G.R. No.

L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of
Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of
Act No. 3936 against several banks, among them the First National City Bank of New York. It is
alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the
Philippines a statement under oath of their respective managing officials of all the credits and
deposits held by them in favor of persons known to be dead or who have not made further deposits
or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and
deposits be escheated to the Republic of the Philippines by ordering defendant banks to deposit
them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various
savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted
to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which
remained dormant for 10 years or more, are subject to escheat however, it has inadvertently
included in said report certain items amounting to P18,589.89 which, properly speaking, are not
credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not
included in the claim of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the
purview of Act No. 3936, but not the telegraphic transfer payment which orders are of different
category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to
reconsider was filed by defendant, the court a quo changed its view and held that even said demand
drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff
has appealed. lawphil.net

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and
interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a
period of ten years or more. Such unclaimed balances, together with the increase and
proceeds thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to escheat include credits or
deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person
unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term
"credit" in its usual meaning is a sum credited on the books of a company to a person who appears
to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1,
4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,
101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits"
in banks where the relationship created between the depositor and the bank is that of creditor and
debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs.
Pacific Coast Biscuit Co., et al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning
of the term "credits" or "deposits" employed in the law? Can their import be considered as a sum
credited on the books of the bank to a person who appears to be entitled to it? Do they create a
creditor-debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking
terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs.
Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on another to pay a sum of
money therein mentioned to a third person, on demand or at a future time therein specified (13
Words and Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common
term, for all bills of exchange. And the words "draft" and "bill of exchange" are used indiscriminately
(Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101;
Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on
the instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself does not operate as an assignment of the funds in the hands of the drawee available for the
payment thereon and the drawee is not liable on the bill unless and until he accepts the same." In
other words, in order that a drawee may be liable on the draft and then become obligated to the
payee it is necessary that he first accepts the same. In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented either for acceptance or for payment
within a reasonable time after their issuance or after their last negotiation thereof as the case may be
(Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or
to the extent of the loss caused by the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any
chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee
concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's
pretense, for it has been held that the latter is a primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of
exchange payable demand. It is an order upon a third party purporting to drawn upon a
 deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95
Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42
A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes
its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W.
734)....
lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill
of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10
C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified

check and the deposit represented by the check passes to the credit of the checkholder, who
is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756,
195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in
advance by the act of issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate deposit or a certified check
(Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within
the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates
a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The
purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is
concerned, though insofar as the remitting bank is concerned the contract is executory until the
credit is established (Ibid.) We agree with the following comment the Solicitor General: "This is so
because the drawer bank was already paid the value of the telegraphic transfer payment order. In
the particular cases under consideration it appears in the books of the defendant bank that the
amounts represented by the telegraphic payment orders appear in the names of the respective
payees. If the latter choose to demand payment of their telegraphic transfers at the time the same
was (were) received by the defendant bank, there could be no question that this bank would have to
pay them. Now, the question is, if the payees decide to have their money remain for sometime in the
defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now
with the drawer bank? The latter was already paid the value of the telegraphic payment orders
otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say
that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the items
specifically referred to and listed under paragraph 3 of appellee bank's answer representing
telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines.
No costs.

[G.R. No. L-8155. October 23, 1956.]

VIOLET MCGUIRE SUMACAD, ET AL., Plaintiffs-Appellees, v. THE PROVINCE OF SAMAR, ET

AL., defendants; THE PHILIPPINE NATIONAL BANK, Defendant-Appellant.
 Jose T. Sumcad for appellees.

Ramon B. de los Reyes and Angel Ilagan for appellant.

SYLLABUS

1. NEGOTIABLE INSTRUMENTS; CHECKS; IMPLIED ACCEPTANCE BY THE DRAWEE; LIABILITY OF

DRAWER AND DRAWEE. — The request by the appellant bank as drawee, from the Bureau of Posts for
photostatic copies of the check and the subsequent requirement by it for its presentation to the
provincial treasurer and the provincial auditor for certification, amounted to an implied acceptance of
the bank which thereby assumed the obligation of paying the check and holding sufficient deposit of
the drawer for the purpose. However, said obligation is merely subsidiary, the drawer of the check
being primarily liable to pay the same.

DECISION

PARAS, J.:

In May, 1942, while the province of Samar was still occupied by Japanese military forces, a check was
issued by said province to Paulino M. Santos (then the postmaster of Borongan) for the sum of
P25,000, drawn against the Philippine National Bank Cebu Branch. The payee negotiated the check
with James McGuire, an American citizen and resident of the municipality of Borongan. After the
liberation in 1946, James McGuire presented the check to the municipal treasurer of Borongan for
payment, but the latter (who merely noted it) was not able or did not choose to pay the same. James
McGuire wrote letters to the Bureau of Posts dated May 28 and August 5, 1948, and March 30, 1950
seeking payment of the check, which were in turn referred by the Director of the Bureau of Posts to
the Philippine National Bank on April 21, 1950. On April 25, 1950, the Philippine National Bank
requested the Bureau of Posts to furnish it with photostatic copies of the check which were duly
received by the bank on May 12, 1950. As of this date the province of Samar still had a deposit of
P84,287.47 in the Philippine National Bank. On May 14, 1950, the latter requested James McGuire to
present the check to the provincial treasurer and the provincial auditor for certification in accordance
with the circular issued by the Secretary of Finance of July 3, 1947. On August 22, 1950, James
McGuire again requested the Bureau of Posts to expedite compliance with the requirement of the
Philippine National Bank so as to permit the encashment of the check. Before the check could be
certified by the authorities concerned as being in order and entitled to priority of payment, the
province of Samar, on September 4, 1951, withdraw the amount of P83,504.07, leaving a balance of
only P743.43. In the meantime, James McGuire transferred his rights to the check to the herein
plaintiffs who, unable to cash it, filed in the Court of First Instance of Samar on July 27, 1953, the
present complaint against the province of Samar and the Philippine National Bank. After trial the court
rendered a decision sentencing the defendants to pay jointly and severally to the plaintiffs the sum of
P25,000, plus legal interest from May 1950, P1,000 as attorney’s fees, and the costs. Only the
Philippine National Bank has appealed.

The position of the appellant bank is that it did not issue the check and was merely called upon to pay
the same upon being presented for encashment if and when funds for the purpose were available; that
it could not have paid said check because it was never presented to it with the required certification
under the circular of the Secretary of Finance of July 3, 1947; that the relation between the appellant
bank and the province of Samar was that of debtor and creditor, the debtor being without power to
inquire into the obligation of his creditor unless it had an interest in the same; that there is nothing in
the records to show that the holder of the check ever requested the appellant bank to withhold the
amount of the check or ever filed, before the exhaustion of the deposit of the province of Samar, any
order from the courts or proper authorities to withhold the amount covered by the check; that in any
event, the appellant bank cannot be held solidarily liable, the province of Samar being the drawee of
the check and therefore primarily liable to pay the same.
Appellant’s contentions are in the main correct. But in view of the fact that as early as May 12, 1950,
upon its own request, it was furnished with photostatic copies of the check in question; and on May
14, 1950, it went to the trouble of requiring James McGuire to present the check to the provincial
treasurer and provincial auditor for necessary certification, it voluntarily assumed the obligation of
holding so much of the deposit of the province of Samar as would be sufficient to cover the amount of
the check, or before allowing the withdrawal that exhausted said deposit, of making the necessary
inquiry on the matter. In our opinion, an implied acceptance of the check by the appellant bank was
thereby created. The request by the appellant bank from the Bureau of Posts for photostatic copies of
the check and the subsequent requirement by it for its presentation by James McGuire to the
provincial treasurer and the provincial auditor for certification, would be an empty gesture if the
appellant did not thereby mean to assume the obligation of paying the check and holding sufficient
deposit of the drawer for the purpose. Even so, appellant’s resulting obligation is merely subsidiary,
the province of Samar being primarily liable to pay the check.

It being understood that the obligation of the appellant is merely subsidiary, the appealed decision is
hereby affirmed, without costs in this instance. So ordered.

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R.
CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision of public respondent; Intermediate Appellate
1

Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in
toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now
Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by
the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho
Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent,
Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R.
Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as
follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a

contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2).
To effect payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No.
DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76),
which were all paid by the Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-
1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president,
Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
 Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To
enable the defendant-appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties
who, by the very terms and conditions thereof, were to be jointly and severally liable
to the Prudential Bank should the defendant-appellant fail to pay the total amount or
any portion of the drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile machineries and installed
the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On

December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton
Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was
renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the
textile machineries in the defendant-appellant's factory were sold to AIC
Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V,
and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount of P956,384.95
was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In
their respective answers, the defendants interposed identical special defenses, viz.,
the complaint states no cause of action; if there is, the same has prescribed; and the
plaintiff is guilty of laches.
2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine

Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974
until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the
same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's
cause of action thereon has not accrued, hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is

ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to
reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a)
disregarding its right to reimbursement from the private respondents for the entire unpaid balance of
the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby
violating the principle of the third party payor's right to reimbursement provided for in the second
paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing
to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13
of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust
receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a
simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that
Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence
and jurisprudence which provide that such liability had already attached; (f) contravening the judicial
admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved
in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance
by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last
assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code,
applies only if there is no express contract between the parties and there is a clear showing that the
payment is justified. In the instant case, the relationship existing between the petitioner and
Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-
2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner
was not justified in unilaterally paying the amounts stated therein. The public respondent did not
agree with the petitioner's claim that the drafts were sight drafts which did not require presentment
for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior
acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid
demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is
solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his
signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first
contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches
only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the
trust receipt made the latter automatically liable thereon because the so-called solidary guaranty
clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by
two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is
not acknowledged before a notary public. Besides, even granting that it was executed and
acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to
show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all
legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and
2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary,
respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with
his obligation.5

Its motion to reconsider the decision having been denied by the public respondent in its Resolution
of 11 June 1986, petitioner filed the instant petition on 31 July 1986 submitting the following legal
6

issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY

ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT
AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER
MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT
 UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND
UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE

TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF

RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR;

AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF

RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE
PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE

PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS

RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM

RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by
private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was

indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with

Philippine Rayon for the obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the latter situation,
whether the case should have been dismissed on the ground of lack
of cause of action as there was no prior exhaustion of Philippine
Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the
two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter
after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11"
inclusive) did not arise because the same were not presented for acceptance. In short, both courts
concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter
liable thereon. We are unable to agree with this proposition. The transaction in the case at bar
stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in
the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile
machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit,

plaintiff bank was under obligation to pay through its correspondent bank in Japan
10

the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of
credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay
plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against
said plaintiff bank together with any accruing commercial charges, interest, etc.
pursuant to the terms and conditions stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a
customer that the issuer will honor drafts or other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own
11

promise to pay for one of its customers who in return promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant
12

case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL). The said section reads:
13

Sec. 143. When presentment for acceptance must be made. — Presentment for
acceptance must be made:

(a) Where the bill is payable after sight, or in any

other case, where presentment for acceptance is
necessary in order to fix the maturity of the
instrument; or

(b) Where the bill expressly stipulates that it shall be

presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at

the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any

party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; this may be done in writing by the drawee in the bill itself, or in a separate instrument.
14 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts.
Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable
upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time
 within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1)
were duly accepted as indicated on their face (sic), and upon such acceptance
should have been paid forthwith. These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand,

or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards

the person so issuing, accepting, or indorsing it, payable on demand. (emphasis
supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any
accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified" does not, contrary to the holding of the public respondent, contemplate prior
17

acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued were sight
drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be
the petitioner — and not Philippine Rayon — which had to accept the same for the latter was
not the drawee. Presentment for acceptance is defined an the production of a bill of
exchange to a drawee for acceptance. The trial court and the public respondent, therefore,
18

erred in ruling that presentment for acceptance was an indispensable requisite for Philippine
Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine
Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the
essence of the letter of credit issued by the petitioner. A different conclusion would violate
the principle upon which commercial letters of credit are founded because in such a case,
both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively,
would be placed at the mercy of Philippine Rayon even if the latter had already received the
imported machinery and the petitioner had fully paid for it. The typical setting and purpose of
a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., thus:
19

Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt
by a purchaser of the merchandise, during which interval great price changes may
occur. Buyers and sellers struggle for the advantage of position. The seller is
desirous of being paid as surely and as soon as possible, realizing that the vendee at
a distant point has it in his power to reject on trivial grounds merchandise on arrival,
and cause considerable hardship to the shipper. Letters of credit meet this condition
by affording celerity and certainty of payment. Their purpose is to insure to a seller
payment of a definite amount upon presentation of documents. The bank deals only
with documents. It has nothing to do with the quality of the merchandise. Disputes as
to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the issuing
bank when the proper documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not
holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, this Court explains the
20

nature of a trust receipt by quoting In re Dunlap Carpet Co., thus:

21

By this arrangement a banker advances money to an intending importer, and thereby

lends the aid of capital, of credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the fundamental factor in
the transaction, the banker's advance of money and credit, should receive the
amplest protection. Accordingly, in order to secure that the banker shall be repaid at
the critical point — that is, when the imported goods finally reach the hands of the
intended vendee — the banker takes the full title to the goods at the very beginning;
he takes it as soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that title as his
indispensable security until the goods are sold in the United States and the vendee is
called upon to pay for them. This security is not an ordinary pledge by the importer to
the banker, for the importer has never owned the goods, and moreover he is not able
to deliver the possession; but the security is the complete title vested originally in the
bankers, and this characteristic of the transaction has again and again been
recognized and protected by the courts. Of course, the title is at bottom a security
title, as it has sometimes been called, and the banker is always under the obligation
to reconvey; but only after his advances have been fully repaid and after the importer
has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, trust receipts:
22

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided

by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the
imported merchandise as soon an he has paid its price. The ownership of the
merchandise continues to be vested in the owner thereof or in the person who has
advanced payment, until he has been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be turned over to him by the importer or
by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January
1973, a trust receipt transaction is defined as "any transaction by and between a person referred to
in this Decree as the entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security interests' over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein
the entrustee binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation
to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or
for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said machinery
to good use and have profited by its operation and/or disposition but very recent information that
(sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and
therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for
the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale
or other disposition of the same that they may have made, notwithstanding demands therefor;
defendants have fraudulently misapplied or converted to their own use any money realized from the
lease, sale, and other disposition of said machinery." While there is no specific prayer for the
23

delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered
by the trust receipt, such relief is covered by the general prayer for "such further and other relief as
may be just and equitable on the premises." And although it is true that the petitioner commenced
24

a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from
enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13
of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appear in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct
25

from the criminal action, may be brought by the injured party in cases of defamation, fraud and
physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public
respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not
bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt,
which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with

the foregoing, we jointly and severally agree and undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or non-
fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.)
Anaclet
o R. Chi
ANACL
ETO R.
CHI 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we
jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's
liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the
mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit
 "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was
prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that
it was to be signed and executed by two persons. It was signed only by defendant-
appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in
that capacity. The last sentence of the guaranty clause is incomplete. Furthermore,
the plaintiff-appellant also failed to have the purported guarantee clause
acknowledged before a notary public. All these show that the alleged guaranty
provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee Chi cannot be held liable thereunder
because the records show that the plaintiff-appellant had neither exhausted the
property of the defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article 2052 of the Civil Code
and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the principal debtor fails to comply with his
obligation.27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the
obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space
therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of
the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may
be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had
signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the
two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to
the undertaking between either one or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited
to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be
28

strictly construed against the party responsible for its preparation.29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause
was effectively disregarded simply because it was not signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony
or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The
attestation by witnesses and the acknowledgement before a notary public are not required by law to
make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form
they may have been entered into, provided all the essential requisites for their validity are present;
however, when the law requires that a contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of
30 31

another, the law merely requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety
32
before a notary public is required to make the same a public document, under Article 1358 of the
Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi,
namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims
that because of the said criminal proceedings, Chi would be answerable for the civil liability arising
therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because
such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice
to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the
correct solution. It is clear that if the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense. The penalty referred to is
imprisonment, the duration of which would depend on the amount of the fraud as provided for in
Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these entities which are
made liable for the civil liability arising from the criminal offense. This is the import of the clause
"without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier,
since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner
was acting well within its rights in filing an independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against
private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance
thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or
as guarantor — because his signature at the dorsal portion thereof was useless; and even if he
could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the
Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that petitioner had done so Reliance is thus placed on
33

Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action
against a guarantor. In Southern Motors, Inc. vs. Barbosa, this Court stated:
34

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may

demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of
the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-
defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of
the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any
right to relief in respect to or arising out of the same transaction or series of
transactions is alleged to exist, whether jointly, severally, or in the alternative, may,
except as otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to all such
plaintiffs or to all such defendants may arise in the action; but the court may make
such orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in which he may
have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to
permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It
will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he shall only be liable for those costs
incurred after being judicially required to pay. Interest and damages, being accessories of the
36

principal obligation, should also be paid; these, however, shall run only from the date of the filing of
the complaint. Attorney's fees may even be allowed in appropriate cases. 37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by
Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full
extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00
as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against
private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the
petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733
and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in
Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby
entered:
 1. Declaring private respondent Philippine Rayon Mills, Inc. liable on
the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive)
and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner:
(a) the amounts due thereon in the total sum of P956,384.95 as of 15
September 1974, with interest thereon at six percent (6%) per annum
from 16 September 1974 until it is fully paid, less whatever may have
been applied thereto by virtue of foreclosure of mortgages, if any; (b)
a sum equal to ten percent (10%) of the aforesaid amount as
attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on

the trust receipt and ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the date of the filing of the
complaint in Civil Case No. Q-19312 until the same is fully paid as
well as the costs and attorney's fees in the sum of P10,000.00 if the
writ of execution for the enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

SO ORDERED.

G.R. No. L-41764 December 19, 1980

NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner,

vs.
HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID, respondents.

CONCEPCION JR., J.:

A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of
First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's Ex-
Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment.

Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private
respondent. On July 19, 1974, a compromise judgment was rendered by the respondent Judge in
1

accordance with an amicable settlement entered into by the parties the terms and conditions of
which, are as follows:

(1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five
Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August
25, 1972;

(2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received
by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022
amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00);
 (3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00
for attorney's fees will be paid by defendant to the plaintiff within five months from
today, July 19, 1974; and

(4) Failure one the part of the defendant to comply with any of the above-conditions,
a writ of execution may be issued by this Court for the satisfaction of the obligation.
2

For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon
motion of the private respondent, issued an order for the issuance of a writ of execution on
December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00
pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the
petitioner, to wit:

(1) Unit American Lathe 24

(1) Unit American Lathe 18 Cracker Wheeler

(1) Unit Rockford Shaper 24

and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner
deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-
Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment
obligation, consisting of the following:

1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the

Equitable Banking Corporation; and

2. P13,130.00 incash. 3

In a letter dated January 14, 1975, to the Ex-Officio Sheriff, private respondent through counsel,
4

refused to accept the check as well as the cash deposit. In the 'same letter, private respondent
requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot
produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was
postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the
scheduled auction sale that afternoon did not push through because of a last ditch attempt to
convince the private respondent to accept the check. The auction sale was then postponed on the
following day, January 16, 1975 at 10:00 o'clock a.m. At about 9:15 a.m., on January 16, 1975, a
5

certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the
latter reminded Mr. Tañedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr.
Tañedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give
them fifteen minutes within which to contract their lawyer which request was granted. After Mr.
Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must
proceed and the Ex-Officio Sheriff proceeded with the auction sale. In the course of the
6

proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent
as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff
declared a deficiency of P13,130.00. Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued
7

a "Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala
Tong for the total amount of P50,000.00 only. Subsequently, on January 17, 1975, petitioner filed
8

an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by
the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions
said order by way of the present petition alleging in the main that said respondent Judge capriciously
and whimsically abused his discretion in not granting the motion for issuance of certificate of
satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the
judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in
the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and
(2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when
the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section
24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining
order enjoining the respondent Ex-Officio Sheriff from delivering the personal properties subject of
the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale."

We find the petition to be impressed with merit.

The main issue to be resolved in this instance is as to whether or not the private respondent can
validly refuse acceptance of the payment of the judgment obligation made by the petitioner
consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-
Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim
that he has the right to refuse payment by means of a check, the respondent Judge cited the
following:

Section 63 of the Central Bank Act:

Sec. 63. Legal Character. — Checks representing deposit money do not have legal
tender power and their acceptance in payment of debts, both public and private, is at
the option of the creditor, Provided, however, that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a delivery to the
creditor in cash in an amount equal to the amount credited to his account.

Article 1249 of the New Civil Code:

Art. 1249. — The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.

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

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

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

Likewise, the respondent Judge sustained the contention of the private respondent that he has the
right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than
the judgment obligation, citing the following Article of the New Civil Code:

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial payment.

However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting for
the liquidation of the latter.
It is to be emphasized in this connection that the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a
bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been
deposited, it is a certified crossed check. It is a well-known and accepted practice in the business
9

sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified
by the drawee bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a
10

check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said
11

certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties, is to enable the holder to use it as money." When the holder
12

procures the check to be certified, "the check operates as an assignment of a part of the funds to the
creditors." Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to
13

the effect "that a check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his
account" shall apply in this case. Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation
of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private
respondent to have refused acceptance of the payment of the obligation in his favor. The auction
sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's
Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the
instance of the respondent Judge. However, the private respondent still refused to receive the same.
Obviously, the private respondent is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of
satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his
discretion in not granting the same under the circumstances.

In view of the conclusion reached in this instance, We find no more need to discuss the ground
relied in the petition.

It is also contended by the private respondent that Appeal and not a special civil action for certiorari
is the proper remedy in this case, and that since the period to appeal from the decision of the
respondent Judge has already expired, then, the present petition has been filed out of time. The
contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long
become final and executory and so, the same is not being questioned herein. The subject of the
petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975
of the respondent Judge which was merely issued in execution of the said decision. Thus, even
granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for
the respondent Judge had already issued a writ of execution. 14

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Declaring as null and void the order of the respondent Judge dated August 28, 1975;

2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of
sale issued pursuant thereto;
3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the
judgment obligation in his favor;

4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties
to the herein petitioner.

The temporary restraining order issued is hereby made permanent.

Costs against the private respondent.

SO ORDERED.

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

x-----------------------x

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari assail the Decision and Resolution dated July 8, 2004 and
1 2

October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of
3

Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed
and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 5951 and 4

6009, respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking
5

Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other

hand, denied the respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and
individual, resident or non-resident of the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent with respect to dividends and other income
derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are
managed by HSBC through instructions given through electronic messages. The said instructions
are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank
Financial Telecommunication." In purchasing shares of stock and other investment in securities, the
investor-clients would send electronic messages from abroad instructing HSBC to debit their local or
foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.
7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary
Stamp Tax (DST) from September to December 1997 and also from January to December 1998
amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total ₱19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total ₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven
Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not involve transfer of funds from abroad
are not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK &
STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions
involving the following transactions of residents and non-residents of the Philippines with respect to
their local or foreign currency accounts are subject to documentary stamp tax under Section 181 of
the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the
Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and
to pay a named recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual
fund transfer since the funds are already in the Philippine accounts. The instructions are in the form
of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment
is against the delivery of investments purchased. The purchase of investments and the payment
comprise one single transaction. DST has already been paid under Section 176 for the investment
purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may
be another bank, a corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and
to pay a named recipient, who may be another bank, a corporate entity or an
individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or
tested cable, and may not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in
the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that
–

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or Philippine equivalent of such value, if expressed in
foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting
to be drawn in a foreign country but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a
bill of exchange or order for the payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however, while the payor is residing
outside the Philippines, he maintains a local and foreign currency account in the Philippines from
where he will draw the money intended to pay a named recipient. The instruction or order to pay
shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the
meantime, such electronic instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any transfer of funds from abroad or
from the place where the instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be entered as such in its books of
accounts. The actual debiting of the payor’s account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local
or foreign currency account, is not subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank drafts is subject to the
documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and
subject to the physical impossibility on the part of the payor to be present and prepare and sign an
instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in cash.
In this light, the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an
automatic bank transfer of local funds from a savings account to a checking account maintained by a
depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account
and thereafter upon instruction of the non-resident depositor-payor, through an electronic message,
the depository bank to debit his account and pay a named recipient shall not be subject to
documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of its regular banking transaction
which is not subject to documentary stamp tax. Neither does the receipt of funds makes the recipient
subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the client
once credited to his account, and which, thereafter can be disposed in the manner he wants. The
payor-client’s further instruction to debit his account and pay a named recipient in the Philippines
does not involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or
foreign currency account in the Philippines is not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made through an electronic
message by non-resident payor-client to debit his local or foreign currency account maintained in the
Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic
instruction purporting to draw funds from a local account intended to be paid to a named recipient in
the Philippines is not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, this ruling shall be considered null and
void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue 8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for
the refund of the amount of ₱19,572,992.10 allegedly representing erroneously paid DST to the BIR
for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the
amount of ₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period
covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to
the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the two-
year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in
CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered to
refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75 in
CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing erroneously paid
DST that have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC
is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not
apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients:

The instruction made through an electronic message by a nonresident investor-client, which is to

debit his local or foreign currency account in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated in Section 181 of the Code. In this
case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a depositor in one bank.
The act of debiting the account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under Section 180 of the same
Code. These electronic message instructions cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account
of the local bank, and the actual debiting of the payor’s local or foreign currency account in the
Philippines is the actual transaction that should be properly entered as such. 9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE
in favor of Petitioner the amount of ₱30,360,570.75 representing erroneous payment of documentary
stamp tax for the taxable year 1998. 10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted.
Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of ₱16,436,395.83
representing erroneously paid documentary stamp tax for the months of September 1997 to
December 1997. 11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:

At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive
investments in the Philippines mainly involving shares of stocks in domestic corporations. These
investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should they
desire to purchase shares of stock and other investments securities in the Philippines, the investor-
clients send their instructions and advises via electronic messages from abroad to [HSBC] in the
form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency
account and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo,
pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on
its acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed
before the [CTA], were essentially orders to pay the purchases of securities made by its client-
investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering
that the said tax was levied against the acceptances and payments by [HSBC] of the subject
electronic messages/orders for payment. The issue of whether such electronic messages may be
equated as a written document and thus be subject to tax is beside the point. As We have already
stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order
for payment of money but on the acceptance or payment of the said bill or order. The acceptance of
a bill or order is the signification by the drawee of its assent to the order of the drawer to pay a given
sum of money while payment implies not only the assent to the said order of the drawer and a
recognition of the drawer’s obligation to pay such aforesaid sum, but also a compliance with such
obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs.
Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the
[DST] under Section 181 is the existence of the requirement of acceptance or payment by the
drawee (in this case, [HSBC]) of the order for payment of money from its investor-clients and that the
said order was drawn from a foreign country and payable in the Philippines. These requisites are
surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar.
In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the
Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the transactions giving rise thereto. In the
same case, the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153
[1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. It is an excise upon the facilities
used in the transaction of the business separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC]
pursuant to the order made by its client-investors as embodied in the cited electronic messages,
through which the herein parties’ privilege and opportunity to transact business respectively as
drawee and drawers was exercised, separate and apart from the circumstances and conditions
related to such acceptance and subsequent payment of the sum of money authorized by the
concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its privilege
under its drawee-drawer relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for payment of money. The
acceptance of a bill or order for payment may be done in writing by the drawee in the bill or order
itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in writing in a
separate instrument’ each time it debited the local or foreign currency accounts of its client-investors
pursuant to the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or facilities covered by the
tax – in this case, the acceptance by [HSBC] of the order for payment of money sent by the client-
investors through electronic messages. x x x. 12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and
legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise
of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly specialized
court which performs judicial functions, particularly for the review of tax cases. HSBC further argues
that the Commissioner of Internal Revenue had already settled the issue on the taxability of
electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling
No. DA-280-2004. 13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax
Code imposes DST on the acceptance or payment of a bill of exchange or order for the payment of
money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege
which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long
standing administrative practice, respondent is not barred from questioning his own revenue ruling.
Tax refunds like tax exemptions are strictly construed against the taxpayer. 14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but payable
in the Philippines" and that "a bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer." A bill of exchange is one of two general forms of negotiable instruments under the
Negotiable Instruments Law. 15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the Philippines
and pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic
bank transfer of local funds from a savings account to a checking account maintained by a depositor
in one bank." The Court favorably adopts the finding of the CTA that the electronic messages
"cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred" and that the said electronic messages are "mere memoranda" of the
transaction consisting of the "actual debiting of the [investor-client-payor’s] local or foreign currency
account in the Philippines" and "entered as such in the books of account of the local bank," HSBC. 16

More fundamentally, the instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the

following requirements:

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

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

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

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

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

indicated therein with reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998
subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed
in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST
paid during the period September to December 1997 and subject of G.R. No. 166018, is worded
exactly the same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904, which provided:
17

SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of any
sum of money drawn or purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax
upon such document in the same manner as is required in this Act for the stamping of inland bills of
exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp
shall have been affixed thereto. (Emphasis supplied.)
18

It then became Section 30(h) of the 1914 Tax Code : 19

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and
upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident
thereto documentary taxes for and in respect of the transaction so had or accomplished shall be paid
as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the
same, and at the time such act is done or transaction had:

xxxx

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the Philippine Islands,
on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange
or order, or the Philippine equivalent of such value, if expressed in foreign currency, two centavos[.]
(Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26, as 20

amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the
payment of money, payable at sight or on demand, or after a specific period after sight or from a
stated date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money
drawn in a foreign country but payable in this country whether at sight or on demand or after a
specified period after sight or from a stated date, is presented for acceptance or payment, there
must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each ₱200 or
fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939, which provided:
21

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code, as amended by Presidential Decree Nos. 1457
22

and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for
the past one hundred years. The identical text and common history of Section 230 of the 1977 Tax
1âwphi1

Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST on either
(a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of
money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties
incident thereto. Under Section 173 of the 1997 Tax Code, the persons primarily liable for the
23

payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring
the taxable documents, instruments or papers. 24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property. 25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax
Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the Philippines. In other
words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn abroad but payable in the
Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment for
the bill of exchange or order for the payment of money which it has drawn abroad but payable in the
Philippines.

Acceptance applies only to bills of exchange. Acceptance of a bill of exchange has a very definite
26

meaning in law. In particular, Section 132 of the Negotiable Instruments Law provides:
27

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange ] is the
28

signification by the drawee of his assent to the order of the drawer. The acceptance must be in
writing and signed by the drawee. It must not express that the drawee will perform his promise by
any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of
exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money and
the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay." Once the drawee accepts, he becomes an
29

acceptor. As acceptor, he engages to pay the bill of exchange according to the tenor of his
30

acceptance. 31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment. Presentment for acceptance is the production or exhibition of the bill of exchange to
32

the drawee for the purpose of obtaining his acceptance. 33

Presentment for acceptance is necessary only in the instances where the law requires it. In the
34

instances where presentment for acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the
purpose of demanding and obtaining payment thereof. 35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for
payment.

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

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

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

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

SO ORDERED.