks were allegedly
issued in full settlement of the drawer's
account evidenced by the promissory note.
These two checks were not delivered to the
petitioner-payee or to any of its authorized
representatives. For reasons not shown, these
checks came into the possession of respondent
Lee Kian Huat, who deposited the checks
without the petitioner-payee's indorsement
(forged or otherwise) to the account of
respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the
Producers Bank. Cheng Uy, Branch Manager of
the Balintawak branch of Producers Bank,
relying on the assurance of respondent
Samson Tung, President of Plastic Corporation,
that the transaction was legal and regular,
instructed the cashier of Producers Bank to
accept the checks for deposit and to credit
them to the account of said Plastic Corporation,
inspite of the fact that the checks were crossed
and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner
filed the complaint as aforestated.
The main issue before Us is whether petitioner
Bank has a cause of action against any or all of
the defendants, in the alternative or otherwise.
A cause of action is defined as an act or
omission of one party in violation of the legal
right or rights of another. The essential
elements are: (1) legal right of the plaintiff;
(2) correlative obligation of the defendant; and
(3) an act or omission of the defendant in
violation of said legal right. 2chanrobles virtual
law library
The normal parties to a check are the drawer,
the payee and the drawee bank. Courts have
long recognized the business custom of using
printed checks where blanks are provided for
the date of issuance, the name of the payee,
the amount payable and the drawer's
signature. All the drawer has to do when he
wishes to issue a check is to properly fill up the
blanks and sign it. However, the mere fact that
he has done these does not give rise to any
liability on his part, until and unless the check
is delivered to the payee or his representative.
A negotiable instrument, of which a check is, is
not only a written evidence of a contract right
but is also a species of property. Just as a deed
to a piece of land must be delivered in order to
convey title to the grantee, so must a
negotiable instrument be delivered to the
payee in order to evidence its existence as a
binding contract. Section 16 of the Negotiable
Instruments Law, which governs checks,
provides in part:
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect
thereto. . . .
Thus, the payee of a negotiable instrument
acquires no interest with respect thereto until
its delivery to him. 3 Delivery of an instrument
means transfer of possession, actual or
constructive, from one person to
another. 4 Without the initial delivery of the
instrument from the drawer to the payee,
there can be no liability on the instrument.
Moreover, such delivery must be intended to
give effect to the instrument.
The allegations of the petitioner in the original
complaint show that the two (2) China Bank
checks, numbered 384934 and 384935, were
not delivered to the payee, the petitioner
herein. Without the delivery of said checks to
petitioner-payee, the former did not acquire
any right or interest therein and cannot
therefore assert any cause of action, founded
on said checks, whether against the drawer
Sima Wei or against the Producers Bank or any
of the other respondents.
In the original complaint, petitioner Bank, as
plaintiff, sued respondent Sima Wei on the
promissory note, and the alternative
defendants, including Sima Wei, on the two
checks. On appeal from the orders of dismissal
of the Regional Trial Court, petitioner Bank
alleged that its cause of action was not based
on collecting the sum of money evidenced by
the negotiable instruments stated but
on quasi-delict - a claim for damages on the
ground of fraudulent acts and evident bad faith
of the alternative respondents. This was clearly
an attempt by the petitioner Bank to change
not only the theory of its case but the basis of
his cause of action. It is well-settled that a
party cannot change his theory on appeal, as
this would in effect deprive the other party of
his day in court. 5chanrobles virtual law library
Notwithstanding the above, it does not
necessarily follow that the drawer Sima Wei is
freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed
to by her. Her allegation that she has paid the
balance of her loan with the two checks
payable to petitioner Bank has no merit for, as
We have earlier explained, these checks were
never delivered to petitioner Bank. And even
granting, without admitting, that there was
delivery to petitioner Bank, the delivery of
checks in payment of an obligation does not
constitute payment unless they are cashed or
their value is impaired through the fault of the
creditor. 6 None of these exceptions were
alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves
that she has been relieved from liability on the
promissory note by some other cause,
petitioner Bank has a right of action against
her for the balance due thereon.
However, insofar as the other respondents are
concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the
checks on which it based its action against said
respondents, it never owned them (the checks)
nor did it acquire any interest therein. Thus,
anything which the respondents may have
done with respect to said checks could not
have prejudiced petitioner Bank. It had no
right or interest in the checks which could have
been violated by said respondents. Petitioner
Bank has therefore no cause of action against
said respondents, in the alternative or
otherwise. If at all, it is Sima Wei, the drawer,
who would have a cause of action against her
co-respondents, if the allegations in the
complaint are found to be true.

With respect to the second assignment of error

raised by petitioner Bank regarding the
applicability of Section 13, Rule 3 of the Rules
of Court, We find it unnecessary to discuss the
same in view of Our finding that the petitioner
Bank did not acquire any right or interest in
the checks due to lack of delivery. It therefore
has no cause of action against the
respondents, in the alternative or otherwise.

In the light of the foregoing, the judgment of

the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause
of action, the case is REMANDED to the trial
court for a trial on the merits, consistent with
this decision, in order to determine whether
respondent Sima Wei is liable to the
Development Bank of Rizal for any amount
under the promissory note allegedly signed by
her.

SO ORDERED.