TRADERS ROYAL BANK v.
COURT OF APPEALS (Ram) Central Bank of the Philippines to register the transfer of the subject
March 3, 1997 | Torres, Jr., J. | Negotiable Instruments vs. Certificate of Indebtedness
PETITIONER: Traders Royal Bank
RESPONDENTS: Court of Appeals, Filriters Guaranty Assurance Corporation and
Central Bank of the Philippines
SUMMARY: Filriters Guaranty Assurance Corporation (FILRITERS) is the
registered owner of Central Bank Certificate of Indebtedness No. D891 (CBCI).
CBCI was then transferred to Philippine Underwriters Finance Corporation
(PHILFINANCE). Philfinance transferred the same CBCI to Traders Royal Bank
(TRB) under a repurchase agreement. However, Philfinance failed to buy back the
note. TRB then tried to transfer and register the CBCI under its name. The Central
Bank did not want to recognize this transfer. Hence, this petition. The issues in this
case are WoN the CBCI is a negotiable instrument and WoN the Assignment of
registered certificate is valid. The SC held that the CBCI is not a negotiable
instrument because it lacked the words of negotiability, which serve as an expression
of consent that the instrument may be transferred by negotiation. It is actually a
certificate of indebtedness that acknowledges to pay a sum of money to a specified
person or entity for a period of time. Moreover, the SC also held the assignment
was null and void because Philfinance never acquired any title or rights under CBCI
No. D891. Thus, it never had the right to assign it to TRB.
DOCTRINE: The language of negotiability which characterize a negotiable paper
as a credit instrument is its freedom to circulate as a substitute for money. Hence,
freedom of negotiability is the touchstone relating to the protection of holders. This
freedom in negotiability is totally absent in a certificate of indebtedness as it merely
acknowledges to pay a sum of money to a specified person or entity for a period of
time.
FACTS:
1. Filriters Guaranty Assurance Corporation (FILRITERS) is the registered
owner of Central Bank Certificate of Indebtedness No. D891 (CBCI). Alfredo
Banaria (Senior VP of Treasury for Filriters) without authorization and
clearance from the Board of Directors transferred the CBCI using a deed of
assignment to Philippine Underwriters Finance Corporation (PHILFINANCE).
2. Subsequently, Philfinance transferred the same CBCI to Traders Royal Bank
(TRB) under a repurchase agreement. However, Philfinance failed to buy back
the note on maturity date and executed a deed of assignment to convey to TRB
all its rights and title to CBCI No. D891.
3. The TRB tried to use the deed of assignment to transfer and register the CBCI
under its name. However, the Central Bank did not want to recognize the
transfer. Hence, TRB filed a special civil action for mandamus against the
Central Bank in the RTC.
4. RTC Decision:
a. Docketed as Civil Case No. 83-17966 in the Regional Trial Court of
Manila, Branch 32, the action was originally filed as a Petition for
Mandamus 5 under Rule 65 of the Rules of Court, to compel the
CBCI to petitioner Traders Royal Bank (TRB).
b. CBCI No. 891 is not a negotiable instrument
c. The deed of assignment of the CBCI to Philfinance is null and void.
5. CA Decision:
a. TRBs appeal still failed.
b. CBCI is not a negotiable instrument.
c. Philfinance acquired no title or rights under CBCI No. D891, which it
could assign or transfer to Traders Royal Bank and which the latter
can register with the Central Bank.
d. Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law.
6. TRBs contentions before the SC:
a. Assignment from Philfinance to TRB is valid.
i. Philfinance owns 90% of Filriters equity and the two
corporations have identical corporate officers, thus
demanding the application of the Doctrine of piercing the
veil of corporate fiction to make the transfer of the CBCI
from the registered owner to TRB valid. Since, TRBs
payment to Philfinance is in effect a payment to Filriters as
well.
ii. Filriters and Philfinance, though separate corporate entities
on paper, have used their corporate fiction to defraud TRB
into purchasing the subject CBCI
b. It admitted that the subject CBCI is not a negotiable instrument in the
absence of words of negotiability within the meaning of the
Negotiable Instruments Law (Act 2031).
ISSUES:
1. WoN the CBCI is a negotiable instrument NO.
2. WoN the Assignment of registered certificate is valid NO.
3. **WoN the Doctrine of piercing the veil of corporate fiction is applicable NO.
(Additional issue)
RULING: ACCORDINGLY, the petition is DISMISSED and the decision appealed
from dated January 29, 1990 is hereby AFFIRMED.
RATIO:
1. THE CBCI IS NOT A NEGOTIABLE INSTRUMENT
a. The CBCI clearly indicated that it is payable to Filriters and no one
else. Moreover, the certificate lacked the words of negotiability, which
serve as an expression of consent that the instrument may be
transferred by negotiation.
i. A certificate of indebtedness is for the creation and
maintenance of a permanent improvement revolving fund
and is similar to a bond.
ii. Being equivalent to a bond it is understood as an
acknowledgement of an obligation to pay a fixed sum of
 money.
iii. The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom to
circulate as a substitute for money.
iv. Hence, freedom of negotiability is the touchstone relating to
the protection of holders in due course.
v. This freedom in negotiability is totally absent in a certificate
of indebtedness as it merely acknowledges to pay a sum of
money to a specified person or entity for a period of time.
b. Before the instruments become negotiable instruments, the instrument
must conform to the requirements under the Negotiable Instrument
Law. Otherwise, instrument shall not bind the parties.
i. CB Circular 769, Series of 1980 (Rules and Regulations
Governing CBCIs) provides that registered certificates are
payable only to the registered owner (Article II, Section 1).
ii. This is a sufficient notice that assignments do not give
registered owners rights as absolute owner of the CBCIs.
iii. The CBCI constitutes part of the reserve investments of
Filriters against liabilities required by the Insurance Code
and its assignment or transfer is expressly prohibited by law.
iv. TRB did not attempt to get any clearance or authorization
from the Insurance Commissioner. Petitioner knew that
Philfinance is not registered owner of the CBCI No. D891.
The fact that a non-owner was disposing of the registered
CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to
dispose to the CBCI.
2. THE ASSIGNMENT WAS NULL AND VOID.
a. It was done without the knowledge and consent of the directors of
Filriters.
i. Under 1409 of the Civil Code those contracts which are
absolutely simulated or fictitious are considered void and
inexistent from the beginning.
b. There was no consideration involved.
i. The deed of assignment stated that the transfer was for value
received, but there was really no consideration involved.
What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation.Thus, for lack of any
consideration, the assignment made is a complete nullity.
c. It was not duly authorized in writing by the Board, as required by
Article V, Section 3 of CB Circular No. 769 otherwise known as the
Rules and Regulations Governing Central Bank Certificates of
Indebtedness.
d. The assignment was a personal act of Alfredo Banaria and not the
corporate act of Filriters
e. Hence, Philfinance never acquired title or rights under CBCI No.
D891.
3. **THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION IS NOT APPLICABLE
a. The Doctrine of piercing the veil of corporate entity is an equitable
remedy, and may be awarded only in cases when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud or
defend crime or where a corporation is a mere alter ego or business
conduit of a person. It is the protection of the interests of innocent
third persons dealing with the corporate entity, which the law aims to
protect by this doctrine.
b. The fact that Philfinance owns majority shares in Filriters is not by
itself a ground to disregard the independent corporate status of
Filriters.
c. There are not enough evidences to show that TRB was defrauded
when it acquired the subject certificate of indebtedness from
Philfinance.
i. On its face, the subject certificates states that it is registered
in the name of Filriters. TRB knew that Philfinance is not the
registered owner of CBCI No. D891.
ii. No showing to the effect that petitioner had any dealings
whatsoever with Filriters, nor did it make inquiries as to the
ownership of the certificate.
b. Moreover, CBCI No. D891 is governed by CB Circular No. 769,
series of 1980. TRB, being a commercial bank, cannot claim
ignorance of Central Bank Circular 769, and its requirements.
4. APPLICABLE LAWS:
a. Under section 1 of Act no. 2031 an instrument to be negotiable must
conform to the following requirements:
i. It must be in writing and signed by the maker or drawer;
ii. Must contain an unconditional promise or order to pay a sum
certain in money;
iii. Must be payable on demand, or at a fixed or determinable
future time;
iv. Must be payable to order or to bearer; and
v. Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable
certainty.
b. Under section 3, Article V of Rules and Regulations Governing
Central Bank Certificates of Indebtedness states that:
i. The assignment of registered certificates shall not be valid
unless made at the office where the same have been issued
and registered or at the Securities Servicing Department,
Central Bank of the Philippines, and by the registered owner
thereof, in person or by his representative, duly authorized in
writing. For this purpose, the transferee may be designated as
the representative of the registered owner.