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G.R. No. 89252 May 24, 1993 RAUL SESBREO, petitioner, vs. HON.

COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents. Salva, Villanueva & Associates for Delta Motors Corporation. Reyes, Salazar & Associates for Pilipinas Bank. FELICIANO, J.: On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner: (a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum; (b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33. On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn against insufficient funds. On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows: PILIPINAS BANK Makati Stock Exchange Bldg., Ayala Avenue, Makati, Metro Manila February 9, 1981 VALUE DATE TO Raul Sesbreo April 6, 1981 MATURITY DATE NO. 10805 DENOMINATED CUSTODIAN RECEIPT This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE

CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated. SERIAL MAT. FACE ISSUED REGISTERED AMOUNT NUMBER DATE VALUE BY HOLDER PAYEE 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 UNDERWRITERS FINANCE CORP. We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular banking hours. Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity. PILIPINAS BANK (By Elizabeth De Villa Illegible Signature) 1 On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner. Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner. Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta. In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
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As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner. Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6 Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiffappellant, it is Philfinance. As correctly observed by the trial court: This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision) WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant. Petitioner moved for reconsideration of the above Decision, without success. Hence, this Petition for Review on Certiorari. After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the parties to file their respective memoranda. 7 Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships. I. We consider first the relationship between petitioner and Delta. The Court of appeals in effect held that petitioner acquired no rights vis-avis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point: Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.) 9 Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance. Delta, however, disputes petitioner's contention and argues: (1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee; (2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and (3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11 We consider Delta's arguments seriatim. Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from theassignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an
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instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument: The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original parties. 12 (Emphasis added) DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full: April 10, 1980 Philippine Underwriters Finance Corp. Benavidez St., Makati, Metro Manila. Attention: Mr. Alfredo O. Banaria SVPTreasurer GENTLEMEN: This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981. As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo. Very Truly Yours, (Sgd.) Florencio B. Biagan Senior Vice President 13 We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely

necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes. Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case. It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement: There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities."
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The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor. xxx xxx xxx There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18 (Citations omitted; emphasis supplied) We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasis supplied) On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity." As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have

ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him. The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the equities i.e., the defenses which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied) Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that: [n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22 At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him. It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified
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Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner. II. We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words: Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you . 23 The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that: (1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and payable to the order of Philfinance; (2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24 (3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and (4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity." Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No.

2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731. We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo. We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer. We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of generating
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interest revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fundproviders only after trouble has erupted. In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance. We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes.Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981. The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may havevis-a-vis Philfinance. III. The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us. Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner. 28 WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. Bidin, Davide, Jr., Romero and Melo, JJ., concur. 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,
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Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors and other heavy equipment business, offered to sell to petitionercorporation 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 sellerassignor to inspect the job site. After conducting said inspection, the sellerassignor 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 sellerassignor 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 petitionercorporation 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 DEFENDANTSAPPELLANTS CLAIM OF WARRANTY. II
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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 plaintiffappellee 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 SELLERASSIGNOR 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.
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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 90day 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
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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 sellerassignor 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).
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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 sellerassignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the sellerassignor, 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
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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 sellerassignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its claims against the sellerassignor 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. SO ORDERED. 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. SESBREO, respondents. BELLOSILLO, J.: RAUL H. SESBREO 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
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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 ascustodian 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. 9The rationale behind this doctrine is

obvious consideration of public policy. The Court succinctly stated inCommissioner 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. 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. Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation. Eduardo G. Castelo for Sima Wei. Monsod, Tamargo & Associates for Producers Bank. Rafael S. Santayana for Mary Cheng Uy. CAMPOS, JR., J.:
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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 petitionerpayee 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. 2 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. 3Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 4Without 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. 5
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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. Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur. G.R. No. L-39641 February 28, 1983 METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee, vs. SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendants-appellants. Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee. Diosdado Garingalao for defendants-appellants. DE CASTRO, J.:

The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue issued therein being one purely of law. On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that in case on non-payment of any of the installments, the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to twenty-five percent of the total amount due. On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following indorsement: Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G. NONILLO Asst. General Manager The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30, 1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that the same has been dishonored and demanded payment. Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been declared insolvent. During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1 On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12, 1973, the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered: (a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of interest from October 30, 1969; (b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and
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(c) To pay the cost of suit. Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur. Not satisfied with the decision, the present appeal was instituted, appellant Aquino, J., is on leave. Sambok raising a lone assignment of error as follows: The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only secondarily liable thereof. Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified indorser that being a qualified indorser, it does not warrant that if said note is dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of the Negotiable Instruments Law: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. The appeal is without merit. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. 2 Such an indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law already mentioned herein. However, appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment. "Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general indorser. Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonored by nonpayment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. 5 His liabiliy becomes the same as that of the original obligor. 6 Consequently, the holder need not even proceed against the maker before suing the indorser. WHEREFORE, the decision of the lower court is hereby affirmed. No costs. SO ORDERED.
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