Republic of the Philippines with his purchased of fuel products from the latter

SUPREME COURT (Original Record, p. 208).

Manila
SECOND DIVISION
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal
of the decision promulgated by respondent court on March 8, 1991 in
CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which
dismissed the complaint filed therein by herein petitioner against
respondent bank.
The undisputed background of this case, as found by the court a
quo and adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial
banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in
favor of one Angel dela Cruz who deposited with
herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1
to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time
deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed
and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On
the basis of said affidavit of loss, 280 replacement
CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated
and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said
depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which
stated, among others, that he (de la Cruz)
surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the
assignment and further authorizes said bank to pre-
terminate, set-off and "apply the said time deposits
to the payment of whatever amount or amounts
may be due" on the loan upon its maturity (TSN,
February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost
by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by
said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a
letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of
the CTDs in question and of its decision to pre-
terminate the same.

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to
2 Mar. 82 74701 to
4 Mar. 82 90127 to
5 Mar. 82 74797 to
5 Mar. 82 89965 to
5 Mar. 82 70147 to
8 Mar. 82 90001 to
9 Mar. 82 90023 to
9 Mar. 82 89991 to
9 Mar. 82 90251 to
———
Total 280
===== ========
2. Angel dela Cruz delivered the said certificates
of time (CTDs) to herein plaintiff in connection
8. On December 8, 1982, plaintiff was requested
74691 90 360,000
by herein defendant to furnish the former "a copy
74740 40 160,000
of the document evidencing the guarantee
90146 20 80,000
agreement with Mr. Angel dela Cruz" as well as
94800 4 16,000
"the details of Mr. Angel dela Cruz" obligation
89986 22 88,000
against which plaintiff proposed to apply the time
90150 4 16,000
deposits (Defendant's Exhibit 564).
90020 20 80,000
90050 28 112,000
90000 10 40,000 9. No copy of the requested documents was
90272 22 88,000 furnished herein defendant.
————
P1,120,000 10. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
 11. In April 1983, the loan of Angel dela Cruz with
the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the
time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-
131).
12. In view of the foregoing, plaintiff filed the
instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein
at 16% per annum, moral and exemplary damages
as well as attorney's fees.
After trial, the court a quo rendered its decision
dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates
of deposit; and (3) in disregarding the pertinent provisions of the Code
of Commerce relating to lost instruments payable to bearer. 4
. . . While it may be true that the word "bearer"
appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER"
stamped on the space provided supposedly for the
name of the depositor, the words "has deposited" a
certain amount follows. The document further
provides that the amount deposited shall be
"repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are
payable, not to whoever purports to be the "bearer"
but only to the specified person indicated therein,
the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the
person who made the deposit and further engages
itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that
the CTDs in question are negotiable instruments. Section 1 Act No.
2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker
or drawer;

The instant petition is bereft of merit. (b) Must contain an unconditional promise or
order to pay a sum certain in money;
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse. (c) Must be payable on demand, or at a fixed or
determinable future time;
SECURITY BANK
AND TRUST COMPANY (d) Must be payable to order or to bearer; and
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines (e) Where the instrument is addressed to a drawee,
SUCAT OFFICEP 4,000.00 he must be named or otherwise indicated therein
CERTIFICATE OF DEPOSIT with reasonable certainty.
Rate 16%
The CTDs in question undoubtedly meet the requirements of the law
Date of Maturity FEB. 23, 1984 FEB 22, for negotiability. The parties' bone of contention is with regard to
1982, 19____ requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
Security Bank's Branch Manager way back in 1982, testified in open
This is to Certify that B E A R court that the depositor reffered to in the CTDs is no other than Mr.
E R has deposited in this Bank Angel de la Cruz.
the sum of PESOS: FOUR
THOUSAND ONLY, xxx xxx xxx
SECURITY BANK SUCAT
OFFICE P4,000 & 00 Atty. Calida:
CTS Pesos, Philippine
Currency, repayable to said
depositor 731 days. after date, q In other words Mr. Witness,
upon presentation and you are saying that per books
surrender of this certificate, of the bank, the depositor
with interest at the rate referred (sic) in these
of 16% per cent per annum. certificates states that it was
Angel dela Cruz?
(Sgd. Illegible) (Sgd. Illegible)
witness:
—————————— —————————
—— a Yes, your Honor, and we
have the record to show that
Angel dela Cruz was the one
AUTHORIZED SIGNATURES 5 who cause (sic) the amount.

Respondent court ruled that the CTDs in question are non-negotiable Atty. Calida:
instruments, nationalizing as follows:
 q And no other person or
entity or company, Mr.
Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the
depositor identified in all of
these certificates of time
deposit insofar as the bank is
concerned?
witness:
a Angel dela Cruz is the
depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself.9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What
the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall
be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be
the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact
in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore,
the amounts deposited are repayable to whoever may be the bearer
thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but
obviously other parties not privy to the transaction between them
would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for
the application of the elementary rule that the interpretation of obscure
words or stipulations in a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records reveal that
Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained,
requires both delivery and indorsement. For, although petitioner seeks
to deflect this fact, the CTDs were in reality delivered to it as a security
for De la Cruz' purchases of its fuel products. Any doubt as to whether
the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another
to believe a particular thing true, and to act upon such belief, he cannot,
in any litigation arising out of such declaration, act, or omission, be
permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as
security, petitioner's credit manager could have easily said so, instead
of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a
bill of particularity therein 17 praying, among others, that petitioner, as
plaintiff, be required to aver with sufficient definiteness or particularity
(a) the due date or dates of payment of the alleged indebtedness of
Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt
showing that the CTDs were delivered to it by De la Cruz
as payment of the latter's alleged indebtedness to it, plaintiff
corporation opposed the motion. 18 Had it produced the receipt prayed
for, it could have proved, if such truly was the fact, that the CTDs were
delivered as payment and not as security. Having opposed the motion,
petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated
Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's pronouncements
in Lopez, supra, we quote therefrom:
The character of the
transaction between the
parties is to be determined by
their intention, regardless of
what language was used or
what the form of the transfer
was. If it was intended to
secure the payment of money,
it must be construed as a
pledge; but if there was some
 other intention, it is not a
pledge. However, even
though a transfer, if regarded
by itself, appears to have been
absolute, its object and
character might still be
qualified and explained by
contemporaneous writing
declaring it to have been a
deposit of the property as
collateral security. It has been
said that a transfer of property
by the debtor to a creditor,
even if sufficient on its face to
make an absolute conveyance,
should be treated as a pledge
if the debt continues in
inexistence and is not
discharged by the transfer,
and that accordingly the use of
the terms ordinarily importing
conveyance of absolute
ownership will not be given
that effect in such a
transaction if they are also
commonly used in pledges
and mortgages and therefore
do not unqualifiedly indicate a
transfer of absolute
ownership, in the absence of
clear and unambiguous
language or other
circumstances excluding an
intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in
favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed)
could at the most constitute petitioner only as a holder for value by
reason of his lien. Accordingly, a negotiation for such purpose cannot
be effected by mere delivery of the instrument since, necessarily, the
terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually
provided for.
The pertinent law on this point is that where the holder has a lien on
the instrument arising from contract, he is deemed a holder for value
to the extent of his lien. 23 As such holder of collateral security, he
would be a pledgee but the requirements therefor and the effects
thereof, not being provided for by the Negotiable Instruments Law,
shall be governed by the Civil Code provisions on pledge of
incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against
third persons if a description of the thing pledged
and the date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not
indorsed, the factual findings of respondent court quoted at the start of
this opinion show that petitioner failed to produce any document
evidencing any contract of pledge or guarantee agreement between it
and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs
did not legally vest in petitioner any right effective against and binding
upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the
mode whereby proof may be made of the date of a pledge contract, but
a rule of substantive law prescribing a condition without which the
execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public
instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:
Art. 1625. An assignment of credit, right or action
shall produce no effect as against third persons,
unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property
in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit or the extent of its
lien nor the execution of any public instrument which could affect or
bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the
CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the
requirements of the law in the case of lost negotiable instruments and
the issuance of replacement certificates therefor, on the ground that
petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29 The issues agreed upon by them for resolution
in this case are:
1. Whether or not the CTDs as worded are
negotiable instruments.
2. Whether or not defendant could legally apply
the amount covered by the CTDs against the
depositor's loan by virtue of the assignment
(Annex "C").
3. Whether or not there was legal compensation or
set off involving the amount covered by the CTDs
and the depositor's outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel defendant
to preterminate the CTDs before the maturity date
provided therein.
 5. Whether or not plaintiff is entitled to the
proceeds of the CTDs.
6. Whether or not the parties can recover damages,
attorney's fees and litigation expenses from each
other.
As respondent court correctly observed, with appropriate citation of
some doctrinal authorities, the foregoing enumeration does not include
the issue of negligence on the part of respondent bank. An issue raised
for the first time on appeal and not raised timely in the proceedings in
the lower court is barred by estoppel. 30 Questions raised on appeal
must be within the issues framed by the parties and, consequently,
issues not raised in the trial court cannot be raised for the first time on
appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary
to the disposition of a case are properly raised. Thus, to obviate the
element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the
trial, except such as may involve privileged or impeaching matters. The
determination of issues at a pre-trial conference bars the consideration
of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right
to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue.
We agree with private respondent that the broad ultimate issue of
petitioner's entitlement to the proceeds of the questioned certificates
can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised
in the court below, petitioner still cannot have the odds in its favor. A
close scrutiny of the provisions of the Code of Commerce laying down
the rules to be followed in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions, even assuming their
applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for
itself.
Art 548. The dispossessed owner, no matter for
what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the
principal, interest or dividends due or about to
become due, be not paid a third person, as well as
in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not
mandatory but discretionary on the part of the "dispossessed owner" to
apply to the judge or court of competent jurisdiction for the issuance
of a duplicate of the lost instrument. Where the provision reads "may,"
this word shows that it is not mandatory but discretional. 34 The word
"may" is usually permissive, not mandatory. 35 It is an auxiliary verb
indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548
to 558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of
a bearer instrument so that he may obtain a duplicate of the same, and,
on the other, an option in favor of the party liable thereon who, for
some valid ground, may elect to refuse to issue a replacement of the
instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined
therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition
is DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE
CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.
TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of
the respondent Court of Appeals dated January 29, 1990, 1 affirming
the nullity of the transfer of Central Bank Certificate of Indebtedness
(CBCI) No. D891,2 with a face value of P500,000.00, from the
Philippine Underwriters Finance Corporation (Philfinance) to the
petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached
Assignment4dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of
Manila, Branch 32, the action was originally filed as a Petition
for Mandamus5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the subject
CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty
Assurance Corporation (Filriters) executed a
"Detached Assignment" . . ., whereby Filriters, as
registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of
PESOS: FIVE HUNDRED THOUSAND
(P500,000) and having an aggregate value of
PESOS: THREE MILLION FIVE HUNDRED
THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex
"A") contains an express authorization executed
by the transferor intended to complete the
assignment through the registration of the transfer
in the name of PhilFinance, which authorization is
specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central
Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a
Repurchase Agreement with PhilFinance . . .,
whereby, for and in consideration of the sum of
PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series,
Serial No. D891 with a face value of P500,000.00
. . ., which CBCI was among those previously
acquired by PhilFinance from Filriters as averred
in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase
Agreement (Annex "B"), Philfinance agreed to
repurchase CBCI Serial No. D891 (Annex "C"), at
the stipulated price of PESOS: FIVE HUNDRED
NINETEEN THOUSAND THREE HUNDRED
SIXTY-ONE & 11/100 (P519,361.11) on April
27, 1981;
7. PhilFinance failed to repurchase the CBCI on
the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were
dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed
a Detached Assignment in favor of the Petitioner
to enable the latter to have its title completed and
registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred
and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore,
it did thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." .
..
9. Petitioner presented the CBCI (Annex "C"),
together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to
the Securities Servicing Department of the
respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a
new certificate in the name of petitioner as
absolute owner thereof;
10. Respondent failed and refused to register the
transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title
over the same and despite repeated demands in
writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer
of the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be
valid unless made at said
office (where the Certificate
has been registered) by the
registered owner hereof, in
person or by his attorney duly
authorized in writing, and
similarly noted hereon, and
upon payment of a nominal
transfer fee which may be
required, a new Certificate
shall be issued to the
transferee of the registered
holder thereof."
and, without a doubt, the Detached Assignments
presented to respondent were sufficient
authorizations in writing executed by the
registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted
provision;
12. Upon such compliance with the aforesaid
requirements, the ministerial duties of registering
a transfer of ownership over the CBCI and issuing
a new certificate to the transferee devolves upon
the respondent;
Upon these assertions, TRB prayed for the registration by the Central
Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took
cognizance of the defendant Central Bank of the Philippines' Motion
for Admission of Amended Answer with Counter Claim for
Interpleader6 thereby calling to fore the respondent Filriters Guaranty
Assurance Corporation (Filriters), the registered owner of the subject
CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI
No. 891;
12. The CBCI constitutes part of the reserve
investment against liabilities required of
respondent as an insurance company under the
Insurance Code;
13. Without any consideration or benefit
whatsoever to Filriters, in violation of law and the
trust fund doctrine and to the prejudice of
policyholders and to all who have present or future
claim against policies issued by Filriters, Alfredo
Banaria, then Senior Vice-President-Treasury of
Filriters, without any board resolution, knowledge
or consent of the board of directors of Filriters, and
without any clearance or authorization from the
Insurance Commissioner, executed a detached
assignment purportedly assigning CBCI No. 891
to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-
President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom
were holding the same positions in Philfinance),
without any consideration or benefit redounding to
Filriters and to the grave prejudice of Filriters, its
policy holders and all who have present or future
claims against its policies, executed similar
detached assignment forms transferring the CBCI
to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and
inoperative because the assignment is without the
knowledge and consent of directors of Filriters,
and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular
No. 769;
16. The assignment of the CBCI to Philfinance is
a personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without
consideration and for that reason, the assignment
is void from the beginning (Article 1409, Civil
Code);
b) The assignment was executed without any
knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of
Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an
insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal
act in the sense of malum in se or malum
prohibitum, for anyone to make, either as
corporate or personal act;
d) The transfer of dimunition of reserve
investments of Filriters is expressly prohibited by
law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the
capital impairment and in the solvency deficiency
of Filriters (and has in fact helped in placing
Filriters under conservatorship), an inevitable
result known to the officer who executed
assignment.
17. Plaintiff had acted in bad faith and with
knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable
instrument and as a certificate of indebtedness is
not payable to bearer but is a registered in the
name of Filriters;
b) The provision on transfer of the CBCIs provides
that the Central Bank shall treat the registered
owner as the absolute owner and that the value of
the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff
that the assignments do not give them the
registered owner's right as absolute owner of the
CBCI's;
c) CB Circular 769, Series of 1980 (Rules and
Regulations Governing CBCIs) provides that the
registered certificates are payable only to the
registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary
course of business;
a) The CBCI constitutes part of the reserve
investments of Filriters against liabilities requires
by the Insurance Code and its assignment or
transfer is expressly prohibited by law. There was
no attempt to get any clearance or authorization
from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is
clearly not a transaction in the usual or regular
course of its business;
c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all
or substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of
Manila, Branch XXXIII found the assignment of CBCI No. D891 in
favor of Philfinance, and the subsequent assignment of the same CBCI
by Philfinance in favor of Traders Royal Bank null and void and of no
force and effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in
favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff
Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in
favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the
plaintiff Traders Royal Bank as null and void and
of no force and effect;
(b) Ordering the respondent Central Bank of the
Philippines to disregard the said assignment and to
pay the value of the proceeds of the CBCI No.
D891 to the Filriters Guaranty Assurance
Corporation;
(c) Ordering the plaintiff Traders Royal Bank to
pay respondent Filriters Guaranty Assurance
Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of
Appeals 10, but their appeals likewise failed. The findings of the fact of
the said court are hereby reproduced:
 The records reveal that defendant Filriters is the
registered owner of CBCI No. D891. Under a deed
of assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No.
D891, which was still registered in the name of
Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase
agreement dated February 4, 1981, granting
Philfinance the right to repurchase the instrument
on or before April 27, 1981. When Philfinance
failed to buy back the note on maturity date, it
executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and
the title to CBCI No. D891.
Armed with the deed of assignment, TRB then
sought the transfer and registration of CBCI No.
D891 in its name before the Security and Servicing
Department of the Central Bank (CB). Central
Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by
defendant Filriters.
Left with no other recourse, TRB filed a special
civil action for mandamus against the Central
Bank in the Regional Trial Court of Manila. The
suit, however, was subsequently treated by the
lower court as a case of interpleader when CB
prayed in its amended answer that Filriters be
impleaded as a respondent and the court adjudge
which of them is entitled to the ownership of CBCI
No. D891. Failing to get a favorable judgment.
TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a
negotiable instrument, and having acquired the said certificate from
Philfinance as a holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from any defense
available to prior parties among themselves, and it may thus, enforce
payment of the instrument for the full amount thereof against all parties
liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a
negotiable instrument, since the instrument clearly stated that it was
payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which
serve as an expression of consent that the instrument may be
transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to
Philfinance was fictitious, having made without consideration, and did
not conform to Central Bank Circular No. 769, series of 1980, better
known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", which provided that any "assignment of
registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly
authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from
Philfinance whose interest was inexistent, having acquired the
certificate through simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation, to
guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed
the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary
written authorization from the Board of Directors
of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind
Filriters and violated as the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is
AFFIRMED, with costs against plaintiff-
appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that
Philfinance owns 90% of Filriters equity and the two corporations have
identical corporate officers, thus demanding the application of the
doctrine or piercing the veil of corporate fiction, as to give validity to
the transfer of the CBCI from registered owner to petitioner
TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's
ruling that the transfer of the CBCI from Filriters to Philfinance was
null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the
absence of words of negotiability within the meaning of the negotiable
instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for
value received, hereby promises to pay bearer, of
if this Certificate of indebtedness be registered, to
FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to
certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money. It is
usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable
instrument, stating that:
As worded, the instrument provides a promise "to
pay Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the
 instrument is payable only to Filriters, the
registered owner, whose name is inscribed
thereon. It lacks the words of negotiability which
should have served as an expression of consent
that the instrument may be transferred by
negotiation.15
A reading of the subject CBCI indicates that the same is payable to
FILRITERS GUARANTY ASSURANCE CORPORATION, and to
no one else, thus, discounting the petitioner's submission that the same
is a negotiable instrument, and that it is a holder in due course of the
certificate.
The language of negotiability which characterize a negotiable paper as
a credit instrument is its freedom to circulate as a substitute for money.
Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is
the foundation for the protection which the law throws around a holder
in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from
the writing, that is, from the face of the instrument
itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be
legally ascertained. While the writing may be read
in the light of surrounding circumstance in order
to more perfectly understand the intent and
meaning of the parties, yet as they have constituted
the writing to be the only outward and visible
expression of their meaning, no other words are to
be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what
the parties may have secretly intended as
contradistinguished from what their words
express, but what is the meaning of the words they
have used. What the parties meant must be
determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance
to TRB, in accord with existing law, so as to entitle TRB to have the
CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that
Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from
Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value
received", there was really no consideration
involved. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister
corporation. Thus, for lack of any consideration,
the assignment made is a complete nullity.
What is more, We find that the transfer made by
Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise
known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the
Official Gazette on November 19, 1980, Section 3
thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed
the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary
written authorization from the Board of Directors
of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind
Filriters and violated at the same time Central
Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the
transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal
Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights
under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the
latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB
must upheld, as the respondent Filriters and Philfinance, though
separate corporate entities on paper, have used their corporate fiction
to defraud TRB into purchasing the subject CBCI, which purchase now
is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and
the two companies have the same corporate
officers, if the principle of piercing the veil of
corporate entity were to be applied in this case,
then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a
payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has,
that it never received any payment for that CBCI
sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the
Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a
sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent
therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court
of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the
payment by TRB to Philfinance should be
construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate
entity, as this merely an equitable remedy, and may be awarded only
in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through
the protective shroud which exempts its stockholders from liabilities
that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing
corporate fiction. But to do this, the court must be sure that the
corporate fiction was misused, to such an extent that injustice, fraud,
or crime was committed upon another, disregarding, thus, his, her, or
its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this
doctrine.
The corporate separateness between Filriters and Philfinance remains,
despite the petitioners insistence on the contrary. For one, other than
the allegation that Filriters is 90% owned by Philfinance, and the
identity of one shall be maintained as to the other, there is nothing else
which could lead the court under circumstance to disregard their
corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, 19 in the
absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to
disregard the independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a
single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness
from Philfinance.
On its face the subject certificates states that it is registered in the name
of Filriters. This should have put the petitioner on notice, and prompted
it to inquire from Filriters as to Philfinance's title over the same or its
authority to assign the certificate. As it is, there is no showing to the
effect that petitioner had any dealings whatsoever with Filriters, nor
did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its
TRANSFER. Thus:
TRANSFER. This Certificate shall pass by
delivery unless it is registered in the owner's name
at any office of the Bank or any agency duly
authorized by the Bank, and such registration is
noted hereon. After such registration no transfer
thereof shall be valid unless made at said office
(where the Certificates has been registered) by the
registered owner hereof, in person, or by his
attorney, duly authorized in writing and similarly
noted hereon and upon payment of a nominal
transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency
duly authorized by the Bank may deem and treat
the bearer of this Certificate, or if this Certificate
is registered as herein authorized, the person in
whose name the same is registered as the absolute
owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof,
and for all other purpose whether or not this
Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written
authorization for the transfer or to require Philfinance to submit such
an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI
No. D891. The fact that a non-owner was disposing of the registered
CBCI owned by another entity was a good reason for petitioner to
verify of inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series
of 1990 21, known as the Rules and Regulations Governing Central
Bank Certificates of Indebtedness, Section 3, Article V of which
provides that:
Sec. 3. Assignment of Registered Certificates. —
Assignment of registered certificates shall not be
valid unless made at the office where the same
have been issued and registered or at the Securities
Servicing Department, Central Bank of the
Philippines, and by the registered owner thereof,
in person or by his representative, duly authorized
in writing. For this purpose, the transferee may be
designated as the representative of the registered
owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central
Bank Circular 769, and its requirements. An entity which deals with
corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation
liable. 22 This is only fair, as everyone must, in the exercise of his rights
and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the
said. Central Bank Circular, which for all intents, is considered part of
the law. As found by the courts a quo, Alfredo O. Banaria, who had
signed the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have the necessary
written authorization from the Board of Directors of Filriters to act for
the latter. As it is, the sale from Filriters to Philfinance was fictitious,
and therefore void and inexistent, as there was no consideration for the
same. This is fatal to the petitioner's cause, for then, Philfinance had
no title over the subject certificate to convey the Traders Royal
Bank. Nemo potest nisi quod de jure potest — no man can do anything
except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part
of its legal and capital reserves, which are required by law 24 to be
maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given
before the court on May 30, 1986.
Q Do you know this Central
Bank Certificate of
Indebtedness, in short, CBCI
No. D891 in the face value of
P5000,000.00 subject of this
case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the
company sought to be
examined by the Insurance
 Commission sometime in
early 1981 and this CBCI No.
891 was among the CBCI's
that were found to be missing.
Q Let me take you back
further before 1981. Did you
have the knowledge of this
CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an
investment of Filriters
required by the Insurance
Commission as legal reserve
of the company.
Q Legal reserve for the
purpose of what?
A Well, you see, the Insurance
companies are required to put
up legal reserves under
Section 213 of the Insurance
Code equivalent to 40 percent
of the premiums receipt and
further, the Insurance
Commission requires this
reserve to be invested
preferably in government
securities or government
binds. This is how this CBCI
came to be purchased by the
company.
It cannot, therefore, be taken out of the said funds, without violating
the requirements of the law. Thus, the anauthorized use or distribution
of the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the
maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of
indebtedness must be upheld over the claimed interest of Traders Royal
Bank.
ACCORDINGLY, the petition is DISMISSED and the decision
appealed from dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7271 August 30, 1957
PHILIPPINE NATIONAL BANK, plaintiff-appellant,
vs.
JOSE ZULUETA, defendant-appellee.
Natalio M. Balboa and Ramon B. de los Reyes for appellant.
Lorenzo F. Miravite for appellee.
BENGZON, J.:
In the Manila court of first instance, the Philippine National Bank sued
the defendant upon a letter of credit and a draft for the amount of
$14,449.15. Although willing to pay the equivalent in pesos of the
draft, plus bank charges, the defendant objected to the 17% excise tax
imposed by Republic Act No. 601 which the Bank tried to collect. Both
documents, he contended, had been issued and had matured before the
approval of said Act, therefore the excise tax should not be charged.
After the trial, the court rendered judgment exempting defendant from
the 17% excise tax; but ordered him to deliver to plaintiff the sum of
P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning
from January 9, 1953.
The plaintiff appealed, insisting on the right to collect 17% excise or
exchange tax. This is the only issue between the parties now.
For a statement of the facts we may quote from plaintiff's brief. "On
October 26, 1948, Defendant-Appellee applied for a commercial letter
of credit with Plaintiff-Appellant, Philippine National Bank (Manila)
and was granted L/C No. 35171 (Exhibit "B") on November 6, 1948,
in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City,
U.S.A., for $14,449.15 for the purchase of an electric passenger
elevator; on May 17, 1949, and under the said letter of credit (Exhibit
"B"), Otis Elevator Co. drew a 90 day sight draft for $14,449.15
(Exhibit "A") which draft was duly presented to and accepted by
Defendant-Appellee on July 6, 1949. Said acceptance matured on
October 4, 1949. Upon Defendant-Appellee's signing a 90 day trust
receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to
Defendant-Appellee the covering documents of the shipment. In the
meantime, debit advice (Exhibit "G") was received from Plaintiff-
Appellant's New York Agency to the effect that it advanced or paid the
draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and charged
Plaintiff-Appellant the sum of $14,467.21 representing the face value
of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission. After
the maturity date (October 4, 1949) Plaintiff-Appellant presented the
draft to Defendant-Appellee for payment but the latter failed, neglected
and refused to pay.
During its special session in January, 1951, Congress passed House
Bill No. 1513, now Republic Act No. 601, approved on March 28,
1951, imposing a 17% special excise tax (otherwise known as foreign
exchange tax) on the value in Philippine peso of foreign exchange sold
by the Central Bank of the Philippines or its authorized agents.
Plaintiff-appellant, as any other commercial bank in the Philippines, is
an authorized agent of the Central Bank of the Philippines.
On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent
bills or statements of collection (Exhibits "D" and "D-1") to
Defendant-Appellee but the latter failed and refused to effect payment
thereof. In those statements, the sum of P4,955.74 was included
representing the 17% special excise tax on the peso value of the draft
for US $14,449.15 (Exhibit "A"), . . . .
Defendant's application for a letter of credit party read as follows:
Please arrange by cable for the establishment of an
Irrevocable Letter of Credit on New York in favor of Otis
Elevator Co., 260 Eleventh Avenue, New York City for
account of Ho. Jose C. Zulueta for the sum of FOURTEEN
THOUSAND FOUR HUNDRED FORTY-NINE AND
15/100 ($14,449.15) DOLLARS against drawn at NINETY
DAYS accompanied by shipping documents covering of
One COMPLETE ELECTRIC PASSENGER ELEVATOR .
..
 Drafts must be drawn and presented or negotiated not later
than May 31, 1949.
IN CONSIDERATION THEREOF, I/we promise and agree
to pay you at maturity in Philippine Currency, the equivalent
of the above amount or such portion thereof as may be drawn
or paid upon the faith of said credit, together with your usual
charges, and I/we authorize you and your respective
correspondents to pay or to accept drafts under this credit, .
..
And the draft issued thereunder (Exhibit A) was negotiable and
addressed to herein defendant as the drawee.
From plaintiff's statement of its position it is not clear whether recovery
is demanded upon the letter of credit, or upon the draft Exhibit A.
Plaintiff may, undoubtedly, proceed on either cause of action. (See Art.
571 Code of Commerce; Sec. 51 Negotiable Instruments Law.)
Had the plaintiff elected to recover on said letter of credit, then it would
meet with the doctrines in Araneta vs. Philippine National Bank, 95
Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority opinion
in that case, plaintiff should receive the equivalent in pesos, on May
17, 1949, of what the New York Agency paid to Otis Elevator, i.e.
$14,467.21 (plus bank fees of course.) According to the minority
opinion, the equivalent in pesos of the same amount of dollars on
October 4, 1949. No. 17% tax on both dates. In converting dollars into
pesos, no 17% exchange tax would be imposable, since it was created
only in March 1951. The plaintiff knows the case, for it was a party to
it; and anticipating, in this appeal, the obvious conclusions, it insists
not so much on the letter of credit, as on the bill of exchange Exhibit
A1 . As stated before, such draft was drawn by Otis Elevator Co. in
New York. It was addressed to defendant as drawee, who is due course
accepted it. There is no, question that upon accepting it, defendant
became a party primarily liable2; and the holder (Philippine National
Bank) may sue him, even if there had been no presentation for payment
on the day of maturity. (Sec. 70 Negotiable Instruments Law.)
Admittedly, defendant's responsibility is for $14,449.15 due in Manila
on October 4, 1949 (plus bank fees). He is under obligation to deliver
such amount in pesos as were the equivalent of $14,449.15. At what
rate of exchange? The rate prevailing on the day of issuance, day of
acceptance, day of maturity, the day suit is filed, or that prevailing on
the day judgment is rendered requiring him to pay? Herein lies the
center of the controversy. Appellant will win this appeal only if the rate
on the last days above mentioned is held to be the legal rate.
The document is negotiable and is governed by the Negotiable
Instruments Law. But this statute does not certain any express
provision on the question. We know the draft is a foreign bill of
exchange, because, drawn in New York, it is payable here. (See. 129
Negotiable Instruments Law.) We also know that although the amount
payable is expressed in dollars — not current money here — it is still
negotiable, for it may be discharged with pesos of equivalent amount3.
The problem arises when we try to determine the "equivalent amount",
because the rate of exchange fluctuates from day to day.
There are decisions in America to the effect that, "the rate of exchange
in effect at the time the bill should have been paid" controls. (11 C.J.S.
p. 264.)
Such decisions agree with the provisions of the Bills of Exchange Act
of England4 and could be taken as enunciating the correct principle,
inasmuch as our Negotiable Instruments Law, practically copied the
American Uniform Negotiable Instruments Law which in turn was
based largely on the Bills of Exchange Act of England of 1882. In fact
we practically followed this rule in Westminster Bank vs. K. Nassor,
58 Phil. 855.
There is one decision applying the rate of exchange at the time
judgment is entered. (11 C. J. S. p.264.)5
This decision however seems not to have taken into account the Bills
of Exchange Act above mentioned. And we have rejected its view in
the Westminster case, supra. Furthermore it related to a bill expressly
made payable in a foreign currency — which is not the case here. And
the theory would probably produce undesirable effects upon
commercial documents, for it would make the amount uncertain, the
parties to the bill not being able to foresee the day judgment would be
rendered.6
But the appellant argues, the defendant had promised to pay
$14,419.15 in dollars; therefore he must be ordered to pay the sum in
dollars at current rates plus 17%.
The argument rests on a wrong premise. Defendant had not promised
to pay in dollars. He agreed to pay the equivalent of $14,419.15
dollars, in Philippine currency 7.
But if we admit that defendant had agreed to pay in dollars, then we
have to apply Republic Act No. 529 and say that his obligation "shall
be discharged in Philippine currency measured at the prevailing rates
of exchange at the time the obligation was incurred."
Now then, Zulueta's obligation having been incurred8 before the
creation of the 17% tax, it may not be validly burdened with such tax,
because the law imposing it could not be deemed to have impaired
obligations already existing at the time of its approval..
The plaintiff's theory seems to be that in remitting dollars to its New
York Agency, after it collects from the defendant, it has to pay for the
said excise tax.9 The trial judge expressed the belief that such
amount had been remitted before the enactment of Republic Act 601,
because considering the practice of banks of replenishing their
agencies abroad with necessary funds, he deemed it improbable that
the Manila Office of the Bank — in two years had not reimburse its
New York Agency for the amount advanced on account of the draft
Exhibit A. This belief most probably accorded with reality; because as
early as May 17, 1949 (Exhibit G) the New York Agency had
"charged" the amount of this draft against the account of the Manila
office there, — which means the Agency had reimbursed itself the
amount of the draft out of the funds of the Manila Office then in its
possession (in New York) or coming to its possession afterwards. And
it is unbelievable that in two years the Manila office never had in New
York sufficient funds to effect the reimbursement.
In fact, the statement of account rendered by plaintiff to defendant on
October 17, 1952, (Exhibit D) enumerated these charges:
To your acceptance amounting to $14,
Plus: Remitter's Commission
$14,
Converted at 3/4 % P29,
5% int. 5/17/49-10/19/52-1251 da. 4,
P34,
10% comm. on $14,449.15 2,91
Documentary stamps 8.70
Air Mail 2.00
17% Excise Tax on P29,151.43 4,95
 Other charges
From the above it may be deduced that the amount of the draft had
been remitted or paid to the New York Agency in May 1949, for the
reason that Zulueta is charged with remitter's commission" and 5%
interest on the amount of the draft (and such commission) beginning
from May 17, 1949. This necessarily impllies that in accordance with
Exhibit G, the New York Agency had been reimbursed of the draft's
amount (or such amount was remitted) on May 17, 1949.10 Now, in
May 1949 no 17% exchange tax was payable upon such remittance;
and the Manila office did not pay it. Therefore Zulueta should not pay
it too.
In view of the foregoing the judgment will be affirmed, with costs
against appellant. So ordered.
Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.
Separate Opinions
REYES, A., J., concurring:
Plaintiff in this case seeks reimbursement in Philippine currency for
the amount in dollars advanced by it through its New York agency to
meet a draft drawn against defendant and accepted by the latter for a
valuable consideration. Plaintiff's to such reimbursement is not
questioned. What is disputed is its pretended right to add to the amount
of the draft the excise tax of 17 % which plaintiff would had to pay to
the Government if it were to remit now to New York the necessary
amount of dollars that its agency there had paid on the draft.
I cannot bring myself to believe that it is only now that plaintiff has
thought of sending dollars to New York to replace the amount
advanced by its agency. As intimated in the majority opinion and in
consonance with good banking practice, the necessary remittance must
have been effected long ago, that is, long before the creation of the
excise tax on foreign exchange in March, 1951. Plaintiff, therefore,
could not have paid such tax, and not having done so it has no right to
get reimbursement therefore from defendant.
I do not think that defendant could be legally made to pay more than
what plaintiff had actually advanced for him, aside from commission
and other charges, on the theory that the Philippine peso has
depreciated in value with respect to the American dollar. Legally, it
has not. The legal rate of exchange between the two currencies is still
two to one. What happened is that with the creation of the excise tax
in 1951, it would now be more costly to remit dollars abroad. But why
should plaintiff make that remittance now when, as already stated, it
must have already done so long before the creation of the excise tax on
foreign exchange?
Lastly, a debtor cannot be charged with bad faith for refusing to pay
that which he should not pay.
FELIX, J., concurring:
The decision rendered in this case, penned by Mr. Justice Cezar
Bengzon, perfectly reflects and delivers the opinion of the majority of
this3.00
Court and I subscribe to each and every statement made and
argument adduced therein. This being so, it would seem that any
concurring or supporting opinion is quite superfluous and I would not
have taken the task of writing further in the matter were it not for the
fact that in the dissenting opinion it is stated that:
It cannot be justly contended that if a debtor had borrowed,
say $10,000, the lender should be satisfied with eight or nine
thousand. Yet that is what the majority's decision actually
amounts to.
The writer further says that:
the majority opinion has the merit of giving the bank a costly
lesson on the advantages of not considering political
influence in the making and collecting of its loans; but I am
afraid the experience will be too quickly forgotten to even
palliate the sacrifice of fundamental justice to technical
considerations.
I, certainly, cannot leave these statements pass unanswered.
To begin with, I might say that if any lesson has been given by the
majority of this court to the plaintiff bank, it is not in this case but in
the case of Araneta vs. The Philippine National Bank (G.R. No. L-
4633, May 31, 1954), cited in the majority decision, where the latter
was a party to that case and a similar doctrine was laid down. Coming
now to the bone of contention, I notice that the dissenting Justice views
the matter involved in the controversy as a loan and submits that the
question really at issue can be boiled down to the proposition of
"whether it is the lender or the borrower who should bear the added
cost of the depreciation of the peso in relation to the dollar".
In this connection, I might say that defendant's obligation to the
plaintiff would have been settled some years ago were it not for the
fact that the Bank insisted in collecting the special excise tax of 17 per
cent on foreign exchange transactions imposed by Republic Act No.
601 which entered into effect on March 28, 1951, and was not yet in
force at the time the obligation of the defendant matured on October 4,
1948. And even if we look at the case as a loanand apply to the
transaction the provisions of Article 312, paragraph 1, of the Code of
Commerce, cited by the dissenting Justice, yet We could not, under the
facts and circumstances of the case that cannot be denied, logically
arrive at the same conclusion that he has come to.
And the reason is obvious. In the first place, We have to take into
account that the New York agency of Philippine National Bank and its
central office in Manila are not separate and independent entities. That
is why it is the Philippine National Bank (Manila office) and not the
New York agency of said Bank that is the plaintiff in this case.
Consequently, any payment made to plaintiffs central office in Manila
for obligations that any debtor may have contracted with said New
York agency is and has to be considered as a payment or settlement of
said obligations, there being no need to attain this result that the
plaintiff would adjust is accounts with its agency, or transmit to the
latter the amounts received from the debtor.
In the second place, the obligation contracted by the defendant was not
to pay $14,419.15 in dollars, but the equivalent of $14,419.15
dollars, in Philippine currency. So, when defendant's obligation
matured on October 4, 1949, the defendant had to pay to the
Bank not the sum of $14,467.21 representing the face value of the draft
Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its
equivalent in pesos at the time of such maturity, and had the defendant
failed to satisfy then his obligation, he could be held liable to pay in
addition thereof, the corresponding interests for the period of default
and nothing else. And that is precisely what defendant is willing to pay.
From the foregoing, I hope to have made clear my stand on the matter.
REYES, J.B.L., dissenting:
As I view it, the question before this court is whether it is the lender or
the defaulting borrower who should bear the added cost of the
depreciation of the peso in relation to the dollar.
When in 1949 the Philippine National Bank remitted to the Otis
Elevator Co. the $14,449.15 for the account of Zulueta, the Bank, in
effect, loaned to Zulueta said amount on the strength of his express
engagement to "pay at maturity in Philippine Currency, the equivalent
of the above amount," which was a promise to pay such amount in
Philippine pesos as could be converted into $14,449.15. There is no
question that Zulueta failed to do so, and has refused to do so up to the
present. In the meantime, in 1951, the Legislature enacted Rep. Act
No. 601, imposing a 17% special excise tax on foreign exchange
transactions, so that thereafter one had to pay 234 pesos for every $100,
instead of P200 as heretofore. Should Zulueta be required to pay for
the dollars at the new rate?
Since Zulueta's obligation is measured in terms of U.S. dollars that
have increased in value vis-a-vis the peso, Art. 312, par. 1, of the Code
of Commerce, which was the law then in force, must be read into the
contract. It provides:
If the loan consists of money, the debtor shall pay it by
returning an amount equal to that received, in accordance
with the legal value which the money may have at the time
of the return, unless the kind of money in which the payment
is to be made has been stipulated, in which case the change
which its value may suffer shall be to the detriment or for the
benefit of the lender. (Emphasis supplied)
The majority decision, in upholding the contention that Zulueta is not
chargeable with the 17% tax, virtually authorizes just the contrary; and
permits the defaulting borrower to repay an amount in pesos that, in
violation of the law and his engagement, can not be converted into the
same amount of dollars loaned to him. I believe it is contrary to all
elemental justice and good faith to enable a borrower to return to his
creditor less than the amount borrowed, specially taking into account
that Zulueta, by his obdurate refusal to pay a just debt, is a debtor in
bad faith who is responsible for any subsequent damages suffered by
his creditor, even if due to fortuitous event.
Applicable here are the considerations in Hawes vs. Woolcock (26
Wis. 629, 635), quoted with approval in Engel vs. Mariano Velasco &
Co., 47 Phil. 115, 143:
In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:
"Perhaps a strict application of logical reasoning to the
question would lead to the result that the premium should be
estimated at the rate when the note fell due. That was when
the money should have been paid, and when the default in
performing the contract occurred. This conclusion would be
supported by the analogy derived from the rule of damages
on contracts to deliver specific articles, fixing the market
price at the time when they ought to have been delivered as
the criterion. This rule might sometimes be to the advantage
of the holder of the note, as in the present case. In other cases,
where the premium was less at the time the note became due
than at the time of trial, it would be to his detriment. And in
view of these uncertainties and fluctuations in the rate, upon
grounds of policy as well as for its tendency to do as
complete justice between the parties as is possible, we have
come to the conclusion that the true rule in such cases is to
give judgment for such an amount as will, at the time of the
judgment, purchase the amount due on the note in the funds
or currency in which it is payable.
The crucial point is that the Bank's action is not for damages, but for
specific performance of Zulueta's obligation. While payable in
Philippine pesos, it was actually one to pay a definite sum in United
States dollars, since he promised to pay an equivalent amount. The
failure to specify any fixed number of pesos, and the omission of any
reference to any rate of exchange, is proof that the parties had in mind
the restoration to the Bank of the value of the dollars it had advanced.
In other words, Zulueta engaged to return to the Bank so many
Philippine pesos as could be converted into $14,449.15; and that is
what the Bank asks him to do. It can not be justly contended that if a
debtor had borrowed, say, ten thousand dollars, the lender should be
satisfied with eight or nine thousand. Yet that is what the majority's
decision actually amounts to.
I see no point in determining the rate of dollar-peso exchange at the
date of maturity or of the constitution of the obligation, since Zulueta
did not engage to pay any definite amount of pesos, but so many as
would be needed to make up $14,449.15. And as Zulueta is being
required to comply with a specific promise, there is no relevancy in
whether or not the main office of the Bank has or has not remitted the
dollars to its American agency; after all, the two part are of the same
institution. Anyway, if the dollars have not been remitted, the amount
that Zulueta is now sentenced to pay will not permit a remittance of the
same number of dollars that the Bank advanced for his account. If they
were heretofore remitted, the funds of the Bank in Manila have been
diminished pro tanto, and they can not be replenished to their original
level in terms of dollars unless Zulueta is required to pay the exchange
tax.
Of course, the majority opinion has the merit of giving the Bank a
costly lesson on the advantages of not considering political influence
in the making and collecting of its loans; but I am afraid the experience
will be too quickly forgotten to even palliate the sacrifice of
fundamental justice to technical considerations.
For the foregoing reasons, I dissent.
Labrador, Concepcion and Endencia, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY
WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court
which assails on questions of law a decision of the Intermediate
Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as
well as its resolution dated October 17, 1985, denying the motion for
reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had
for its program of logging activities for the year 1978 the opening of
additional roads, and simultaneous logging operations along the route
of said roads, in its logging concession area at Baganga, Manay, and
Caraga, Davao Oriental. For this purpose, it needed two (2) additional
units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf
& Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (the "seller-assignor"),
a corporation dealing in tractors and other heavy equipment business,
offered to sell to petitioner-corporation two (2) "Used" Allis Crawler
Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability
of the "Used" tractors being offered, petitioner-corporation requested
the seller-assignor to inspect the job site. After conducting said
inspection, the seller-assignor assured petitioner-corporation that the
"Used" Allis Crawler Tractors which were being offered were fit for
the job, and gave the corresponding warranty of ninety (90) days
performance of the machines and availability of parts. (t.s.n., May 28,
1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's
skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice- president, respectively, agreed to
purchase on installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the
two 2) units of tractors (Exh. "3-A"). At the same time, the deed of sale
with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed
of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units
of "Used" tractors to the petitioner-corporation's job site and as agreed,
the seller-assignor stationed its own mechanics to supervise the
operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of
the tractors broke down and after another nine (9) days, the other
tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested
for the seller-assignor's usual prompt attention under the warranty (E
exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-
1," "6-D," and "6-E"), but the tractors did not come out to be what they
should be after the repairs were undertaken because the units were no
longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were
delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its
obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for sale. The proceeds
were to be given to the respondent and the excess, if any, to be divided
between the seller-assignor and petitioner-corporation which offered
to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee,
and Vergara.
The complaint was filed by the respondent against the petitioners for
the recovery of the principal sum of One Million Ninety Three
Thousand Seven Hundred Eighty Nine Pesos & 71/100
(P1,093,789.71), accrued interest of One Hundred Fifty One Thousand
Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand
Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of
the complaint and asking the trial court to order the respondent to pay
the petitioners damages in an amount at the sound discretion of the
court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees,
and Five Thousand Pesos (P5,000.00) for expenses of litigation. The
petitioners likewise prayed for such other and further relief as would
be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the
following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally
in their official and personal capacities the
principal sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED
NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE
HUNDRED FIFTY ONE THOUSAND SIX
HUNDRED EIGHTEEN PESOS & 86/100
(P151,618.,86) as of August 15, 1979 and accruing
interest thereafter at the rate of 12% per annum;
 2. ordering defendants to pay jointly and severally
attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-
46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I order (Sec. 1, NIL); the promissory note was
THAT THE LOWER COURT ERRED IN FINDING THAT THE
SELLER ATLANTIC GULF AND PACIFIC COMPANY OF
MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS
CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT
PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF THE
PROMISSORY NOTE AND SUED UNDER SAID NOTE AS
HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial court.
The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the
issue of warranty, We are of the considered
opinion that aside from the fact that no provision
of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention
appears, there is an implied warranty, the defense
of breach of warranty, if there is any, as in this
case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee
of the promissory note and a holder of the same in
due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated
Plywood Industries, Inc. The plaintiff-appellant
herein upon application by appellant corporation
granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a
defense available to appellants either to withdraw
from the contract and/or demand a proportionate
reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the
issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the
plaintiff-appellee is a financing corporation
engaged in financing and receivable discounting
extending credit facilities to consumers and
industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to
R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals
that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and
signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at
a fixed or determinable future time; it is payable to
negotiated when it was transferred and delivered
by IPM to the appellee and duly endorsed to the
latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its
face before the same was overdue and without
notice, that it had been previously dishonored and
that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any
defect of title of prior parties and free from
defenses available to prior parties among
themselves and may enforce payment of the
instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants
engaged that they would pay the note according to
its tenor, and admit the existence of the payee IPM
and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the
questioned promissory note, We opine that the
same is legally and conclusively enforceable
against the defendants-appellants.
WHEREFORE, finding the decision appealed
from according to law and evidence, We find the
appeal without merit and thus affirm the
decision in toto. With costs against the appellants.
(pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17,
1985 was denied by the Intermediate Appellate Court in its resolution
dated October 17, 1985, a copy of which was received by the
petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT
BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS
THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF
THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY
FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER- ASSIGNOR IN FAVOR OF THE RESPONDENT DOES
NOT CHANGE THE NATURE OF THE TRANSACTION FROM
BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED
IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED
THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October
17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was
filed out of time; that the promissory note is a negotiable instrument
and respondent a holder in due course; that respondent is not liable for
any breach of warranty; and finally, that the promissory note is
admissible in evidence.
The core issue herein is whether or not the promissory note in question
is a negotiable instrument so as to bar completely all the available
defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners'
motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express
90-day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became
inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for
warranty against the hidden defects which the
thing sold may have, should they render it unfit for
the use for which it is intended, or should they
diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would
not have acquired it or would have given a lower
price for it; but said vendor shall not be answerable
for patent defects or those which may be visible,
or for those which are not visible if the vendee is
an expert who, by reason of his trade or profession,
should have known them.
ART. 1562. In a sale of goods, there is an implied
warranty or condition as to the quality or fitness
of the goods, as follows:
(1) Where the buyer, expressly or by implication
makes known to the seller the particular purpose
for which the goods are acquired, and it appears
that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or
manufacturer or not), there is an implied warranty
that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as
to the quality or fitness for a particular purpose
may be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the
vendee for any hidden faults or defects in the thing
sold even though he was not aware thereof.
This provision shall not apply if the contrary has
been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold.
(Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule, extends
to the corporation to whom it assigned its rights and interests unless
the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's
rights are based on the negotiable instrument and assuming further that
the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke
down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure
to comply with its warranty, the tractors became totally unserviceable
and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
 ART. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation with
the payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562,
1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and
demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract
with the seller-assignor, necessarily can no longer sue the seller-
assignor except by way of counterclaim if the seller-assignor sues it
because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35
SCRA 102) we held:
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law. But the law
definitely does not require that the contracting
party who believes itself injured must first file suit
and wait for adjudgement before taking
extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach
will have to passively sit and watch its damages
accumulate during the pendency of the suit until
the final judgment of rescission is rendered when
the law itself requires that he should exercise due
diligence to minimize its own damages (Civil
Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in
question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and
severally promise to pay to the INDUSTRIAL
PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS &
71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in
24 monthly installments starting July 15, 1978 and
every 15th of the month thereafter until fully paid.
...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be payable to
order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument.
The instrument in order to be considered
negotiablility-i.e. must contain the so-called
'words of negotiable, must be payable to 'order' or
'bearer'. These words serve as an expression of
consent that the instrument may be transferred.
This consent is indispensable since a maker
assumes greater risk under a negotiable instrument
than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The
instrument is payable to order where it is drawn
payable to the order of a specified person or to him
or his order. . . .
xxx xxx xxx
These are the only two ways by which an
instrument may be made payable to order. There
must always be a specified person named in the
instrument. It means that the bill or note is to be
paid to the person designated in the instrument or
to any person to whom he has indorsed and
delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only
to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of
a negotiable instrument but will merely "step into
the shoes" of the person designated in the
instrument and will thus be open to all defenses
available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, page 38).
(Emphasis supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually,
the records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the
counsel that what is being
assigned is the Deed of Sale
with Chattel Mortgage with
the promissory note which is
as testified to by the witness
was indorsed? (Counsel for
Plaintiff nodding his head.)
Then we have no further
questions on cross,
COURT:
 You confirm his
manifestation? You are
nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be
assigned. A deed of sale is a
transaction between two
persons; what is assigned are
rights, the rights of the
mortgagee were assigned to
the IFC Leasing & negotiating it.
Acceptance Corporation.
COURT:
He puts it in a simple way as
one-deed of sale and chattel
mortgage were assigned; . . .
you want to make a
distinction, one is an
assignment of mortgage right
and the other one is
indorsement of the
promissory note. What
counsel for defendants wants
is that you stipulate that it is
contained in one single
transaction?
ATTY. ILAGAN:
We stipulate it is one single
transaction. (pp. 27-29, TSN.,
February 13, 1980).
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the respondent
cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale
on installment of the tractors, there was an arrangement between the
seller-assignor, Industrial Products Marketing, and the respondent
whereby the latter would pay the seller-assignor the entire purchase
price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with
Promissory Note, the Deed of Assignment and the Disclosure of
Loan/Credit Transaction shows that said documents evidencing the
sale on installment of the tractors were all executed on the same day
by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge of the fact
that the seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors
-sold were not defective. The respondent knew that when the tractors
turned out to be defective, it would be subject to the defense of failure
of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking
the instrument amounted to bad faith, is not a holder in due course. As
such, the respondent is subject to all defenses which the petitioners
may raise against the seller-assignor. Any other interpretation would
be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee
for the entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it
had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN
DUE COURSE. — A holder in due course is a
holder who has taken the instrument under the
following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had
no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF
DEFFECT. — To constitute notice of an infirmity
in the instrument or defect in the title of the person
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad
faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price.
Many times, in pursuance of a previous
arrangement with the seller, a finance company
pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from
the buyer, with interest. With the increasing
frequency of installment buying in this country, it
is most probable that the tendency of the courts in
the United States to protect the buyer against the
finance company will , the finance company will
be subject to the defense of failure of consideration
and cannot recover the purchase price from the
buyer. As against the argument that such a rule
would seriously affect "a certain mode of
transacting business adopted throughout the
State," a court in one case stated:
 It may be that our holding here The complaint against the petitioner before the trial court is
will require some changes in DISMISSED.
business methods and will
impose a greater burden on SO ORDERED.
the finance companies. We
think the buyer-Mr. & Mrs.
General Public-should have Republic of the Philippines
some protection somewhere SUPREME COURT
along the line. We believe the Manila
finance company is better able
to bear the risk of the dealer's EN BANC
insolvency than the buyer and
in a far better position to G.R. No. L-2516 September 25, 1950
protect his interests against
unscrupulous and insolvent
dealers. . . . ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
If this opinion imposes great
burdens on finance companies
it is a potent argument in favor Laurel, Sabido, Almario and Laurel for petitioner.
of a rule which win afford Office of the Solicitor General Felix Bautista Angelo and Solicitor
public protection to the Manuel Tomacruz for respondent.
general buying public against
unscrupulous dealers in BENGZON, J.:
personal property. . . . (Mutual
Finance Co. v. Martin, 63 So.
For having issued a rubber check, Ang Tek Lian was convicted
2d 649, 44 ALR 2d 1 [1953])
of estafa in the Court of First Instance of Manila. The Court of Appeals
(Campos and Campos, Notes
affirmed the verdict.
and Selected Cases on
Negotiable Instruments Law,
Third Edition, p. 128). It appears that, knowing he had no funds therefor, Ang Tek Lian drew
on Saturday, November 16, 1946, the check Exhibits A upon the China
Banking Corporation for the sum of P4,000, payable to the order of
In the case of Commercial Credit Corporation v. Orange Country
"cash". He delivered it to Lee Hua Hong in exchange for money which
Machine Works (34 Cal. 2d 766) involving similar facts, it was held
the latter handed in act. On November 18, 1946, the next business day,
that in a very real sense, the finance company was a moving force in
the check was presented by Lee Hua Hong to the drawee bank for
the transaction from its very inception and acted as a party to it. When
payment, but it was dishonored for insufficiency of funds, the balance
a finance company actively participates in a transaction of this type
of the deposit of Ang Tek Lian on both dates being P335 only.
from its inception, it cannot be regarded as a holder in due course of
the note given in the transaction.
The Court of Appeals believed the version of Lee Huan Hong who
testified that "on November 16, 1946, appellant went to his
In like manner, therefore, even assuming that the subject promissory
(complainant's) office, at 1217 Herran, Paco, Manila, and asked him to
note is negotiable, the respondent, a financing company which actively
exchange Exhibit A — which he (appellant) then brought with him —
participated in the sale on installment of the subject two Allis Crawler
with cash alleging that he needed badly the sum of P4,000 represented
tractors, cannot be regarded as a holder in due course of said note. It
by the check, but could not withdraw it from the bank, it being then
follows that the respondent's rights under the promissory note involved
already closed; that in view of this request and relying upon appellant's
in this case are subject to all defenses that the petitioners have against
assurance that he had sufficient funds in the blank to meet Exhibit A,
the seller-assignor, Industrial Products Marketing. For Section 58 of
and because they used to borrow money from each other, even before
the Negotiable Instruments Law provides that "in the hands of any
the war, and appellant owns a hotel and restaurant known as the North
holder other than a holder in due course, a negotiable instrument is
Bay Hotel, said complainant delivered to him, on the same date, the
subject to the same defenses as if it were non-negotiable. ... "
sum of P4,000 in cash; that despite repeated efforts to notify him that
the check had been dishonored by the bank, appellant could not be
Prescinding from the foregoing and setting aside other peripheral located any-where, until he was summoned in the City Fiscal's Office
issues, we find that both the trial and respondent appellate court erred in view of the complaint for estafa filed in connection therewith; and
in holding the promissory note in question to be negotiable. Such a that appellant has not paid as yet the amount of the check, or any part
ruling does not only violate the law and applicable jurisprudence, but thereof."
would result in unjust enrichment on the part of both the assigner-
assignor and respondent assignee at the expense of the petitioner-
Inasmuch as the findings of fact of the Court of Appeals are final, the
corporation which rightfully rescinded an inequitable contract. We
only question of law for decision is whether under the facts
note, however, that since the seller-assignor has not been impleaded
found, estafa had been accomplished.
herein, there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather unlikely
possibility that it so desires, Article 315, paragraph (d), subsection 2 of the Revised Penal Code,
punishes swindling committed "By post dating a check, or issuing such
check in payment of an obligation the offender knowing that at the time
WHEREFORE, in view of the foregoing, the decision of the
he had no funds in the bank, or the funds deposited by him in the bank
respondent appellate court dated July 17, 1985, as well as its resolution
were not sufficient to cover the amount of the check, and without
dated October 17, 1986, are hereby ANNULLED and SET ASIDE.
informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly
held liable. In this connection, it must be stated that, as explained
in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to
"cash" and had not been endorsed by Ang Tek Lian, the defendant is
not guilty of the offense charged. Based on the proposition that "by
uniform practice of all banks in the Philippines a check so drawn is
invariably dishonored," the following line of reasoning is advanced in
support of the argument:
. . . When, therefore, he (the offended party ) accepted the
check (Exhibit A) from the appellant, he did so with full
knowledge that it would be dishonored upon presentment. In
that sense, the appellant could not be said to have acted
fraudulently because the complainant, in so accepting the
check as it was drawn, must be considered, by every rational
consideration, to have done so fully aware of the risk he was
running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of
the drawer before honoring a check payable to "cash." But cases there
are too, where no such requirement had been made . It depends upon
the circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn
payable to the order of "cash" is a check payable to bearer, and the
bank may pay it to the person presenting it for payment without the
drawer's indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146
Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate
Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831;
Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe
& Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d),
818. See also H. Cook & Son vs. Moody (1916), 17 Ga.
App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the
word cash "does not purport to be the name of any person",
and hence the instrument is payable to bearer. The drawee
bank need not obtain any indorsement of the check, but may
pay it to the person presenting it without any indorsement. .
. . (Zollmann, Banks and Banking, Permanent Edition, Vol.
6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and /or assurance
against possible complications, — for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner, (c) raising of the
amount payable, etc. The bank may therefore require, for its protection,
that the indorsement of the drawer — or of some other person known
to it — be obtained. But where the Bank is satisfied of the identity and
/or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it
would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder.
Where a check is in the ordinary form, and is payable to
bearer, so that no indorsement is required, a bank, to which
it is presented for payment, need not have the holder
identified, and is not negligent in falling to do so. . . . (Michie
on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is
presented for payment need not necessarily have the holder
identified and ordinarily may not be charged with negligence
in failing to do so. See Opinions 6C:2 and 6C:3 If the bank
has no reasonable cause for suspecting any irregularity, it
will be protected in paying a bearer check, "no matter what
facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer
check without further inquiry, it is entirely reasonable for the
bank to insist that holder give satisfactory proof of his
identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check
Exhibit A was totally unconnected with its dishonor. The Court of
Appeals declared that it was returned unsatisfied because the drawer
had insufficient funds— not because the drawer's indorsement was
lacking.
Wherefore, there being no question as to the correctness of the penalty
imposed on the appellant, the writ of certiorari is denied and the
decision of the Court of Appeals is hereby affirmed, with costs.
Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-14883 July 31, 1963
NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA,
ENCARNACION DE LEON and BIENVENIDO B.
ERAÑA,petitioners-appellants,
vs.
C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees.
N. S. Sison for petitioners-appellants.
Revilla, Lustre and Agloro for respondents-appellees.
REGALA, J.:
This is an appeal from the order of the Quezon City Court of First
Instance, Judge Nicasio Yatco, presiding, dismissing the petition
for mandamus filed by the herein petitioners to compel the respondent
City Treasurer of Quezon City to accept Government negotiable land
certificates as payment for land taxes.
The respondent City Treasurer accepts the following statement of facts
set forth in the petitioners' brief:
On May 11, 1957, the Land Tenure Administration, LTA for short,
purchased from the petitioners Narcisa Buencamino, Amada de Leon-
Eraña, and Encarnacion de Leon, and other members of the de Leon
family their hacienda in Talavera, Nueva Ecija for a total consideration
of P2,746,000.00. For the purpose, a Memorandum Agreement was
executed on the said date which expressly declared that the LTA was
purchasing the hacienda upon petition of the tenants thereof in
accordance with Republic Act No. 1400, otherwise known as the Land
Reform Act of 1955.
The parties to the sale agreed that of the full price of P2,746,000.00,
50% or P1,373,000.00 was to be paid in cash and the balance in
negotiable land certificates. Below is a reproduction of one such
negotiable land certificate typical of and identical to all the other issued
by the LTA to the petitioners.
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This
certificate is issued in accordance with the
provisions of Section 9, Republic Act No. 1400,
entitled "AN ACT DEFINING A LAND
TENURE POLICY, PROVIDING FOR AN
INSTRUMENTALITY TO CARRY OUT THE
POLICY, AND APPROPRIATING FUNDS FOR
ITS IMPLEMENTATION", approved September
9, 1955, and is due and payable to BEARER on
demand and upon presentation at the Central Bank
of the Philippines without interest, if presented for
payment within five years from the date of issue;
with interest at the rate of 4 per centum per annum,
if presented for payment after five years from the
date of issue; with interest at the rate of 4-½ per
centum per annum, if presented for payment after
ten years from the date of issue; and, with interest
at the rate of 5 per centum per annum, if presented
for payment after fifteen years from the date of
issue. Both principal and interest are payable by
the Treasurer of the Philippines, through the
Central Bank of the Philippines, in legal tender
currency of the Philippines.
This land certificate is part of the total negotiable
land certificates issued and limited to the
aggregate principal sum of SIXTY MILLION
PESOS a year, to be issued during the first two
years from September 9, 1955 when Republic Act
No. 1400 was approved, and P30 million each year
during the succeeding years, for the purchase of
private agricultural lands for resale at cost to bona-
fide tenants or occupants, or, in the case of estates
abandoned by the owners for the last five years, to
private individuals who will work the lands
themselves and who are qualified to acquire or
own lands, but who do not own more than six
hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made
until after five (5) years from the date of execution
of the Deed of Sale of Hacienda de Leon, pursuant
to the conditions under Paragraph "b" of the
Memorandum Agreement executed between the
Land Tenure Administration and the owners of
Hacienda de Leon on May 11, 1957,
acknowledged before Marcelo Lagramada, Notary
Public for Manila, as Doc. No. 324, Page 66, Book
No. 6, Series of 1957.
(Sgd.) JUAN CAÑIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
(Sgd.) VICENTE GELLA
Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
The condition in the certificate regarding its encashment only after the
lapse of five years from the date of execution of the Deed of Sale of
Hacienda de Leon was adopted or taken from the Memorandum
Agreement of May 11, 1957 first mentioned above and which was
subsequently ratified by the Cabinet and the President. As stipulated in
the said document, the condition reads:
B. That the mode of payment shall be 50% in cash and 50%
in negotiable land certificates except that the encashment of
the said negotiable land certificate may not be made until
after five (5) years from the date of the execution of the deed
of sale with the payments of the corresponding interest, said
negotiable land certificate may be applied and used for all
the purposes authorized by Republic Act No. 1400 and other
pertinent laws on the matter within the said period of five (5)
years; (page 3, Memorandum Agreement).1äwphï1.ñët
Subsequently, this stipulation was incorporated and clarified in the
Absolute Deed of Sale executed to formalize the terms contained in the
Memorandum Agreement. Under the deed of sale, dated July 31, 1957,
the above condition was —
That the VENDORS shall not, however, within five (5)
years, present for encashment the negotiable land certificates
amounting to ONE MILLION THREE HUNDRED
SEVENTY THREE THOUSAND PESOS (P1,373,000.00)
but nevertheless, shall be authorized to use the same for
payment of land taxes or obligations due and payable in
favor of the Government and such other uses or purposes
provided for by Section 10 of Republic Act No. 1400 within
the said period of five (5) years from this date. (page 4,
Absolute Deed of Sale)
Doubtless, therefore, the aforecited provisions of the Memorandum
Agreement and the Absolute Deed of Sale in relation to the condition
in the negotiable land certificate were mere implementation of Section
10 of Republic Act No. 1400, which provided:
Sec. 10. Uses of certificates. — Negotiable land certificates
maybe used by the holder thereof for any of the following
purposes:
xxx xxx xxx
 (3) Payment of all tax obligations of the holder thereof, or of
any debt or monetary obligation of the holder to the
Government or any of its instrumentalities or agencies,
including the Rehabilitation Finance Corporation and the
Philippine National Bank; Provided, however, That payment
of indebtedness shall not be less than twenty per centum of
the total indebtedness of the debtor; and .
xxx xxx xxx
Availing themselves of what they considered was their contractual and
statutory rights under the certificate, the petitioners presented two of
them to the respondent City Treasurer in payment of certain 1957
realty tax obligations to Quezon City. The respondent Treasurer
refused to accept the same and claimed that as per the opinion rendered
by the Secretary of Finance, it was discretionary on his part, the
respondent Treasurer, to accept or reject the said certificates. And,
invoking his discretion in the premises, the respondent Treasurer
explained that he could not accept the certificates offered as Quezon
City was then in great need of funds.
The petitioners were thus obliged to settle in cash the 1957 tax
obligation aforementioned. Subsequently, however, the petitioners
tendered once more the same certificates in payment of their 1958
realty taxes and the respondent Treasurer similarly rejected the tender.
As a result, the petitioners filed the instant mandamus proceedings
with the Court of First Instance of Quezon City.
Although the issue raised by the instant appeal has already been
rendered moot, by time, it is the sense of this Court that a brief
discussion of the point of controversy will favor the best interest of
justice as well as of the parties hereto.
We hold the refusal of the respondent Treasurer to accept the land
certificates to be legally justified. They failed to comply with the
requirements of Republic Act No. 1400.
Under the above-mentioned law, the land certificates "shall be payable
to bearer on demand." (Section 9) The one issued, however, were
payable to bearer only after the lapse of five years from a given period.
Obviously then, the requirement that they should be payable on
demand was not met since an instrument payable on demand is one
which (a) is expressed to be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment (Sec. 7, Negotiable
Instruments Law) The 5-year period within which the certificates could
not be encashed was an expression of the time for payment contrary to
paragraph (b) of the last law cited.
The petitioners maintain, as already indicated above, that although the
questioned certificates may not really be payable on demand, they may
nevertheless be used for the payment of realty obligations to the
Government because of Section 10 of Republic Act No. 1400. As
expressed by the petitioners, "as to Government agencies and
instrumentalities, the certificate is payable to bearer on demand during
that first five-year period."

To the above petition, the LTA filed a timely answer sustaining the
petitioners' stand. The Secretary of Finance, represented by the
Solicitor General, also filed an answer, which argued that he was not a
necessary party to the case as he was not the officer with the duty of
collecting taxes.
The respondent Treasurer did not file an answer. Instead, represented
by the City Attorney's Office, he filed a Motion to Dismiss on the
ground that the petition filed to state a cause of action.
There is no merit in the above assertion. It is a conclusion unsupported
by any provision of law. While Section 10 of Republic Act No. 1400
expressly authorizes the use of the said certificates for the "payment of
all tax obligations of the holder thereof," the said section can only have
meant such certificates as were issued strictly in accordance with
Section 9 of the same Act, i.e., that the instrument is payable on
demand. And, as discussed above, the certificates issued were not
payable on demand, then the benefits of Section 10 cannot be properly
invoked.

The Motion to Dismiss discussed various arguments for the position of IN VIEW OF ALL THE FOREGOING, the order appealed from is
the respondent that he could not be compelled to accept the certificates. hereby affirmed, with costs against the appellants.
In effect, however, they resolve themselves into the single question of
whether or not the said certificates where drawn payable on demand as Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
required by Section 9 of Republic Act 1400. Barrera, Paredes and Dizon, JJ., concur.
Padilla, J., took no part.
The respondent Treasurer contends that the certificates in question Makalintal, J., reserves his vote.
were not issued strictly in accordance with the provisions of Republic
Act No. 1400 because while Section 9 of that Act inquires that Republic of the Philippines
"negotiable land certificates shall be issued in denominations of one SUPREME COURT
thousand pesos or multiples of one thousand pesos and shall be payable Manila
to bearer on demand . . ., " the ones issue to the petitioners were payable
to bearer not on demand but, only upon the expiration of the five-year EN BANC
period there in specified.
G.R. No. L-18103 June 8, 1922
On the other hand, the petitioners contend that although the certificates
issued could not really be encashed within the period therein
mentioned, they could, however, still be used for the settlement of tax PHILIPPINE NATIONAL BANK, plaintiff-appellee,
liabilities at any time after their issue in accordance with Section 10 of vs.
the same Act. The petitioners maintain that the 5-year restriction MANILA OIL REFINING & BY-PRODUCTS COMPANY,
against encashment referred merely and exclusively to the time when INC., defendant-appellant.
the certificates may be converted to cash and not anymore to the utility
of the said instruments as substitutes for tax obligations. Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
The court a quo sustained the position of the respondent Treasurer and Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs,
dismissed the suit for mandamus. Thus, this appeal. Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence;
Francis B. Mahoney, and Jose A. Espiritu, amici curiae.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity
in this jurisdiction of a provision in a promissory note whereby in case
the same is not paid at maturity, the maker authorizes any attorney to
appear and confess judgment thereon for the principal amount, with
interest, costs, and attorney's fees, and waives all errors, rights to
inquisition, and appeal, and all property exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil
Refining & By-Products Company, Inc., executed and delivered to the
Philippine National Bank, a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the
order of the Philippine National Bank sixty-one
thousand only pesos at Philippine National Bank,
Manila, P.I.
Without defalcation, value received; and to hereby
authorize any attorney in the Philippine Islands, in
case this note be not paid at maturity, to appear in
my name and confess judgment for the above sum
with interest, cost of suit and attorney's fees of ten
(10) per cent for collection, a release of all errors
and waiver of all rights to inquisition and appeal,
and to the benefit of all laws exempting property,
real or personal, from levy or sale. Value received.
No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS
CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS
CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay
the promissory note on demand. The Philippine National Bank brought
action in the Court of First Instance of Manila, to recover P61,000, the
amount of the note, together with interest and costs. Mr. Elias N.
Rector, an attorney associated with the Philippine National Bank,
entered his appearance in representation of the defendant, and filed a
motion confessing judgment. The defendant, however, in a sworn
declaration, objected strongly to the unsolicited representation of
attorney Recto. Later, attorney Antonio Gonzalez appeared for the
defendant and filed a demurrer, and when this was overruled, presented
an answer. The trial judge rendered judgment on the motion of attorney
Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise
squarely the question which was suggested in the beginning of this
opinion. In view of the importance of the subject to the business
community, the advice of prominent attorneys-at-law with banking
connections, was solicited. These members of the bar responded
promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar
that although the sanction of judgement notes in the Philippines might
prove of immediate value to clients, every one of the attorneys has
looked upon the matter in a big way, with the result that out of their
independent investigations has come a practically unanimous protest
against the recognition in this jurisdiction of judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute
expressly or tacitly recognizes a confession of judgment commonly
called a judgment note. On the contrary, the provisions of the Code of
Civil Procedure, in relation to constitutional safeguards relating to the
right to take a man's property only after a day in court and after due
process of law, contemplate that all defendants shall have an
opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment notes,
especially as the Code provides that in case the defendant or his
assignee omits to set up a counterclaim, he cannot afterwards maintain
an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one
provision of the substantive law, namely, that the validity and
fulfillment of contracts cannot be left to the will of one of the
contracting parties (Civil Code, art. 1356), constitutes another
indication of fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments
Law (Act No. 2031) expressly recognizes judgment notes, and that
they are enforcible under the regular procedure. The Negotiable
Instruments Law, in section 5, provides that "The negotiable character
of an instrument otherwise negotiable is not affected by a provision
which ". . . (b) Authorizes a confession of judgment if the instrument
be not paid at maturity." We do not believe, however, that this
provision of law can be taken to sanction judgments by confession,
because it is a portion of a uniform law which merely provides that, in
jurisdiction where judgment notes are recognized, such clauses shall
not affect the negotiable character of the instrument. Moreover, the
same section of the Negotiable Instruments. Law concludes with these
words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity
in the absence of statute of a provision in a note authorizing an attorney
to appear and confess judgment against the maker. This situation, in
reality, has its advantages for it permits us to reach that solution which
is best grounded in the solid principles of the law, and which will best
advance the public interest.
The practice of entering judgments in debt on warrants of attorney is
of ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law,
there were two kinds of judgments by confession; the one a judgment
by cognovit actionem, and the other by confession relicta
verificatione. A number of jurisdictions in the United States have
accepted the common law view of judgments by confession, while still
other jurisdictions have refused to sanction them. In some States,
statutes have been passed which have either expressly authorized
confession of judgment on warrant of attorney, without antecedent
process, or have forbidden judgments of this character. In the absence
of statute, there is a conflict of authority as to the validity of a warrant
of attorney for the confession of judgement. The weight of opinion is
that, unless authorized by statute, warrants of attorney to confess
judgment are void, as against public policy.
Possibly the leading case on the subject is First National Bank of
Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120
S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses
that on October 4, 1990, the defendant executed and delivered to the
plaintiff an obligation in which the defendant authorized any attorney-
at-law to appear for him in an action on the note at any time after the
note became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess
judgement in favor of the First National Bank of Kansas City for the
amount that might then be due thereon, with interest at the rate therein
mentioned and the costs of suit, together with an attorney's fee of 10
per cent and also to waive and release all errors in said proceedings and
judgment, and all proceedings, appeals, or writs of error thereon.
Plaintiff filed a petition in the Circuit Court to which was attached the
above-mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgement be
rendered in favor of the plaintiff as prayed in the petition. After the
Circuit Court had entered a judgement, the defendants, through
counsel, appeared specially and filed a motion to set it aside. The
Supreme Court of Missouri, speaking through Mr. Justice Graves, in
part said:
But going beyond the mere technical question in our
preceding paragraph discussed, we come to a question urged
which goes to the very root of this case, and whilst new and
novel in this state, we do not feel that the case should be
disposed of without discussing and passing upon that
question.
xxx xxx xxx
And if this instrument be considered as security for a debt,
as it was by the common law, it has never so found
recognition in this state. The policy of our law has been
against such hidden securities for debt. Our Recorder's Act
is such that instruments intended as security for debt should
find a place in the public records, and if not, they have often
been viewed with suspicion, and their bona fides often
questioned.
Nor do we thing that the policy of our law is such as to thus
place a debtor in the absolute power of his creditor. The field
for fraud is too far enlarged by such an instrument.
Oppression and tyranny would follow the footsteps of such
a diversion in the way of security for debt. Such instruments
procured by duress could shortly be placed in judgment in a
foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some
other appellate court is granted to all persons against whom
an adverse judgment is rendered, and this statutory right is
by the instrument stricken down. True it is that such right is
not claimed in this case, but it is a part of the bond and we
hardly know why this pound of flesh has not been demanded.
Courts guard with jealous eye any contract innovations upon
their jurisdiction. The instrument before us, considered in the
light of a contract, actually reduces the courts to mere clerks
to enter and record the judgment called for therein. By our
statute (Rev. St. 1899, sec. 645) a party to a written
instrument of this character has the right to show a failure of
consideration, but this right is brushed to the wind by this
instrument and the jurisdiction of the court to hear that
controversy is by the whose object is to oust the jurisdiction
of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties
to a contract distinguishing between the different courts of
the country is contrary to public policy. The principle has
also been applied to a stipulation in a contract that a party
who breaks it may not be sued, to an agreement designating
a person to be sued for its breach who is nowise liable and
prohibiting action against any but him, to a provision in a
lease that the landlord shall have the right to take immediate
judgment against the tenant in case of a default on his part,
without giving the notice and demand for possession and
filing the complaint required by statute, to a by-law of a
benefit association that the decisions of its officers on claim
shall be final and conclusive, and to many other agreements
of a similar tendency. In some courts, any agreement as to
the time for suing different from time allowed by the statute
of limitations within which suit shall be brought or the right
to sue be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so
far as it goes beyond the usual provisions of a note, is void
as against the public policy of the state, as such public policy
is found expressed in our laws and decisions. Such
agreements are iniquitous to the uttermost and should be
promptly condemned by the courts, until such time as they
may receive express statutory recognition, as they have in
some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court
never had jurisdiction of the defendant, and the judgement is
reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40
L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another
well-considered authority. The notes referred to in the record contained
waiver of presentment and protest, homestead and exemption rights
real and personal, and other rights, and also the following material
provision: "And we do hereby empower and authorize the said A. B.
Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement
against us and in favor of said A. B. Farquhar Co., Limited, for the
above named sum with costs of suit and release of all errors and
without stay of execution after the maturity of this note." The Supreme
Court of West Virginia, on consideration of the validity of the
judgment note above described, speaking through Mr. Justice Miller,
in part said:
As both sides agree the question presented is one of first
impression in this State. We have no statutes, as has
Pennsylvania and many other states, regulating the subject.
In the decision we are called upon to render, we must have
recourse to the rules and principles of the common law, in
force here, and to our statute law, applicable, and to such
judicial decisions and practices in Virginia, in force at the
time of the separation, as are properly binding on us. It is
pertinent to remark in this connection, that after nearly fifty
years of judicial history this question, strong evidence, we
think, that such notes, if at all, have never been in very
general use in this commonwealth. And in most states where
they are current the use of them has grown up under statutes
authorizing them, and regulating the practice of employing
them in commercial transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit
per alium, facit per se, is as applicable here as in other cases.
We do not think so. Strong reasons exist, as we have shown,
for denying its application, when holders of contracts of this
character seek the aid of the courts and of their execution
process to enforce them, defendant having had no day in
 court or opportunity to be heard. We need not say in this case
that a debtor may not, by proper power of attorney duly
executed, authorize another to appear in court, and by proper
endorsement upon the writ waive service of process, and
confess judgement. But we do not wish to be understood as
approving or intending to countenance the practice
employing in this state commercial paper of the character
here involved. Such paper has heretofore had little if any
currency here. If the practice is adopted into this state it
ought to be, we think, by act of the Legislature, with all
proper safeguards thrown around it, to prevent fraud and
imposition. The policy of our law is, that no man shall suffer
judgment at the hands of our courts without proper process
and a day to be heard. To give currency to such paper by
judicial pronouncement would be to open the door to fraud
and imposition, and to subject the people to wrongs and
injuries not heretofore contemplated. This we are unwilling
to do.
A case typical of those authorities which lend support to judgment
notes is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac.,
291). The Supreme Court of New Mexico, in a per curiam decision, in
part, said:
In some of the states the judgments upon warrants of
attorney are condemned as being against public policy.
(Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65;
40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First
National Bank of Kansas City vs. White, 220 Mo., 717; 120
S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are
examples of such holding.) By just what course of reasoning
it can be said by the courts that such judgments are against
public policy we are unable to understand. It was a practice
from time immemorial at common law, and the common law
comes down to us sanctioned as justified by the reason and
experience of English-speaking peoples. If conditions have
arisen in this country which make the application of the
common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be
declared as against the public policy of the state. We are
aware that the argument against them is that they enable the
unconscionable creditor to take advantage of the necessities
of the poor debtor and cut him off from his ordinary day in
court. On the other hand, it may be said in their favor that it
frequently enables a debtor to obtain money which he could
by no possibility otherwise obtain. It strengthens his credit,
and may be most highly beneficial to him at times. In some
of the states there judgments have been condemned by
statute and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given
as security to a creditor accompanying a promissory note
confers a valid power, and authorizes a confession of
judgment in any court of competent jurisdiction in an action
to be brought upon said note; that our cognovit statute does
not cover the same field as that occupied by the common-
law practice of taking judgments upon warrant of attorney,
and does not impliedly or otherwise abrogate such practice;
and that the practice of taking judgments upon warrants of
attorney as it was pursued in this case is not against any
public policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned,
it may be said that they are based on the practice of the English-
American common law, and that the doctrines of the common law are
binding upon Philippine courts only in so far as they are founded on
sound principles applicable to local conditions.
Judgments by confession as appeared at common law were considered
an amicable, easy, and cheap way to settle and secure debts. They are
a quick remedy and serve to save the court's time. They also save the
time and money of the litigants and the government the expenses that
a long litigation entails. In one sense, instruments of this character may
be considered as special agreements, with power to enter up judgments
on them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney
are void as against public policy, because they enlarge the field for
fraud, because under these instruments the promissor bargains away
his right to a day in court, and because the effect of the instrument is
to strike down the right of appeal accorded by statute. The recognition
of such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with reference to
short-term obligations. It can readily be seen that judgement notes,
instead of resulting to the advantage of commercial life in the
Philippines might be the source of abuse and oppression, and make the
courts involuntary parties thereto. If the bank has a meritorious case,
the judgement is ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are
not authorized nor contemplated by our law. We are further of the
opinion that provisions in notes authorizing attorneys to appear and
confess judgments against makers should not be recognized in this
jurisdiction by implication and should only be considered as valid
when given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to
the lower court for further proceedings in accordance with this
decision. Without special finding as to costs in this instance, it is so
ordered.
Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez,
JJ., concur.
Footnotes
1MEMORANDA
OF "AMICI CURIAE"
Attorney Thos. L. Hartigan, of Hartigan and
Welch, states:
"Though we are attorneys for two of the large
banks here and keenly interested in the
introduction of any improvements that would
make for simplication of procedure and rapidity of
practice, we cannot favor the introduction of
confessions of judgment in the Philippine islands.
In our opinion, it would open the doors to fraud to
an extent that would more than counterbalance any
advantages of its use.
"With our lack of system in recording judgments
and with the practice of keeping merchants' books
in various foreign languages, there would be
ample opportunity for a debtor to make
preferences by confessions of judgment which
could not be discovered by the creditors until too
late and which would be nearly impossible to set
aside even when discovered in time.
"Although, as representatives of the banks, we are
representing the creditor class, we believe the
introduction of confessions of judgment would
ultimately cause much more loss than benefit to
that class."
Attorney Clyde A. DeWitt, of Fisher and DeWitt,
states:
"There is no statutory sanction in this jurisdiction
for such provisions in negotiable instruments.
Section 5 (b) of the Negotiable Instruments Law
does not constitute such sanction because (1) it
merely provides that such clauses will not affect
the negotiable character of the instrument, and (2)
it concludes with language showing that the
Legislature did not intend thereby to validate any
provision otherwise unlawful. The language is:
'But nothing in this section shall validate any
provision or stipulation otherwise illegal.'
"The question then is whether or not, in the
absence of express legislative sanction, such
warrants of attorney are valid. There are not many
American cases in which this precise question has
been considered, and in those cases in which the
question has been raised, the reasoning of the
courts has been colored by the fact that the
commercial use of these warrants of attorney as
security for debt was sanctioned at common law,
and the procedural statutes are held to be merely
cumulative and not in derogation of the common
law remedies. We, of course, have no such
situation here.
"The cases are collected in a note to First National
Bank vs. White (220 Mo., 717), found in 16 Ann.
Cas., 893, and it is there shown that in Missouri
and Kansas such provisions are held to be void as
against the public policy of the State as expressed
in its laws and the decisions of its courts, while in
Colorado and Illinois their validity was upheld as
a familiar common-law security not affected by
the procedural statutes. Yet it is there pointed out
that in Kahn vs. Lesser (97 Wis., 217, 72 N.W.,
739), the court, in referring to a judgment by
confession under warrant of attorney in a
promissory note, said:
"'The judgment in this case must stand,
if at all, by the authority of the statute.
The proceeding by which it was entered
was outside and in derogation of the
common-law practice of courts; and the
statute, as well as the proceedings under
it, must be strictly construed.'"
"In Iowa, in an early case, McClish vs. Manning
(3 Green, 233), the validity of these warrants of
attorney was upheld, referring to a statute
authorizing any person to confess a judgment, by
himself or his attorney. In a later decision,
Hamilton vs. Schoenberger (47 Ilowa, 385), it was
expressly held that such a provision, in a note
could not be enforced in the courts of that State,
and was not authorized or contemplated by its
laws. And in Tolman vs. Jansen (106 Iowa, 455),
it was held that such a provision, being void,
would not affect the negotiability of a note, even
though its effect would be to make uncertain the
time of payment.
"The reasoning in First National Bank vs. White,
supra, is persuasive. The court there held that these
warrants of attorney are void as against the public
policy of the state on the ground, first, that their
effect is to enlarge the field for fraud; second, that
under such an instrument the promissor bargains
away his right to his day in court; third, that the
effect of the instrument is to strike down the right
to appeal accorded by statute, and, fourth, that
there was no provision for the public recording of
such an instrument if regarded as a security for a
debt.
"It seems to me that on the precise grounds stated
in the White case, these warrants of attorney
should be held void as against public policy in this
jurisdiction. If given effect, they bargain away the
jurisdiction of the courts to try and determine the
liability of the maker of the note on its merits. To
uphold them would be to facilitate the operations
of usurers, the collection of gambling debts, and
would make difficult, if not impossible under our
procedure, the setting aside of judgments entered
in virtue thereof where the execution of the
instrument was obtained by fraud, duress, or where
there had been an entire failure of consideration. I
can think of no advantage which would result to
the commercial world from upholding these
warrants of attorney which would outweigh the
foregoing considerations."
Attorney e. Arthur Perkins, of Perkins and
Kincaid, states:
"Leaving aside entirely the legal considerations
involved, I feel that there is only one answer to
your inquiry, and that is, that the best interests of
the commercial life of the Philippines require the
non-recognition of such a form of judgment note.
Feeling that you would want to know the reasons
which impell me to adopt such a conclusion, I will
say briefly that if the Supreme Court should, by a
decision, recognize such a judgment note and
thereby place the stamp of approval upon
transactions of such a nature, the entire business
population of the Philippine Islands would be
justified in their future transactions with debtors in
requiring, in all instances, the execution of notes
of a similar tenor, with the consequence that the
debtor would thereby be deprived, to all intents
and purposes, upon ignorant debtors. It will prove
a serious drawback to the campaign being now
waged against usury.
"There is the further fear that the banks and money
lenders having accounts now outstanding will
immediately require every debtor to execute that
form of note and to refuse further extensions of
credit unless sit is done, which the debtor under the
stress of circumstances will be compelled to
accept, amounting in effect to duress.
"The recognition of such a form of obligation
would be so revolutionary in character as to bring
about a complete reorganization of commercial
customs and practices with reference to short-term
obligations.
"Having in mind that the Philippine National Bank
is practically the only institution which can assist
the farmers and agriculturists, the practice of
requiring a judgment note would place the latter
wholly at the mercy of the bank, and this is stated
without any reflection on the bank, but merely to
point out one of the consequent evils which will
necessarily follow if the practice should receive
the high judicial sanction which a judgment of the
Supreme Court would necessarily give to it.
"Another feature which occurs to me is that where
any new enterprise is being launched, it is
universally the custom for such company to
arrange with some banking institution for credit
facilities, over and above the capital with which it
brings business. Should it become the custom here
to require the execution of so-called judgment
notes, organizers of corporations, partnerships and
the like, who have in mind to secure additional
working capital or credit facilities from banks, will
be very reluctant to put their funds into any
enterprises which could be destroyed without
warning by the creditor exercising the rights which
that form of transaction would give him. This is
would act therefore as a deterrent to new
enterprises and the development of industry
through individual initiative and with private
funds.
"Let us take a very simple illustration of his.
Suppose that you and I should form a partnership,
with a capital of P50,000 to buy hemp and , in
connection with our business, we went to some
banking institution for the purpose of securing
credit facilities, as is customary, in the conduct of
our business. Let us then suppose that the bank,
taking into consideration the capital which we
ourselves had furnished and our standing in the
community, was willing to allow us a credit in the
further sum of P50,000 upon our signing a so-
called judgment note. Would not you and I
consider a long time before we would so far
obligate ourselves as to place it in the power of the
bank to send their attorney over to court, upon the
least provocation or at the first unfavorable rumor,
and to confess judgment in our names, which
would permit the sheriff to close us out without
even an opportunity to be heard?
"The sum and substance of the whole proposition
is that such a practice is contrary to good morals."
Attorney David C. Johnson, of Gibbs,
McDonough and Johnson, states:
"It seems that under the common law a confession
of judgment was only allowable by the defendant
himself, either before or after appearance and
answer. The confession of judgment by warrant of
attorney is a statutory development (15 R.C.L.,
656, 657; 17 Am. and Eng. Encyc. of Law [2d ed.],
765; Pl. and Pr., 973-975; Masson vs. Ward, 80
Vt., 290; 130 A. S. R., 987,988).
"The procedure contemplated in the note quoted in
your letter is contrary to that contemplated in our
code of procedure, which gives to all defendants
an opportunity at least to be heard. An action on
the note in question could be so presented that the
defendant would never be summoned or notified,
since an appearance and confession of judgment
might be filed simultaneously. We believe that this
procedure should not be recognized in this
jurisdiction by implication, but should have
legislative sanction with the rights of the defendant
amply safeguarded. We believe that section 5 of
Act No. 2031 does not of itself sanction any of the
acts mentioned in that section, but is only a
statement regarding the negotiable character of the
instrument. Subsection A of section 5 states that
the authority to sell collateral security does not
affect negotiability. As we understand the decision
of the Supreme Court in the case of Mahoney vs.
Tuason(39 Phil., 952), the creditor in this
jurisdiction is not authorized by law to sell
collateral security except in the manner provided
in section 14 of Act No. 1508. This would seem to
reinforce our opinion.
"There are some favorable features of a judgment
note or warrant for confession of judgment, but we
believe that there are many objections which
outweigh any of the advantages. Forgery and
usury are more prevalent in these Islands than in
the United States. The sanctioning of this
procedure would add an additional weapon to the
money lender who desires to overreach his debtor.
"We have delayed answering your letter in order
that we might consult our Mr. Gibbs, who returned
from Baguio yesterday.
"The foregoing is the consensus of opinion of the
member of this firm."
Attorney Julian Wolfson states:
"It is assumed that the only question propounded
is :
"'Admitting that there may be some doubt, as to a
correct solution, which solution, the recognition of
a confession of judgment, or a non-recognition of
a confession of judgment, would be for the best
interest of the commercial life of the Philippines?
and that no opinion is required upon the incidental
questions previously asked, as same have already
been determined by an examination of such
authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7,
723-5; 6 C. J., pp. 645-6 (Notes 35 & 42); 8 C. J.,
p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37);
and such leading textbooks as 'Brannan's
Negotiable Instruments Law' and 'Selover on
Negotiable Instruments.' "Everyone is entitled to
'his day in court.' This right may be waved after an
opportunity has been given to exercise the right,
but must not and cannot be taken away before an
opportunity has been given to exercise the right.
"The ordinary ship's bill of lading and the ordinary
fire and marine insurance policy are generally
printed on forms prepared by the carrier and the
insurer respectively, and generally contain a clause
making it a condition precedent to the institution
of an action to first submit the matter to a board of
arbitration. The Supreme Court has never
recognized this clause. The reasons are stated in
the opinions. Once submitted to arbitration, then
another question is raised.
"Special defenses to written instruments are
common. Need we do more than cite the following
cases: Maulini vs. Serrano (28 Phil., 640); Henry
W. Peabody and Co. vs. Bromfield and Ross (38
Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39
Phil., 970).
"If the judgment note (this term is used throughout
for brevity and as it is the recognized term) is to be
recognized, what chance has defendant of
defending as did the defendants in the above cited
cases? Non!
"Often a promissory note is a mere formality taken
by a bank as evidence of indebtedness, while the
real indebtedness may be for a superior or inferior
amount incurred by way of overdraft, letters of
credit outstanding, acceptances to mature, or a
thousand other forms of banking credit. Such
"judgment notes" are generally made payable on
demand. In the case at bar, the note is made
payable on demand. The real indebtedness may be
partially paid, or the liquidation may be going
along too slow to suit the bank and then use is
made of the judgment note. The defendant might
have perfect defense except for the judgment note.
Would not article 1269 of the Civil Code here
apply?
"The 'judgment notes,' is not once in a thousand
times signed at the time of receiving money from
the bank. The indebtedness represented thereby is
incurred in prior transactions, the obligation
became past due and the bank, as a forcible
measure, produces one of these 'judgment notes,'
when the debtor is absolutely helpless, and says
'Sign on the dotted line' and the debtor has no
option, he signs. The minds of the parties never
met. The debtor owes the money, knows that the
bank must have evidence of the indebtedness to
pass the auditors and the debtor further realizes he
must accept that bank's dictation, because if he
declines, he is liable to immediate ruin, or if not
that, he will never get further accommodation
from the bank. He does not realize, even if he
knows, what is meant by a 'judgment note.' Again,
would not article 1269 of the Civil Code here
apply?
"Just a few months ago there was a suit instituted
by a local bank for a large sum of money, based on
a written instrument which, on its face, seemed
absolute. Special defenses were pleaded, setting
up that the instrument did not express the real
understanding of the parties and the real
understanding was set up. The special defenses
were fully proved and the lower court dismissed
the bank's suit. The bank did not even attempt to
appeal to the Supreme Court (See Cause No.
18239 of the Docket of the Court of First Instance
of Manila). Suppose the instrument sued on had
contained a clause of confession of judgment,
what chance would defendant have had to prove
his defense? None!
"Let us go a step further and see where this leads
us. A is a dealer in hardware and sells B a bill of
goods. A prints a form, which he has B to sign, in
which B acknowledges receipt of the goods and in
consideration thereof premises to pay A and "a
confession of judgment" clause is inserted. The
goods turn out entirely different from those
ordered and invoiced. B refuses to pay. A sues on
his "judgment note." What change has B? None!
"Very often a promissory note is only one of a
series of documents given as security for the debt.
What about considering the other documents
which bear on the transaction?
"A bank may have made certain advances and may
have undertaken to make more, but fails to do so,
to the damage and prejudice of debtor. Let us
assume that the bank agreed to advance several
hundred thousand pesos in installments of P60,000
each, and had advanced only the first installments,
taking a "judgment note" for said first installment,
and had failed to advance further, to the damage of
the debtor. What would become of section 97 of
the Code of Civil Procedure? How would debtor
be able to exercise his right of counterclaim? Was
it ever contemplated at the time of signing the
judgment note that the debtor would not only
waive defense, but absolutely shut himself out of
court, as he would, according to section 97 above
cited, on his counterclaim? Yet again, would not
article 1269 of the Civil Code here apply?
"We dare not attempt to elaborate on what would
happen in the provinces of the Philippines should
a "judgment note" be held valid.
"What about the Usury Law? How could a defense
be offered there? The usurious rate might not
appear on the face of the "judgment note," but it
may be there all the same.
"Examples could be multiplied until the very
absurdity of the proposition would be clearly seen,
even by a blind man.
"Of what possible benefit would the recognition of
a "judgment note" serve "the best interest of the
commercial life of the Philippines? None! An
honest creditor is willing to let his debtor have his
day in court and is willing to prove to the court his
case. It might take slightly longer to go through
with a trial, but that cannot be considered a set-
back. But, on the other hand, a dishonest creditor
would take unfair advantage of a "judgment note"
and would use it to the utmost to harass and take
advantage of the poor and helpless debtor. The real
consequences likely, in fact sure, to arise from
such recognition are horrible beyond words to
contemplate.
"There can be but one answer to the proposition
and that is: The non-recognition of a confession of
judgment would be for the best interests of the
commercial life of the Philippines."
Attorney J. G. Lawrence, of Ross and Lawrence,
states:
"We are aware of no expression of our Legislature
or courts which would indicate that confessions of
judgment under powers given in a promissory note
are contrary to public policy. This action was
regularly brought in accordance with the
provisions of the Code of Civil Procedure and the
defendant served with process. The answer,
confessing judgment, was filed in strict
accordance with the powers contained in the note
— a power coupled with an interest which
defendant would be estopped of denying. We think
that no express legal sanction is necessary to
legalize such a proceeding.
"On the question of what ought to be the public
policy of the Philippines, we hold quite a different
opinion. While the use of judgment notes might in
some cases expedite the collection of just debts,
we believe that under conditions as exist here, their
use should be discouraged. The lend themselves
easily to fraud in the hands of friends of a
dishonest debtor, and to extortion in the hands of
usurers who are already too well equipped with
the pacto de retro.
"While we believe that the position of the bank is
sound legally, we should be very glad to be proven
mistaken."
Attorney Francis B. Mahoney, of the Philippine
Trust Company, states:
"I have not gone into the law and cases, except to
take a glance at the subject of judgments in
Volume 15 of Ruling Case Law. However, the
reasons indicated on page 651 thereof are
significant.
"Unquestionably, if our Legislature provided in
unmistakable terms for confession of judgment as
herein indicated, the validity and constitutionality
of the enactment might be questioned as failing to
provide those constitutional safeguards of taking a
man's property only after a day in court and after
the due process of law.
"This conclusion is stronger — a fortiori — where
the enacting provision — if such section 5 of Act.
No. 2031 may be called — is of a lefthanded
nature, apparently relating only to negotiability —
incidentally thus answering here your first inquiry.
Whatever legal principles there might be in favor
of recognizing a confession of judgment — for
example, the matter of expediency — stronger and
more vital principles oppose such recognition.
"By refusing to recognize confession of judgment
under existing statutes or under general legal
principles, at the worst phase from the point of
view of the plaintiff bank, there would result only
possible delay, costs and attorney's fees, which,
after all, are only passed on to the clients of the
bank in the shape of interests, charges. etc. If the
bank has a meritorious case, the judgment is
ultimately certain as courts.
"If the defendant debtor has any defense of merit,
he is given an opportunity to present it, as, for
example, in the matter of usury so common, so
difficult to uncover an such an unscrupulous rival
of legitimate banking, the courts may keep their
doors open to the equities of each individual case.
Whereas, if defendant, who theoretically may
allege fraud an who practically has great difficulty
in proving it, must rely upon a defense of fraud, he
has little chance and the doors of the court are
closed to any other defense.
"In the final analysis, the matter simmers down to:
1. Possible delay in judgment with costs, etc. 2.
Certain justice in the end. 3. The eyes and doors of
courts open to the equities of each individual case.
4. Equality before the law,
or
(a) Expediting judgment. (b) Defendant debtor
practically kept out of court by additional expense
and difficulty in securing a hearing. (c) Putting a
strong weapon in the hands of unscrupulous
persons and taking the strength necessary to wield
this weapon from the courts.
"At first glance, if a debtor signs a document
throwing away his right to be heard, the average
man has a feeling such debtor deserves to suffer
the consequences. If that were the entire story,
probably he should. But what man, needing money
badly enough — facing strenuous necessity — will
not in the circumstances be inclined to look on the
cheerful side-to sign and get the money, letting the
future take care of itself? Such is the frailty of
human nature. Then, as the usual thing, the rich
and powerful can take care of themselves, and it is
usually others who have need of courts, just laws
and liberal interpretation of them.
"No doubt, banks would favor expediting
judgments against their debtors, other things being
equal. And no doubt, additional delay in courts and
the incidental costs thereof will be borne by the
clients of the bank. But sound banking is not
established and enhanced by harsh law which put
strong weapons in powerful hands. Contented
peoples, safe laws and sound banking usually go
hand in hand."
Professor Jose A. Espiritu, of the University of the
Philippines, states:
"Permit me to cite first of all the authorities that I
have gathered concerning the principal question at
issue in the case mentioned in your letter, namely,
'The Effect and Validity of Confession of
Judgement in the Philippines.'
"1. Confession of judgment has been
defined as "a voluntary submission to
the jurisdiction of the court, giving by
consent and without the service of
process, what could otherwise be
obtained by summons and complaint,
and other formal proceedings, an
acknowledgment of indebtedness, upon
which it is contemplated that a judgment
may and will be rendered." (8 Cyc., pp.
563, 564.)
"2. As to the general effects of
confession of judgment, the following
statements may be mentioned: 'A
warrant to confess judgment does not
destroy the negotiability of the note.
Such a note is commonly called a
"judgement note." Decisions to the
contrary in the States where the
Negotiable Instruments Law is now in
force are abrogated thereby, since it
expressly provides that the negotiable
character of an instrument otherwise
negotiable is not affected by a provision
which authorizes a confession of
judgment, if the instrument is not paid at
maturity. However, this statutory
provision does not apply to stipulations
for the confession of judgment "prior" to
maturity.' (8 C.J., p. 128, sec. 222.)
"3. Nature of Requisites. "A judgment
may be rendered upon the confession of
defendant, either in an action regularly
commenced against him by the issuance
and service of process, in which case the
confession may be made by his attorney
of record, or, without the institution of a
suit, upon a confession by defendant in
person or by his attorney in fact. It
implies something more than a mere
admission of a debt to plaintiff; in
addition, it is defendant's consent that a
judgment shall be entered against him. .
. . ." (23 cyc., 699.)
"4. Statutory Provisions, "Statutes
regulating the confession of judgments
without action, or otherwise than
according to the course of the common
law, are strictly construed, and a strict
compliance with their provisions must
be shown in order to sustain the validity
of the judgment." (Chapin vs. Tompson,
20 Cla., 681.) "And this applies also to
statutory restriction upon the right to
confess judgment, as that authority to
confess judgment shall not be given in
the same instrument which contains the
promise or obligation to pay the debt, or
that such confession shall not be
authorized by any instrument executed
prior to suit brought." (23 Cyc., 699,
700.)
"5. Warrant or Power of Attorney —
Validity and Necessity. 'A judgment by
confession may be entered upon a
written authority, called a warrant or
letter of attorney, by which the debtor
empowers an attorney to enter an
appearance for him, waive process, and
confess judgment against him for a
designated sum, except where this
method of proceeding is prohibited by
statute. The warrant as the basis of
judgment is generally required to be
placed on file in the clerk's office, and
no judgment can be so entered until it is
so filed.' (23 Cyc., 703.)
"6. Requisites and Sufficiency. 'A
warrant or power of attorney to confess
judgement should be in writing and
should conform to the requirements of
the statute in force at the time of its
execution, although in the absence of
specific statutory directions it is
sufficient, without much regard to its
form, if it contains the essential of a
good power and clearly states its
purpose. It must be signed by the person
against whom the judgment is to be
entered . . . .' (23 Cyc., 704.)
"The above quoted authorities are among the
various authorities I found bearing on the question
at issue. As it can be readily seen none of them
decides squarely and definitely the questions
propounded in your letter. One thing, however,
seems to be clear, from the very provision of
section 5 (b) of the Negotiable Instruments Law
and from the quotation No. 2 of this letter, that a
provision in a note or bill of exchange authorizing
a confession of judgment in default of payment at
its maturity has particular reference, in so far as
Act No. 2031 is concerned, only to the negotiable
character of an instrument. I do not believe that the
Legislature had the intention in passing the said
Act No. 2031 to introduce in the Philippines a new
practice in our Remedial Law, namely, that of
confession of judgment, which is purely
procedural in nature.
"Now as to the second question, to wit: 'Does the
silence of the Code of Civil Procedure on the
subject mean that a confession of judgement
cannot be recognized in this jurisdiction, or can a
judgment by confession be imported into the
Philippines under general legal principles?' Before
answering this question attention is respectfully
called to the quotation No. 4 of this letter, which
expressly provides that statutes regulating
confession of judgments must be strictly construed
and their provisions strictly complied with to
sustain the validity of judgments rendered under Philippines, might be the sources of abuse and
such statutes. Now it being admitted that there is oppression. The very fact that confession of
no express provision in our Code of Civil judgement is almost summary and in fact a violent
Procedure authorizing or sanctioning this mode of remedy, it should first of all be properly regulated
practice in this jurisdiction, and consequently by statute, and those regulations must be strictly
there are no regulations provided to be followed in complied with, before the court should concede to
this particular remedy, I am therefore of the such a remedy."
opinion that confession of judgment should not be
deemed as imported in the Philippines under the
general legal principles. The remedy itself is a
most summary one, and when the defendant-
debtor, instead of admitting or allowing a
judgment be taken against him, presents his Republic of the Philippines
appearance and answers the complaint filed SUPREME COURT
against him, it seems that the trial court should not Manila
render a judgement without first hearing the
evidence that the parties may wish to submit EN BANC
before him, for it may happen that the defendant-
debtor may have some valid or good defenses G.R. No. L-10221 February 28, 1958
against the plaintiff-creditor. This is especially
true in the case of a counterclaim that the
defendant may have against the plaintiff as Intestate of Luther Young and Pacita Young, spouses. PACIFICA
provided in sections 95 and 96 of the Code of Civil JIMENEZ, petitioner-appellee,
Procedure. The same Code provides that in case of vs.
an omission to set up his counterclaim, the DR. JOSE BUCOY, administrator-appellant.
defendant or his assignee loses all his right to bring
further suit on such claim. (Sec. 97, Act No. 190.) Frank W. Brady and Pablo C. de Guia, Jr. for appellee.
E. A. Beltran for appellant.
"In answer to the last question, namely:
"Admitting that there may be some doubt, as to the BENGZON, J.:
correct solution, which solution, the recognition of
a confession of judgement, or the non-recognition
In this intestate of Luther Young and Pacita Young who died in 1954
of a confession of judgment, would be for the best
and 1952 respectively, Pacifica Jimenez presented for payment four
interests of the commercial life of the
promissory notes signed by Pacita for different amounts totalling
Philippines?" I wish first of all to state that a
twenty-one thousand pesos (P21,000).
confession of judgment is a quick remedy. It saves
time and money as far as the parties to the suit are
concerned if the same is properly and legally Acknowledging receipt by Pacita during the Japanese occupation, in
brought. It saves the court's time and the the currency then prevailing, the administrator manifested willingness
government the expense that a long litigation to pay provided adjustment of the sums be made in line with the
entails. As to its disadvantages we may say among Ballantyne schedule.
other things the following: 1. It may be abused in
the same way as the usurious rates of interest on The claimant objected to the adjustment insisting on full payment in
loans are now in the Philippines, because a accordance with the notes.
borrower who is in great need of money might be
induced, if not actually compelled, to sign such a
Applying doctrines of this Court on the matter, the Hon. Primitive L.
burdensome obligation; 2. It deprives the
Gonzales, Judge, held that the notes should be paid in the currency
defendant of his day in court, and as a consequence
prevailing after the war, and that consequently plaintiff was entitled to
it will prevent him to set up and prove before the
recover P21,000 plus attorneys fees for the sum of P2,000.
court his just claims and other lawful defenses
against the plaintiff; 3. It will create multiplicity of
actions in this jurisdiction, for if the confession of Hence this appeal.
judgment has been wrongfully or unjustly entered,
the judgment debtor may start another litigation on Executed in the month of August 1944, the first promissory note read
the same subject-matter that might have been as follows:
brought before the court in case a proper trial was
formally held before the rendition of such a
judgment; and 4. It does not really hold the Received from Miss Pacifica Jimenez the total amount of
plaintiff who has a good cause of action against the P10,000) ten thousand pesos payable six months after the
defendant as his proofs will surely establish his war, without interest.
claims and consequently a judgment must
necessarily be rendered in his favor. The other three notes were couched in the same terms, except as to
amounts and dates.
"From the above statements, I am of the opinion
that unless proper regulations are first duly There can be no serious question that the notes were promises to pay
introduced and incorporated in our remedial law, "six months after the war," the amounts mentioned.
confession of judgments, instead of resulting
advantageous to our commercial life in the
But the important question, which obviously compelled the
administrator to appeal, is whether the amounts should be paid, peso
for peso, or whether a reduction should be made in accordance with
the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese
occupation has received our attention in many litigations after the
liberation. The gist of our adjudications, in so far as material here, is
that if the loan should be paid during the Japanese occupation, the
Ballantyne schedule should apply with corresponding reduction of the
amount.1 However, if the loan was expressly agreed to be payable only
after the war or after liberation, or became payable after those dates,
no reduction could be effected, and peso-for-peso payment shall be
ordered in Philippine currency.2
The Ballantyne Conversion Table does not apply where the
monetary obligation, under the contract, was not payable
during the Japanese occupation but until after one year
counted for the date of ratification of the Treaty of Peace
concluding the Greater East Asia War. (Arellano vs. De
Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the
Japanese occupation, to be discharged after the war, the
payment should be made in Philippine Currency. (Kare et
al. vs. Imperial et al., 102 Phil., 173.)
Now then, as in the case before us, the debtor undertook to pay "six
months after the war," peso for peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the
loan therein given could have been repaid during the Japanese
occupation. Dated December 26, 1944, it was payable within one year.
Payment could therefore have been made during January 1945. The
notes here in question were payable only after the war.
The appellant administrator calls attention to the fact that the notes
contained no express promise to pay a specified amount. We declare
the point to be without merit. In accordance with doctrines on the
matter, the note herein-above quoted amounted in effect to "a promise
to pay ten thousand pesos six months after the war, without interest."
And so of the other notes.
"An acknowledgment may become a promise by the addition of words
by which a promise of payment is naturally implied, such as,
"payable," "payable" on a given day, "payable on demand," "paid . . .
when called for," . . . (10 Corpus Juris Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract
are necessary, provided they amount, in legal effect, to a promise to
pay. In other words, if over and above the mere acknowledgment of
the debt there may be collected from the words used a promise to pay
it, the instrument may be regarded as a promissory note. 1 Daniel, Neg.
Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A.
B. $325, payable on demand," or, "I acknowledge myself to be
indebted to A in $109, to be paid on demand, for value received," or,
"I O. U. $85 to be paid on May 5th," are held to be promissory notes,
significance being given to words of payment as indicating a promise
to pay." 1 Daniel Neg. Inst. see. 39, and cases cited.
(Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young
did not sign these notes, his estate is not liable for the same. This
defense, however, was not interposed in the lower court. There the only
issue related to the amount to be amount, considering that the money
had been received in Japanese money. It is now unfair to put up this
new defense, because had it been raised in the court below, appellees
could have proved, what they now alleged that Pacita contracted the
obligation to support and maintain herself, her son and her
husband (then concentrated at Santo Tomas University) during the
hard days of the occupation.
It is now settled practice that on appeal a change of theory is not
permitted.
In order that a question may be raised on appeal, it is
essential that it be within the issues made by the parties in
their pleadings. Consequently, when a party deliberately
adopts a certain theory, and the case is tried and decided
upon that theory in the court below, he will not be permitted
to change his theory on appeal because, to permit him to do
so, would be unfair to the adverse party. (Rules of Court by
Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38
Phil., 424; American Express Company vs. Natividad, 46
Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480;
Toribio vs. Dacasa, 55 Phil., 461.)
Appellant's last assignment of error concerns attorneys fees. He says
there was no reason for making this and exception to the general rule
that attorney's fees are not recoverable in the absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation
new be awarded in this case if defendant acted in gross and evident bad
faith in refusing to satisfy plaintiff's plainly valid, just and demandable
claim" or "where the court deems it just and equitable that attorney's
fees be recovered" (Article 2208 Civil Code). These are — if
applicable — some of the exceptions to the general rule that in the
absence of stipulation no attorney's fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees.
Needless to say, it is desirable that the decision should state the reason
why such award is made bearing in mind that it must necessarily rest
on an exceptional situation. Unless of course the text of the decision
plainly shows the case to fall into one of the exceptions, for instance
"in actions for legal support," when exemplary damages are awarded,"
etc. In the case at bar, defendant could not obviously be held to have
acted in gross and evident bad faith." He did not deny the debt, and
merely pleaded for adjustment, invoking decisions he thought to be
controlling. If the trial judge considered it "just and equitable" to
require payment of attorney's fees because the defense — adjustment
under Ballantyne schedule — proved to be untenable in view of this
Court's applicable rulings, it would be error to uphold his view.
Otherwise, every time a defendant loses, attorney's fees would follow
as a matter of course. Under the article above cited, even a clearly
untenable defense would be no ground for awarding attorney's fees
unless it amounted to "gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of
defendant's refusal to accept her offer, before the suit, to take P5,000
in full settlement of her claim. We do not think this is tenable,
defendant's attitude being merely a consequence of his line of defense,
which though erroneous does not amount to "gross and evident bad
faith." For one thing, there is a point raised by defendant, which so far
as we are informed, has not been directly passed upon in this
jurisdiction: the notes contained no express promise to pay a definite
amount.
There being no circumstance making it reasonable and just to require
defendant to pay attorney's fees, the last assignment of error must be
upheld.
Wherefore, in view of the foregoing considerations, the appealed
decision is affirmed, except as to the attorney's fees which are hereby
disapproved. So ordered.
Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L. Endencia and Felix, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-27782 July 31, 1970
OCTAVIO A. KALALO, plaintiff-appellee,
vs.
ALFREDO J. LUZ, defendant-appellant.
Amelia K. del Rosario for plaintiff-appellee.
Pelaez, Jalandoni & Jamir for defendant-appellant.
ZALDIVAR, J.:
Appeal from the decision, dated, February 10, 1967, of the Court of
First Instance of Rizal (Branch V, Quezon City) in its Civil Case No.
Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo
hereinafter referred to as appellee), a licensed civil engineer doing
business under the firm name of O. A. Kalalo and Associates, entered
into an agreement (Exhibit A )1 with defendant-appellant Alfredo J .
Luz (hereinafter referred to as appellant), a licensed architect, doing
business under firm name of A. J. Luz and Associates, whereby the
former was to render engineering design services to the latter for fees,
as stipulated in the agreement. The services included design
computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O.
A. Kalalo and Associates bill of quantities and cost estimate, and
consultation and advice during construction relative to the work. The
fees agreed upon were percentages of the architect's fee, to wit:
structural engineering, 12-½%; electrical engineering, 2-½%. The
agreement was subsequently supplemented by a "clarification to letter-
proposal" which provided, among other things, that "the schedule of
engineering fees in this agreement does not cover the following: ... D.
Foundation soil exploration, testing and evaluation; E. Projects that are
principally engineering works such as industrial plants, ..." and "O. A.
Kalalo and Associates reserve the right to increase fees on projects
,which cost less than P100,000 ...."2 Pursuant to said agreement,
appellee rendered engineering services to appellant in the following
projects:
(a) Fil-American Life Insurance Building at
Legaspi City;
(b) Fil-American Life Insurance Building at Iloilo
City;
(c) General Milling Corporation Flour Mill at
Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research
center Los Baños, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life
Insurance Building at Isaac Peral Ermita, Manila;
(h) Arthur Young's residence at Forbes Park,
Makati, Rizal;
(i) L & S Building at Dewey Blvd., Manila; and
(j) Stanvac Refinery Service Building at Limay,
Bataan.
On December 1 1, '1961, appellee sent to appellant a statement of
account (Exhibit "1"),3 to which was attached an itemized statement of
defendant-appellant's account (Exh. "1-A"), according to which the
total engineering fee asked by appellee for services rendered amounted
to P116,565.00 from which sum was to be deducted the previous
payments made in the amount of P57,000.00, thus leaving a balance
due in the amount of P59,565.00.
On May 18, 1962 appellant sent appellee a resume of fees due to the
latter. Said fees, according to appellant. amounted to P10,861.08
instead of the amount claimed by the appellee. On June 14, 1962
appellant sent appellee a check for said amount, which appellee refused
to accept as full payment of the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against appellant,
containing four causes of action. In the first cause of action, appellee
alleged that for services rendered in connection with the different
projects therein mentioned there was due him fees in sum s consisting
of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums
only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and
the balance of P30,881.25. In the second cause of action, appellee
claimed P17,000.00 as consequential and moral damages; in the third
cause of action claimed P55,000.00 as moral damages, attorney's fees
and expenses of litigation; and in the fourth cause of action he claimed
P25,000.00 as actual damages, and also for attorney's fees and
expenses of litigation.
In his answer, appellant admitted that appellee rendered engineering
services, as alleged in the first cause of action, but averred that some
of appellee's services were not in accordance with the agreement and
appellee's claims were not justified by the services actually rendered,
and that the aggregate amount actually due to appellee was only
P80,336.29, of which P69,475.21 had already been paid, thus leaving
a balance of only P10,861.08. Appellant denied liability for any
damage claimed by appellee to have suffered, as alleged in the second,
third and fourth causes of action. Appellant also set up affirmative and
special defenses, alleging that appellee had no cause of action, that
appellee was in estoppel because of certain acts, representations,
admissions and/or silence, which led appellant to believe certain facts
to exist and to act upon said facts, that appellee's claim regarding the
Menzi project was premature because appellant had not yet been paid
for said project, and that appellee's services were not complete or were
performed in violation of the agreement and/or otherwise
unsatisfactory. Appellant also set up a counterclaim for actual and
moral damages for such amount as the court may deem fair to assess,
and for attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain
fees for services rendered was not denied, the only question being the
assessment of the proper fees and the balance due to appellee after
deducting the admitted payments made by appellant, the trial court,
upon agreement of the parties, authorized the case to be heard before a
Commissioner. The Commissioner rendered a report which, in resume,
states that the amount due to appellee was $28,000.00 (U.S.) as his fee
in the International Research Institute Project which was twenty
percent (20%) of the $140,000.00 that was paid to appellant, and
P51,539.91 for the other projects, less the sum of P69,475.46 which
was already paid by the appellant. The Commissioner also
recommended the payment to appellee of the sum of P5,000.00 as
attorney's fees.
At the hearing on the Report of the Commissioner, the respective
counsel of the parties manifested to the court that they had no objection
to the findings of fact of the Commissioner contained in the Report,
and they agreed that the said Report posed only two legal issues,
namely: (1) whether under the facts stated in the Report, the doctrine
of estoppel would apply; and (2) whether the recommendation in the
Report that the payment of the amount. due to the plaintiff in dollars
was legally permissible, and if not, at what rate of exchange it should
be paid in pesos. After the parties had submitted their respective
memorandum on said issues, the trial court rendered its decision dated
February 10, 1967, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of
plaintiff and against the defendant, by ordering the
defendant to pay plaintiff the sum of P51,539.91
and $28,000.00, the latter to be converted into the
Philippine currency on the basis of the current rate
of exchange at the time of the payment of this
judgment, as certified to by the Central Bank of the
Philippines, from which shall be deducted the sum
of P69,475.46, which the defendant had paid the
plaintiff, and the legal rate of interest thereon from
the filing of the complaint in the case until fully
paid for; by ordering the defendant to pay to
plaintiff the further sum of P8,000.00 by way of
attorney's fees which the Court finds to be
reasonable in the premises, with costs against the
defendant. The counterclaim of the defendant is
ordered dismissed.
From the decision, this appeal was brought, directly to this Court,
raising only questions of law.
During the pendency of this appeal, appellee filed a petition for the
issuance of a writ of attachment under Section 1 (f) of Rule 57 of the
Rules of Court upon the ground that appellant is presently residing in
Canada as a permanent resident thereof. On June 3, 1969, this Court
resolved, upon appellee's posting a bond of P10,000.00, to issue the
writ of attachment, and ordered the Provincial Sheriff of Rizal to attach
the estate, real and personal, of appellant Alfredo J. Luz within the
province, to the value of not less than P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and
holding that plaintiff-appellee's letter dated
December 11, 1961 (Exhibit "1") and the
statement of account (Exhibit "1-A") therein
enclosed, had the effect, cumulatively or
alternatively, of placing plaintiff-appellee in
estoppel from thereafter modifying the
representations made in said exhibits, or of making
plaintiff-appellee otherwise bound by said
representations, or of being of decisive weight in
determining the true intent of the parties as to the
nature and extent of the engineering services
rendered and/or the amount of fees due.
II. The lower court erred in declaring and holding
that the balance owing from defendant-appellant
to plaintiff-appellee on the IRRI Project should be
paid on the basis of the rate of exchange of the U.S.
dollar to the Philippine peso at the time of payment
of judgment. .
III. The lower court erred in not declaring and
holding that the aggregate amount of the balance
due from defendant-appellant to plaintiff-appellee
is only P15,792.05.
IV. The lower court erred in awarding attorney's
fees in the sum of P8,000.00, despite the
commissioner's finding, which plaintiff-appellee
has accepted and has not questioned, that said fee
be only P5,000.00; and
V. The lower court erred in not granting
defendant-appellant relief on his counter-claim.
1. In support of his first assignment of error appellant argues that in
Exhibit 1-A, which is a statement of accounts dated December 11,
1961, sent by appellee to appellant, appellee specified the various
projects for which he claimed engineering fees, the precise amount due
on each particular engineering service rendered on each of the various
projects, and the total of his claims; that such a statement barred
appellee from asserting any claim contrary to what was stated therein,
or from taking any position different from what he asserted therein
with respect to the nature of the engineering services rendered; and
consequently the trial court could not award fees in excess of what was
stated in said statement of accounts. Appellant argues that for estoppel
to apply it is not necessary, contrary to the ruling of the trial court, that
the appellant should have actually relied on the representation, but that
it is sufficient that the representations were intended to make the
defendant act there on; that assuming arguendo that Exhibit 1-A did
not put appellee in estoppel, the said Exhibit 1-A nevertheless
constituted a formal admission that would be binding on appellee
under the law on evidence, and would not only belie any inconsistent
claim but also would discredit any evidence adduced by appellee in
support of any claim inconsistent with what appears therein; that,
moreover, Exhibit 1-A, being a statement of account, establishes prima
facie the accuracy and correctness of the items stated therein and its
correctness can no longer be impeached except for fraud or mistake;
that Exhibit 1-A furthermore, constitutes appellee's own interpretation
of the contract between him and appellant, and hence, is conclusive
against him.
On the other hand, appellee admits that Exhibit 1-A itemized the
services rendered by him in the various construction projects of
appellant and that the total engineering fees charged therein was
P116,565.00, but maintains that he was not in estoppel: first, because
when he prepared Exhibit 1-A he was laboring under an innocent
mistake, as found by the trial court; second, because appellant was not
ignorant of the services actually rendered by appellee and the fees due
to the latter under the original agreement, Exhibit "A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because
appellant did not rely thereon as found by the Commissioner, from
whose Report we read:
While it is true that plaintiff vacillated in his claim,
yet, defendant did not in anyway rely or believe in
the different claims asserted by the plaintiff and
instead insisted on a claim that plaintiff was only
entitled to P10,861.08 as per a separate resume of
fees he sent to the plaintiff on May 18, 1962 (See
Exhibit 6).4
The foregoing finding of the Commissioner, not disputed by appellant,
was adopted by the trial court in its decision. Under article 1431 of the
Civil Code, in order that estoppel may apply the person, to whom
representations have been made and who claims the estoppel in his
favor must have relied or acted on such representations. Said article
provides:
Art. 1431. Through estoppel an admission or
representation is rendered conclusive upon the
person making it, and cannot be denied or
disproved as against the person relying thereon.
An essential element of estoppel is that the person invoking it has been
influenced and has relied on the representations or conduct of the
person sought to be estopped, and this element is wanting in the instant
case. In Cristobal vs. Gomez,5 this Court held that no estoppel based
on a document can be invoked by one who has not been mislead by the
false statements contained therein. And in Republic of the Philippines
vs. Garcia, et al.,6 this Court ruled that there is no estoppel when the
statement or action invoked as its basis did not mislead the adverse
party-Estoppel has been characterized as harsh or odious and not
favored in law.7 When misapplied, estoppel becomes a most effective
weapon to accomplish an injustice, inasmuch as it shuts a man's mouth
from speaking the truth and debars the truth in a particular
case.8 Estoppel cannot be sustained by mere argument or doubtful
inference: it must be clearly proved in all its essential elements by
clear, convincing and satisfactory evidence.9 No party should be
precluded from making out his case according to its truth unless by
force of some positive principle of law, and, consequently, estoppel in
pains must be applied strictly and should not be enforced unless
substantiated in every particular. 1 0
The essential elements of estoppel in pais may be considered in relation
to the party sought to be estopped, and in relation to the party invoking
the estoppel in his favor. As related to the party to be estopped, the
essential elements are: (1) conduct amounting to false representation
or concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent with,
those which the party subsequently attempts to assert; (2) intent, or at
least expectation that his conduct shall be acted upon by, or at least
influence, the other party; and (3) knowledge, actual or constructive,
of the real facts. As related to the party claiming the estoppel, the
essential elements are (1) lack of knowledge and of the means of
knowledge of the truth as the facts in questions; (2) (reliance, in good
faith, upon the conduct or statements of the party to be estopped; (3)
action or inaction based thereon of such character as To change the
position or status of the party claiming the estoppel, to his injury,
detriment or prejudice. 1 1
The first essential element in relation to the party sought to be estopped
does not obtain in the instant case, for, as appears in the Report of the
Commissioner, appellee testified "that when he wrote Exhibit 1 and
prepared Exhibit 1-A, he had not yet consulted the services of his
counsel and it was only upon advice of counsel that the terms of the
contract were interpreted to him resulting in his subsequent letters to
the defendant demanding payments of his fees pursuant to the contract
Exhibit A." 1 2 This finding of the Commissioner was adopted by the
trial court. 1 3 It is established , therefore, that Exhibit 1-A was written
by appellee through ignorance or mistake. Anent this matter, it has
been held that if an act, conduct or misrepresentation of the party
sought to be estopped is due to ignorance founded on innocent mistake,
estoppel will not arise. 1 4 Regarding the essential elements of estoppel
in relation to the party claiming the estoppel, the first element does not
obtain in the instant case, for it cannot be said that appellant did not
know, or at least did not have the means of knowing, the services
rendered to him by appellee and the fees due thereon as provided in
Exhibit A. The second element is also wanting, for, as adverted to,
appellant did not rely on Exhibit 1-A but consistently denied the
accounts stated therein. Neither does the third element obtain, for
appellant did not act on the basis of the representations in Exhibit 1-A,
and there was no change in his position, to his own injury or prejudice.
Appellant, however, insists that if Exhibit 1-A did not put appellee in
estoppel, it at least constituted an admission binding upon the latter. In
this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial
admission. Statements which are not estoppels nor judicial admissions
have no quality of conclusiveness, and an opponent. whose admissions
have been offered against him may offer any evidence which serves as
an explanation for his former assertion of what he now denies as a fact.
This may involve the showing of a mistake. Accordingly, in Oas vs.
Roa, 1 6 it was held that when a party to a suit has made an admission
of any fact pertinent to the issue involved, the admission can be
received against him; but such an admission is not conclusive against
him, and he is entitled to present evidence to overcome the effect of
the admission. Appellee did explain, and the trial court concluded, that
Exhibit 1-A was based on either his ignorance or innocent mistake and
he, therefore, is not bound by it.
Appellant further contends that Exhibit 1-A being a statement of
account, establishes prima facie the accuracy and correctness of the
items stated therein. If prima facie, as contended by appellant, then it
is not absolutely conclusive upon the parties. An account stated may
be impeached for fraud, mistake or error. In American Decisions, Vol.
62, p. 95, cited as authority by appellant himself. we read thus:
An account stated or settled is a mere admission
that the account is correct. It is not an estoppel.
The account is still open to impeachment for
mistakes or errors. Its effect is to establish, prima
facie, the accuracy of the items without other
proof; and the party seeking to impeach it is bound
to show affirmatively the mistake or error alleged.
The force of the admission and the strength of the
evidence necessary to overcome it will depend
upon the circumstances of the case.
In the instant case, it is Our view that the ignorance mistake that
attended the writing of Exhibit 1-A by appellee was sufficient to
overcome the prima facie evidence of correctness and accuracy of said
Exhibit 1-A.
Appellant also urges that Exhibit 1-A constitutes appellee's own
interpretation of the contract, and is, therefore, conclusive against him.
Although the practical construction of the contract by one party,
evidenced by his words or acts, can be used against him in behalf of
the other party, 1 7 yet, if one of the parties carelessly makes a wrong
interpretation of the words of his contract, or performs more than the
contract requires (as reasonably interpreted independently of his
performance), as happened in the instant case, he should be entitled to
a restitutionary remedy, instead of being bound to continue to his
erroneous interpretation or his erroneous performance and "the other
party should not be permitted to profit by such mistake unless he can
establish an estoppel by proving a material change of position made in
good faith. The rule as to practical construction does not nullify the
equitable rules with respect to performance by mistake." 1 8 In the
instant case, it has been shown that Exhibit 1-A was written through
mistake by appellee and that the latter is not estopped by it. Hence,
even if said Exhibit 1-A be considered as practical construction of the
contract by appellee, he cannot be bound by such erroneous
interpretation. It has been held that if by mistake the parties followed
a practice in violation of the terms of the agreement, the court should
not perpetuate the error. 1 9
2. In support of the second assignment of error, that the lower court
erred in holding that the balance from appellant on the IRRI project
should be paid on the basis of the rate of exchange of the U.S. dollar
to the Philippine peso at the time of payment of the judgment, appellant
contends: first, that the official rate at the time appellant received his
architect's fees for the IRRI project, and correspondingly his obligation
to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in
support thereof Section 1612 of the Revised Administrative Code,
Section 48 of Republic Act 265 and Section 6 of Commonwealth Act
No. 699; second, that the lower court's conclusion that the rate of
exchange to be applied in the conversion of the $28,000.00 is the
current rate of exchange at the time the judgment shall be satisfied was
based solely on a mere presumption of the trial court that the defendant
did not convert, there being no showing to that effect, the dollars into
Philippine currency at the official rate, when the legal presumption
should be that the dollars were converted at the official rate of $1.00 to
P2.00 because on August 25, 1961, when the IRRI project became due
and payable, foreign exchange controls were in full force and effect,
and partial decontrol was effected only afterwards, during the
Macapagal administration; third, that the other ground advanced by the
lower court for its ruling, to wit, that appellant committed a breach of
his obligation to turn over to the appellee the engineering fees received
in U.S. dollars for the IRRI project, cannot be upheld, because there
was no such breach, as proven by the fact that appellee never claimed
in Exhibit 1-A that he should be paid in dollars; and there was no
provision in the basic contract (Exh. "A") that he should be paid in
dollars; and, finally, even if there were such provision, it would have
no binding effect under the provision of Republic Act 529; that,
moreover, it cannot really be said that no payment was made on that
account for appellant had already paid P57,000.00 to appellee, and
under Article 125 of the Civil Code, said payment could be said to have
been applied to the fees due from the IRRI project, this project being
the biggest and this debt being the most onerous.
In refutation of appellant's argument in support of the second
assignment of error, appellee argues that notwithstanding Republic Act
529, appellant can be compelled to pay the appellee in dollars in view
of the fact that appellant received his fees in dollars, and appellee's fee
is 20% of appellant's fees; and that if said amount is be converted into
Philippine Currency, the rate of exchange should be that at the time of
the execution of the judgment. 2 0
We have taken note of the fact that on August 25, 1961, the date when
appellant said his obligation to pay appellee's fees became due, there
was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00,
and the free market rate. It was so provided in Circular No. 121 of the
Central Bank of the Philippines, dated March 2, 1961. amending an
earlier Circular No. 117, and in force until January 21, 1962 when it
was amended by Circular No. 133, thus:
1. All foreign exchange receipts shall be
surrendered to the Central Bank of those
authorized to deal in foreign exchange as follows:
Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:
(a) Export Proceeds, U.S. Government
Expenditures invisibles other than those
specifically mentioned below.
................................................ 25 75
(b) Foreign Investments, Gold Proceeds, Tourists
and Inward Remittances of Veterans and Filipino
Citizens; and Personal Expenses of Diplomatic Per
personnel ................................. 100"2 1
The amount of $140,000.00 received by appellant foil the International
Rice Research Institute project is not within the scope of sub-paragraph
(a) of paragraph No. 1 of Circular No. 121. Appellant has not shown
that 25% of said amount had to be surrendered to the Central Bank at
the preferred rate because it was either export proceeds, or U.S.
Government expenditures, or invisibles not included in sub-paragraph
(b). Hence, it cannot be said that the trial court erred in presuming that
appellant converted said amount at the free market rate. It is hard to
believe that a person possessing dollars would exchange his dollars at
the preferred rate of P2.00 to $1.00, when he is not obligated to do so,
rather than at the free market rate which is much higher. A person is
presumed to take ordinary care of his concerns, and that the ordinary
course of business has been
followed. 2 2
Under the agreement, Exhibit A, appellee was entitled to 20% of
$140,000.00, or the amount of $28,000.00. Appellee, however, cannot
oblige the appellant to pay him in dollars, even if appellant himself had
received his fee for the IRRI project in dollars. This payment in dollars
is prohibited by Republic Act 529 which was enacted on June 16, 1950.
Said act provides as follows:
SECTION 1. Every provision contained in, or
made with respect to, any obligation which
provision purports to give the obligee the right to
require payment in gold or in a particular kind of
coin or currency other than Philippine currency or
in an amount of money of the Philippines
measured thereby, be as it is hereby declared
against public policy, and null, void and of no
effect, and no such provision shall be contained in,
or made with respect to, any obligation hereafter
incurred. Every obligation heretofore or here after
incurred, whether or not any such provision as to
payment is contained therein or made with respect
thereto, shall be discharged upon payment in any
coin or currency which at the time of payment is
legal tender for public and private debts: Provided,
That, ( a) if the obligation was incurred prior to the
enactment of this Act and required payment in a
particular kind of coin or currency other than
Philippine currency, it shall be discharged in
Philippine currency measured at the prevailing
rate of exchange at the time the obligation was
incurred, (b) except in case of a loan made in a
foreign currency stipulated to be payable in the
same currency in which case the rate of exchange
prevailing at the time of the stipulated date of
payment shall prevail. All coin and currency,
including Central Bank notes, heretofore or
hereafter issued and declared by the Government
of the Philippines shall be legal tender for all
debts, public and private.
Under the above-quoted provision of Republic Act 529, if the
obligation was incurred prior to the enactment of the Act and require
payment in a particular kind of coin or currency other than the
Philippine currency the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time the
obligation was incurred. As We have adverted to, Republic Act 529
was enacted on June 16, 1950. In the case now before Us the obligation
of appellant to pay appellee the 20% of $140,000.00, or the sum of
$28,000.00, accrued on August 25, 1961, or after the enactment of
Republic Act 529. It follows that the provision of Republic Act 529
which requires payment at the prevailing rate of exchange when the
obligation was incurred cannot be applied. Republic Act 529 does not
provide for the rate of exchange for the payment of obligation incurred
after the enactment of said Act. The logical Conclusion, therefore, is
that the rate of exchange should be that prevailing at the time of
payment. This view finds support in the ruling of this Court in the case
of Engel vs. Velasco & Co. 2 3 where this Court held that even if the
obligation assumed by the defendant was to pay the plaintiff a sum of
money expressed in American currency, the indemnity to be allowed
should be expressed in Philippine currency at the rate of exchange at
the time of judgment rather than at the rate of exchange prevailing on
the date of defendant's breach. This is also the ruling of American court
as follows:
The value in domestic money of a payment made
in foreign money is fixed with respect to the rate
of exchange at the time of payment. (70 CJS p.
228)
According to the weight of authority the amount
of recovery depends upon the current rate of
exchange, and not the par value of the particular
money involved. (48 C.J. 605-606)
The value in domestic money of a payment made
in foreign money is fixed in reference to the rate
of exchange at the time of such payment. (48 C.J.
605)
It is Our considered view, therefore, that appellant should pay the
appellee the equivalent in pesos of the $28,000.00 at the free market
rate of exchange at the time of payment. And so the trial court did not
err when it held that herein appellant should pay appellee $28,000.00
"to be converted into the Philippine currency on the basis of the current
rate of exchange at the time of payment of this judgment, as certified
to by the Central Bank of the Philippines, ...." 24
Appellant also contends that the P57,000.00 that he had paid to
appellee should have been applied to the due to the latter on the IRRI
project because such debt was the most onerous to appellant. This
contention is untenable. The Commissioner who was authorized by the
trial court to receive evidence in this case, however, reports that the
appellee had not been paid for the account of the $28,000.00 which
represents the fees of appellee equivalent to 20% of the $140,000.00
that the appellant received as fee for the IRRI project. This is a finding
of fact by the Commissioner which was adopted by the trial court. The
parties in this case have agreed that they do not question the finding of
fact of the Commissioner. Thus, in the decision appealed from the
lower court says:
At the hearing on the Report of the Commissioner
on February 15, 1966, the counsels for both parties
manifested to the court that they have no objection
to the findings of facts of the Commissioner in his
report; and agreed that the said report only poses
two (2)legal issues, namely: (1) whether under the
facts stated in the Report, the doctrine of estoppel
will apply; and (2) whether the recommendation in
the Report that the payment of amount due to the
plaintiff in dollars is permissible under the law,
and, if not, at what rate of exchange should it be
paid in pesos (Philippine currency) .... 2 5
In the Commissioner's report, it is spetifically recommended that the
appellant be ordered to pay the plaintiff the sum of "$28,000. 00 or its
equivalent as the fee of the plaintiff under Exhibit A on the IRRI
project." It is clear from this report of the Commissioner that no
payment for the account of this $28,000.00 had been made. Indeed, it
is not shown in the record that the peso equivalent of the $28,000.00
had been fixed or agreed upon by the parties at the different times when
the appellant had made partial payments to the appellee.
3. In his third assignment of error, appellant contends that the lower
court erred in not declaring that the aggregate amount due from him to
appellee is only P15,792.05. Appellant questions the propriety or
correctness of most of the items of fees that were found by the
Commissioner to be due to appellee for services rendered. We believe
that it is too late for the appellant to question the propriety or
correctness of those items in the present appeal. The record shows that
after the Commissioner had submitted his report the lower court, on
February 15, 1966, issued the following order:
When this case was called for hearing today on the
report of the Commissioner, the counsels of the
parties manifested that they have no objection to
the findings of facts in the report. However, the
report poses only legal issues, namely: (1) whether
under the facts stated in the report, the doctrine of
estoppel will apply; and (2) whether the
recommendation in the report that the alleged
payment of the defendant be made in dollars is
permissible by law and, if not, in what rate it
should be paid in pesos (Philippine Currency). For
the purpose of resolving these issues the parties
prayed that they be allowed to file their respective
memoranda which will aid the court in the
determination of said issues. 2 6
In consonance with the afore-quoted order of the trial court, the
appellant submitted his memorandum which opens with the following
statements:
As previously manifested, this Memorandum shall
be confined to:
(a) the finding in the Commissioner's Report that
defendant's defense of estoppel will not lie (pp. 17-
18, Report); and
(b) the recommendation in the Commissioner's
Report that defendant be ordered to pay plaintiff
the sum of '$28,000.00 (U.S.) or its equivalent as
the fee of the plaintiff under Exhibit 'A' in the IRRI
project.'
More specifically this Memorandum proposes to
demonstrate the affirmative of three legal
issues posed, namely:
First: Whether or not plaintiff's letter dated
December 11, 1961 (Exhibit 'I') and/or Statement
of Account (Exhibit '1-A') therein enclosed has the
effect of placing plaintiff in estoppel from
 thereafter modifying the representations made in
said letter and Statement of Account or of making
plaintiff otherwise bound thereby; or of being
decisive or great weight in determining the true
intent of the parties as to the amount of the
engineering fees owing from defendant to
plaintiff;
Second: Whether or not defendant can be
compelled to pay whatever balance is owing to
plaintiff on the IRRI (International Rice and
Research Institute) project in United States
dollars; and
Third: Whether or not in case the ruling of this
Honorable Court be that defendant cannot be
compelled to pay plaintiff in United States dollars,
the dollar-to-peso convertion rate for determining
the peso equivalent of whatever balance is owing
to plaintiff in connection with the IRRI project
should be the 2 to 1 official rate and not any other
rate. 2 7
It is clear, therefore, that what was submitted by appellant to the lower
court for resolution did not include the question of correctness or
propriety of the amounts due to appellee in connection with the
different projects for which the appellee had rendered engineering
services. Only legal questions, as above enumerated, were submitted
to the trial court for resolution. So much so, that the lower court in
another portion of its decision said, as follows:
The objections to the Commissioner's Report
embodied in defendant's memorandum of
objections, dated March 18, 1966, cannot likewise
be entertained by the Court because at the hearing
of the Commissioner's Report the parties had
expressly manifested that they had no objection to
the findings of facts embodied therein.
We, therefore hold that the third assignment of error of the appellant
has no merit.
4. In his fourth assignment of error, appellant questions the award by
the lower court of P8,000.00 for attorney's fees. Appellant argues that
the Commissioner, in his report, fixed the sum of P5,000.00 as "just
and reasonable" attorney's fees, to which amount appellee did not
interpose any objection, and by not so objecting he is bound by said
finding; and that, moreover, the lower court gave no reason in its
decision for increasing the amount to P8,000.00.
Appellee contends that while the parties had not objected to the
findings of the Commissioner, the assessment of attorney's fees is
always subject to the court's appraisal, and in increasing the
recommended fees from P5,000.00 to P8,000.00 the trial court must
have taken into consideration certain circumstances which warrant the
award of P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection.
Section 12 of Rule 33 of the Rules of Court, on which the fourth
assignment of error is presumably based, provides that when the parties
stipulate that a commissioner's findings of fact shall be final, only
questions of law arising from the facts mentioned in the report shall
thereafter be considered. Consequently, an agreement by the parties to
abide by the findings of fact of the commissioner is equivalent to an
agreement of facts binding upon them which the court cannot
disregard. The question, therefore, is whether or not the estimate of the
reasonable fees stated in the report of the Commissioner is a finding of
fact.
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11),
the same may be awarded, and considering the number of hearings held
in this case, the nature of the case (taking into account the technical
nature of the case and the voluminous exhibits offered in evidence), as
well as the way the case was handled by counsel, it is believed, subject
to the Court's appraisal of the matter, that the sum of P5,000.00 is just
and reasonable as attorney's fees." 28
It is thus seen that the estimate made by the Commissioner was an
expression of belief, or an opinion. An opinion is different from a fact.
The generally recognized distinction between a statement of "fact" and
an expression of "opinion" is that whatever is susceptible of exact
knowledge is a matter of fact, while that not susceptible of exact
knowledge is generally regarded as an expression of opinion. 2 9 It has
also been said that the word "fact," as employed in the legal sense
includes "those conclusions reached by the trior from shifting
testimony, weighing evidence, and passing on the credit of the
witnesses, and it does not denote those inferences drawn by the trial
court from the facts ascertained and settled by it. 3 0 In the case at bar,
the estimate made by the Commissioner of the attorney's fees was an
inference from the facts ascertained by him, and is, therefore, not a
finding of facts. The trial court was, consequently, not bound by that
estimate, in spite of the manifestation of the parties that they had no
objection to the findings of facts of the Commissioner in his report.
Moreover, under Section 11 of Rule 33 of the Rules of Court, the court
may adopt, modify, or reject the report of the commissioner, in whole
or in part, and hence, it was within the trial court's authority to increase
the recommended attorney's fees of P5,000.00 to P8,000.00. It is a
settled rule that the amount of attorney's fees is addressed to the sound
discretion of the court. 3 1
It is true, as appellant contends, that the trial court did not state in the
decision the reasons for increasing the attorney's fees. The trial court,
however, had adopted the report of the Commissioner, and in adopting
the report the trial court is deemed to have adopted the reasons given
by the Commissioner in awarding attorney's fees, as stated in the
above-quoted portion of the report. Based on the reasons stated in the
report, the trial court must have considered that the reasonable
attorney's fees should be P8,000.00. Considering that the judgment
against the appellant would amount to more than P100,000.00, We
believe that the award of P8,000.00 for attorney's fees is reasonable.
5. In his fifth assignment of error appellant urges that he is entitled to
relief on his counterclaim. In view of what We have stated in
connection with the preceding four assignments of error, We do not
consider it necessary to dwell any further on this assignment of error.
WHEREFORE, the decision appealed from is affirmed, with costs
against the defendant-appellant. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando,
Teehankee, Barredo and Villamor, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA
RODRIGUEZ, Respondents.
DECISION
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true recipient
of its proceeds, is it payable to order or bearer? What is the fictitious-
payee rule and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari
of the Amended Decision1 of the Court of Appeals (CA) which
affirmed with modification that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch,
Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or Norma Rodriguez),
and PNBig Demand Deposit (Checking/Current Account No. 810480-
4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line
with their business, they had a discounting3 arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a
client of PNB Amelia Avenue Branch. The association maintained
current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members whenever
the association was short of funds. As was customary, the spouses
would replace the postdated checks with their own checks issued in the
name of the members.
It was PEMSLA’s policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some
PEMSLA officers devised a scheme to obtain additional loans despite
their outstanding loan accounts. They took out loans in the names of
unknowing members, without the knowledge or consent of the latter.
The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the
indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks)
in the name of the members and delivered the checks to an officer of
PEMSLA. The PEMSLA checks, on the other hand, were deposited by
the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by
PEMSLA to its savings account without any indorsement from the
named payees. This was an irregular procedure made possible through
the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and
bank teller in the PNB Branch. It appears that this became the usual
practice for the parties.
For the period November 1998 to February 1999, the spouses issued
sixty nine (69) checks, in the total amount of P2,345,804.00. These
were payable to forty seven (47) individual payees who were all
members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To
put a stop to this scheme, PNB closed the current account of PEMSLA.
As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." The
corresponding Rodriguez checks, however, were deposited as usual to
the PEMSLA savings account. The amounts were duly debited from
the Rodriguez account. Thus, because the PEMSLA checks given as
payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez
filed a civil complaint for damages against PEMSLA, the Multi-
Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.
They sought to recover the value of their checks that were deposited to
the PEMSLA savings account amounting to P2,345,804.00. The
spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of
action. PNB argued that the claim for damages should come from the
payees of the checks, and not from spouses Rodriguez. Since there was
no demand from the said payees, the obligation should be considered
as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to
dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid
to the PEMSLA account without any indorsement from the payees.
The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks.
Consequently, the payees were considered as "fictitious payees" as
defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks
were negotiable by mere delivery. PNB’s Answer included its cross-
claim against its co-defendants PEMSLA and the MCP, praying that
in the event that judgment is rendered against the bank, the cross-
defendants should be ordered to reimburse PNB the amount it shall
pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value
of the checks. All counterclaims and cross-claims were dismissed. The
dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total
amount of P2,345,804.00 or reinstate or restore the amount
of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando T.
Rodriguez, and the amount of P1,570,467.00 in the PNBig
Demand Deposit, Checking/Current Account No. 810624-6
of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal
rate of interest thereon to be computed from the filing of this
complaint until fully paid;
 2. The defendant PNB is hereby ordered to pay the plaintiffs
the following reasonable amount of damages suffered by
them taking into consideration the standing of the plaintiffs
being sugarcane planters, realtors, residential subdivision
owners, and other businesses:
(a) Consequential damages, unearned income in
the amount of P4,000,000.00, as a result of their
having incurred great dificulty (sic) especially in
the residential subdivision business, which was
not pushed through and the contractor even
threatened to file a case against the plaintiffs;
(b) Moral damages in the amount
of P1,000,000.00;
(c) Exemplary damages in the amount
of P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00
considering that this case does not involve very
complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal
ground that the disputed checks should be considered as payable to
bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the
RTC disposition. The CA concluded that the checks were obviously
meant by the spouses to be really paid to PEMSLA. The court a quo
declared:
We are not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from the alleged
breach of contract by the defendant-appellant (PNB) when it paid the
value of the checks to PEMSLA despite the checks being payable to
order. Rather, we are more convinced by the strong and credible
evidence for the defendant-appellant with regard to the plaintiffs-
appellees’ and PEMSLA’s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be deposited in
PEMSLA’s account for payment of the loans it has approved in
exchange for PEMSLA’s checks with the full value of the said loans.
This is the only obvious explanation as to why all the disputed sixty-
nine (69) checks were in the possession of PEMSLA’s errand boy for
presentment to the defendant-appellant that led to this present
controversy. It also appears that the teller who accepted the said checks
was PEMSLA’s officer, and that such was a regular practice by the
parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to
order, but instead, to PEMSLA. We thus find no breach of contract on
the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony,
PEMSLA allegedly issued post-dated checks to its qualified members
who had applied for loans. However, because of PEMSLA’s
insufficiency of funds, PEMSLA approached the plaintiffs-appellees
for the latter to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-appellant,
meanwhile, this arrangement allowed the plaintiffs-appellees to make
a profit by issuing rediscounted checks, while the officers of PEMSLA
and other members would be able to claim their loans, despite the fact
that they were disqualified for one reason or another. They were able
to achieve this conspiracy by using other members who had loaned
lesser amounts of money or had not applied at all. x x x.8 (Emphasis
added)
The CA found that the checks were bearer instruments, thus they do
not require indorsement for negotiation; and that spouses Rodriguez
and PEMSLA conspired with each other to accomplish this money-
making scheme. The payees in the checks were "fictitious payees"
because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter
alia, that the checks on their faces were unquestionably payable to
order; and that PNB committed a breach of contract when it paid the
value of the checks to PEMSLA without indorsement from the payees.
They also argued that their cause of action is not only against PEMSLA
but also against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision,
the last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest
at 6% per annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed
decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE
Our original decision promulgated in this case on 22 July 2004.
SO ORDERED.9
The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the
claim of the spouses Rodriguez that they really intended the checks to
be received by the specified payees. Thus, PNB is liable for the value
of the checks which it paid to PEMSLA without indorsements from the
named payees. The award for damages was deemed appropriate in
view of the failure of PNB to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their
relationship, which constrained respondents to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed
checks, they did not intend for the named payees to receive the
proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary
evidence presented during trial amply proved that spouses Rodriguez
and the officers of PEMSLA conspired with each other to defraud the
bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent
parties. A court discovering an erroneous judgment before it becomes
final may, motu proprio or upon motion of the parties, correct its
judgment with the singular objective of achieving justice for the
litigants.10
However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless
disposition of cases by courts of justice. The highest degree of
diligence must go into the study of every controversy submitted for
decision by litigants. Every issue and factual detail must be closely
scrutinized and analyzed, and all the applicable laws judiciously
studied, before the promulgation of every judgment by the court. Only
in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer
instrument. A check is "a bill of exchange drawn on a bank payable on
demand."11 It is either an order or a bearer instrument. Sections 8 and
9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order
where it is drawn payable to the order of a specified person or to him
or his order. It may be drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to bearer
– that the payee should receive the proceeds of the check.15
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer;
or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact is known to the person making
it so payable; or
(d) When the name of the payee does not purport to be the
name of any person; or
(e) Where the only or last indorsement is an indorsement in
blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order
instrument requires an indorsement from the payee or holder before it
may be validly negotiated. A bearer instrument, on the other hand, does
not require an indorsement to be validly negotiated. It is negotiable by
mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated
when it is transferred from one person to another in such manner as to
constitute the transferee the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument.
However, under Section 9(c) of the NIL, a check payable to a specified
payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact
is known to the person making it so payable. Thus, checks issued to
"Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known
characters in Philippine mythology, are bearer instruments because the
named payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as
used in the NIL. It is for this reason that We look elsewhere for
guidance. Court rulings in the United States are a logical starting point
since our law on negotiable instruments was directly lifted from the
Uniform Negotiable Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living
payee may also be "fictitious" if the maker of the check did not intend
for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check
for convenience or to cover up an illegal activity.14 Thus, a check made
expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a
"fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from
liability and the drawer bears the loss. When faced with a check
payable to a fictitious payee, it is treated as a bearer instrument that can
be negotiated by delivery. The underlying theory is that one cannot
expect a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will
bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the check
to always deny the validity of the indorsement. This despite the fact
that the fictitious payee was purposely named without any intention
The fictitious-payee rule is best illustrated in Mueller & Martin v.
Liberty Insurance Bank.16 In the said case, the corporation Mueller &
Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings
Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not
have signing authority. At the back of the checks, Martin placed the
rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the corporation filed
an action against the bank to recover the amount of the checks, the
claim was denied.
The US Supreme Court held in Mueller that when the person making
the check so payable did not intend for the specified payee to have any
part in the transactions, the payee is considered as a fictitious payee.
The check is then considered as a bearer instrument to be validly
negotiated by mere delivery. Thus, the US Supreme Court held that
Liberty Insurance Bank, as drawee, was authorized to make payment
to the bearer of the check, regardless of whether prior indorsements
were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule. The
rule protects the depositary bank and assigns the loss to the drawer of
the check who was in a better position to prevent the loss in the first
place. Due care is not even required from the drawee or depositary
bank in accepting and paying the checks. The effect is that a showing
of negligence on the part of the depositary bank will not defeat the
protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-
payee rule. A showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will work
to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme. Said the US
Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent
banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is a
"commercial bad faith" exception to UCC 3-405, applicable when the
transferee "acts dishonestly – where it has actual knowledge of facts
and circumstances that amount to bad faith, thus itself becoming a
participant in a fraudulent scheme. x x x Such a test finds support in
the text of the Code, which omits a standard of care requirement from
UCC 3-405 but imposes on all parties an obligation to act with
"honesty in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to
specified payees. It is unrefuted that the 69 checks were payable to
specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA
that had a rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing
persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be part of
the transaction involving the checks. At most, the bank’s thesis shows
that the payees did not have knowledge of the existence of the checks.
This lack of knowledge on the part of the payees, however, was not
tantamount to a lack of intention on the part of respondents-spouses
that the payees would not receive the checks’ proceeds. Considering
that respondents-spouses were transacting with PEMSLA and not the
individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would
be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present
sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks’ proceeds.
The bank failed to satisfy a requisite condition of a fictitious-payee
situation – that the maker of the check intended for the payee to have
no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its
broader sense, the fictitious-payee rule does not apply. Thus, the
checks are to be deemed payable to order. Consequently, the drawee
bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the
fact that its teller or tellers accepted the 69 checks for deposit to the
PEMSLA account even without any indorsement from the named
payees. It bears stressing that order instruments can only be negotiated
with a valid indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly
negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for the
people to have full trust and confidence in their banks.22 For this
reason, banks are minded to treat their customer’s accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly
in accordance with the drawer’s instructions, i.e., to the named payee
in the check. It should charge to the drawer’s accounts only the
payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for the
amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors. The
checks were drawn against respondents-spouses’ accounts. PNB, as
the drawee bank, had the responsibility to ascertain the regularity of
the indorsements, and the genuineness of the signatures on the checks
before accepting them for deposit. Lastly, PNB was obligated to pay
the checks in strict accordance with the instructions of the drawers.
Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The
facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses.
Instead, it paid the values of the checks not to the named payees or
their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined
to be extra vigilant in the management and supervision of their
employees. In Bank of the Philippine Islands v. Court of
Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the
very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater
than those of ordinary clerks and employees. For obvious reasons, the
banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account.
Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27
PNB’s argument that there is no loss to compensate since no demand
for payment has been made by the payees must also fail. Damage was
caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason "Account Closed." These
PEMSLA checks were the corresponding payments to the Rodriguez
checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts
they had advanced.
A bank that has been remiss in its duty must suffer the consequences
of its negligence. Being issued to named payees, PNB was duty-bound
by law and by banking rules and procedure to require that the checks
be properly indorsed before accepting them for deposit and payment.
In fine, PNB should be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-
claim against its co-defendants PEMSLA and MPC. The records are
bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules
expressly provide that failure to file an answer is a ground for a
declaration that defendant is in default.28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no
basis. Thus, this judgment shall be without prejudice to whatever
action the bank might take against its co-defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction
not of its own volition but due to the actions of some of its employees.
Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the
award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with
the MODIFICATION that the award for moral damages is reduced
to P50,000.00, and that this is without prejudice to whatever civil,
criminal, or administrative action PNB might take against PEMSLA,
MPC, and the employees involved.
SO ORDERED.
Commonwealth
v.
Globe Indemnity Company
helpCheck If This Is Still Good Law
Supreme Court of PennsylvaniaJun 26, 1936Full title
323 Pa. 261 (Pa. 1936)Copy Citation
Argued April 29, 1936.
OPINION BY MR. JUSTICE LINN, June 26, 1936:
The Commonwealth maintained a checking account with Diamond
National Bank of Pittsburgh, hereafter called the bank. The bank gave
its bond to the Commonwealth conditioned to disburse the deposit on
its order. The Commonwealth also took the bond of the Globe
Indemnity Company, hereafter called the surety, conditioned for the
performance by the bank of its contract. This bond contained a warrant
to confess judgment. Alleging breach of the bank's contract, the
Commonwealth entered judgment against the surety and assessed
damages in a sum of $28,141.83. The surety petitioned for a rule to
show cause why the judgment should not be opened to allow the surety
to defend. The rule was granted; the Commonwealth answered; a
stipulation of facts was filed by both parties and the court discharged
the rule. Subsequently the case was opened to permit the parties to take
depositions and for oral argument. Depositions were taken and on the
record so amended the learned court below again discharged the rule.
This appeal followed.
Controlling facts may be stated briefly. Statutes provide for the
condemnation and slaughter of tubercular cattle and the payment of
compensation for cattle so taken. The department administering the
subject prepares papers covering each claim or case; these papers result
in action by the auditor general and the state treasurer pursuant to
which the treasurer issues the Commonwealth's check to pay the owner
of the cattle. A clerk named Thomas, employed in the department
charged with assembling these records, fabricated papers showing
amounts payable to various persons as owners of cattle when in fact no
claims had been presented or liability accrued. He placed these false
papers with valid records that were moving from the department of
origin to the fiscal officers charged with duty of drawing checks in
payment of lawful claims. This was done in such way that, without
discovery of the fraud by the auditor general or the state treasurer,
checks were drawn as in the case of valid claims, the alleged claimant
in each case being named as payee of the check. In the course of
business these checks were sent by mail addressed to the payees at the
post-office addresses stated in the papers. After the checks had been
mailed, Thomas and a confederate went to the post offices to which
this mail had been sent, and, presumably, by representing themselves
to be the addressees, obtained the checks. By various methods, not now
important, they either negotiated them through a third person, or
cashed them at banks other than the drawee bank, or had them collected
by other banks, first endorsing the name of the payee. This continued
for some time without discovery, according to this record, apparently
from January 9, 1928, to and including August 20, 1929. On November
6, 1929, the fraud was discovered. The Commonwealth then, in the
words of the agreement of facts, "took steps to gather together all of
the checks involved herein, a considerable task involving handling
thousands upon thousands of checks and securing only those checks
which are the subject of this transaction." On November 23d and again
on November 27, 1929, all the checks then found to have forged
endorsements were presented to the bank with a request that the
Commonwealth's account be credited in the sum of those checks
theretofore charged against the account. The request was refused.
Act of June 1, 1915, P. L. 667, 3 PS section 393.
Section 9 (3) of the Negotiable Instruments Law of 1901, P. L. 194,
196, 56 PS section 14, provides, "The instrument is payable to bearer:
. . . 3. When it is payable to the order of a fictitious or nonexisting
person, and such fact was known to the person making it so payable. .
. ." The payees were fictitious or nonexistent persons but that fact was
not known to the Commonwealth's fiscal officers who drew the checks.
Within the terms of the statute a name is fictitious when it is feigned
or pretended, and a nonexistent person is one who does not exist in the
sense that he was not intended to be the payee by the drawer.
See Snyder v. Corn Exchange Nat. Bank, 221 Pa. 599, 606 et seq., 70
A. 876. In drawing the check to the order of the payee the
Commonwealth was not intending that an imaginary person or a
nonexistent person should as the payee take the check. The checks
were therefore not payable to bearer.
Section 23, 56 PS section 28, provides: "When a signature is forged or
made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority." The alleged
endorsement of the payee's name was a forgery: Com. v. Bachop, 2 Pa.
Super. 294; Com. v. Smith, 6 S. R. 568; the drawer had not intended
that Thomas should endorse the payee's name. Being a forgery, section
23 declares that "it is wholly inoperative" and confers "no right to
retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto" unless the drawer is
estopped. Is the Commonwealth "precluded from setting up the
forgery"?
The first proposition presented in appellant's brief is: "The checks
when put in circulation by the Commonwealth were not susceptible of
a genuine endorsement." The record shows conclusively that that
proposition is sound and, as the Commonwealth did not intend to
make the checks payable to any identified person regardless of name,
or to a fictitious or nonexistent person, appellant's proposition would
seem to end its case.
If the checks were not susceptible of endorsement and the bank
nevertheless made payment, it could not debit the drawer's account,
and, having violated its contract by doing so, the surety became liable.
It also follows that if the checks were not susceptible of endorsement,
drawing and mailing them to the addressees, as stated above, could not
be the proximate cause of the payment made by the bank. The drawer
could not have anticipated that, after they were drawn and mailed,
Thomas and his confederate would by misrepresentation get them from
the mails and that the bank would honor them. The most ordinary
precautions usually expected to be taken by a banker (see United
Security Life, etc., Co. v. Central Nat. Bank, 185 Pa. 586, 40 A. 97, and
particularly the report of the master, Richard C. Dale, at page 591 et
seq.) asked to cash or credit the checks would, if taken, have at once
disclosed that the holder had no title. It is immaterial that the fraud was
initiated by an employee of the Commonwealth: United Security Life,
etc., Co. v. Central Nat. Bank, supra; Nat. Union Fire Ins. Co. v.
Mellon Nat. Bank, 276 Pa. 212, 222, 119 A. 910; Shipman v. Bank, 126
N.Y. 318, 27 N.E. 371. It is also immaterial that before the discovery
of the fraud, the Commonwealth knew that its account had been
debited by the bank from time to time with the amount of these checks.
The bank must know the drawer's signature, but, generally, it takes the
risk of the payee's endorsement; with that the drawer has nothing to do
unless he makes some representation with regard to it and none was
made here. The drawer, assuming the burden of proof of such facts,
may show mistake or fraud in the debits to his account made by the
bank. In this case the facts are clear.
It is also said that the Commonwealth was negligent in giving notice.
As to forged endorsements the rule is that notice must be given
promptly. That of course varies with the circumstances. Here the fact
stipulated is that "thousands upon thousands of checks" had to be
examined to select those involved; it required, as to one batch, 17 days,
and as to another, 21 days. In the circumstances that was prompt notice.
See McNeely Co. v. Bank of North America, 221 Pa. 588, 70 A.
891; Connors v. Old Forge Discount and Deposit Bank, 245 Pa. 97, 91
A. 210; Lesley v. Ewing, 248 Pa. 135, 93 A. 875.
The facts bring the case so clearly within the portions of the Negotiable
Instruments Act quoted above that reference to decisions seems
unnecessary but in view of the argument of the learned counsel for the
appellant that under Marcus v. People's Nat. Bank, 57 Pa. Super. 345,
and Market St. Title Trust Co. v. Chelten Tr. Co., 296 Pa. 230, 236, 145
A. 848, the Commonwealth is not entitled to recover, a word may be
said about them.
It is impossible to consider the decision in the Marcus case consistent
with the Negotiable Instruments Act. Marcus dealt with Moskovitz,
who represented to him that a client named Kirst owned real estate and
wished to borrow money on it. Marcus agreed to lend. Upon receipt of
a bond and mortgage apparently signed by Kirst, Marcus drew his
check to the order of Kirst and handed it to Moskovitz for delivery to
his client. Kirst was nonexistent. Moskovitz endorsed Kirst's name on
the check and also his own; the bank then paid the check. As soon as
Marcus learned of the fraud, he demanded that his account be corrected
and on the bank's refusal, brought suit. A nonsuit was entered by the
trial court and was affirmed in the Superior Court. It was held that
Marcus could not recover; apparently, as we understand it, that he was
precluded from making the defense of forgery. The court said, "The
whole transaction was between the plaintiff and Moskovitz so far as
the pretended lending of money and the payment by the plaintiff to the
borrowers were concerned. The effect of the drawing of the checks on
the bank was an implied representation by the drawer that the payees
were existing persons and yet there could not be a genuine
endorsement of such papers. It is not reasonable to charge the bank
with the consequences of the payment of a forged endorsement when
the plaintiff put in circulation checks which were not susceptible of a
genuine endorsement." It is to be noted that Marcus did not draw his
check to the order of Moskovitz and did not intend that Moskovitz
should be the payee. He intended that Kirst should be the payee and so
stated on the check. He had been told, falsely, as it turned out, that
Kirst was an existing person who made the mortgage and was entitled
to the money. Marcus therefore did not intend to name, and did not
know that he was naming a fictitious or nonexistent person and
therefore under section 9, subsection 3, the check was not to be
regarded as payable to bearer. The mistake he made was not an act
which precluded him from setting up the forgery. Indeed, if the bank
had kept its contract by proper investigation before payment, Marcus
would have been saved from the consequences of his mistake. That
case must be considered disapproved.
The appellant also relies on Market St. Title Tr. Co. v. Chelten Tr.
Co., 296 Pa. 230,145 A. 848, in which a check was erroneously drawn
by a bank to a named payee when another payee was in fact entitled. It
was a controversy between a bank that drew its own check and a bank
which collected the check and the actual decision does not help the
appellant. The bank drew its check in the course of a real estate
settlement but, instead of making it payable to the person entitled to
the money, by some mistake named another payee and sent the check
by mail to the address of the payee who collected the money. The payee
was neither fictitious nor nonexistent. The drawer's intention, so far as
expressed on the face of the check, and by the fact of mailing it, was
that the payee should receive the proceeds. On this point, also, the
appellant relies on States v. First Nat. Bank of Montrose, 17 Pa. Super.
256, and 203 Pa. 69, 52 A. 13, a transaction arising prior to the passage
of the Negotiable Instruments Act. In that case a draft was drawn to a
person who was dead although the drawer was not aware of it. He
mailed the draft to what he supposed was the address of the payee. It
was received by another person who forged the name of the payee and
collected the draft. Four years after he discovered the fraud the drawer
brought an action against the bank; recovery was denied; the only
ground upon which the decision can be justified is that the drawer sued
too late.
It is also obvious from what has been said that the cases of
impersonation, the so-called "imposter" cases, do not help appellant.
They depend on the drawer's intention, a test applied by the weight of
authority; the drawer is precluded (section 23) by that. If a particular
person is intended and designated as payee, it is immaterial to the
drawer by what name he is called; he may endorse and payment to him
will be good (as was decided in Land Title Tr. Co. v. Northwestern Nat.
Bank, 196 Pa. 230, 46 A. 420) because such payment accords with the
drawer's intention. But if any intention may be attributed to the
Commonwealth in drawing and mailing the checks involved in this
case, it is limited by what was stated on the check and by mailing it;
there was here no additional evidence of intention such as handing the
check to the person intended as, for example, in Land Title Tr.
Co.'scase, which precluded the drawer from asserting that it intended
the payee to be the person who owned the property and not the person
who was present at the settlement, answering to the name of and
claiming to be the owner. Compare Real Estate, etc., Co. v. United
Security Trust Co., 303 Pa. 273, 154 A. 593.
Brannan, Negotiable Instruments Law, 5th edition, page 311.
The judgment is affirmed.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City
and in his personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu
City, and RAUL H. SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr.,
before the Regional Trial Court of Cebu City. After trial judgment was
rendered ordering the defendants to pay P11,000.00 to the plaintiff,
private respondent herein. The decision having become final and
executory, on motion of the latter, the trial court ordered its execution.
This order was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner
Loreto D. de la Victoria as City Fiscal of Mandaue City where
defendant Mabanto, Jr., was then detailed. The notice directed
petitioner not to disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the salary checks or other
checks, monies, or cash due or belonging to Mabanto, Jr., under
penalty of law. 1 On 10 March 1992 private respondent filed a motion
before the trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on
the motion for examination of the garnishees, directed petitioner on 4
November 1992 to submit his report showing the amount of the
garnished salaries of Mabanto, Jr., within fifteen (15) days from
receipt 2 taking into consideration the provisions of Sec. 12, pars. (f)
and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require
petitioner to explain why he should not be cited in contempt of court
for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the
notice of garnishment claiming that he was not in possession of any
money, funds, credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but that said checks
were not yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds which could
not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered
petitioner to immediately comply with its order of 4 November
1992. 3 It opined that the checks of Mabanto, Jr., had already been
released through petitioner by the Department of Justice duly signed
by the officer concerned. Upon service of the writ of garnishment,
petitioner as custodian of the checks was under obligation to hold them
for the judgment creditor. Petitioner became a virtual party to, or a
forced intervenor in, the case and the trial court thereby acquired
jurisdiction to bind him to its orders and processes with a view to the
complete satisfaction of the judgment. Additionally, there was no
sufficient reason for petitioner to hold the checks because they were no
longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable
Instruments Law.
With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the
court by sending a written explanation dated 22 July 1992 requesting
for the lifting of the notice of garnishment on the ground that the notice
should have been sent to the Finance Officer of the Department of
Justice. Petitioner insists that he had no authority to segregate a portion
of the salary of Mabanto, Jr. The explanation however was not
submitted to the trial court for action since the stenographic reporter
failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial
court explained that it was not the duty of the garnishee to inquire or
judge for himself whether the issuance of the order of execution, writ
of execution and notice of garnishment was justified. His only duty
was to turn over the garnished checks to the trial court which issued
the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still
in the hands of the maker or its duly authorized representative is owned
by the payee before physical delivery to the latter: and, (2) whether the
salary check of a government official or employee funded with public
funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned
by Mabanto, Jr., because they were not yet delivered to him, and that
petitioner as garnishee has no legal obligation to hold and deliver them
to the trial court to be applied to Mabanto, Jr.'s judgment debt. The
thesis of petitioner is that the salary checks still formed part of public
funds and therefore beyond the reach of garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching
credits belonging to the judgment debtor owing to him from a stranger
to the litigation. 6 Emphasis is laid on the phrase "belonging to the
judgment debtor" since it is the focal point in resolving the issues
raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is
public funds. He receives his compensation in the form of checks from
the Department of Justice through petitioner as City Fiscal of Mandaue
City and head of office. Under Sec. 16 of the Negotiable Instruments
Law, every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto. As ordinarily understood, delivery means the transfer of
the possession of the instrument by the maker or drawer with intent to
transfer title to the payee and recognize him as the holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them
for the judgment creditor. It recognized the role of petitioner
as custodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: "And where the instrument is no longer
in the possession of a party whose signature appears thereon, a valid
and intentional delivery by him is presumed." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court
for no apparent reason. Proof to the contrary is its own finding that the
checks were in the custody of petitioner. Inasmuch as said checks had
not yet been delivered to Mabanto, Jr., they did not belong to him and
still had the character of public funds. In Tiro v. Hontanosas 8 we ruled
that —
The salary check of a government officer or
employee such as a teacher does not belong to him
before it is physically delivered to him. Until that
time the check belongs to the government.
Accordingly, before there is actual delivery of the
check, the payee has no power over it; he cannot
assign it without the consent of the Government.
As a necessary consequence of being public fund, the checks may not
be garnished to satisfy the judgment. 9 The rationale behind this
doctrine is obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways v. San
Diego 10 that —
The functions and public services rendered by the
State cannot be allowed to be paralyzed or
disrupted by the diversion of public funds from
their legitimate and specific objects, as
appropriated by law.
In denying petitioner's motion for reconsideration, the trial court
expressed the additional ratiocination that it was not the duty of the
garnishee to inquire or judge for himself whether the issuance of the
order of execution, the writ of execution, and the notice of garnishment
was justified, citing our ruling in Philippine Commercial Industrial
Bank v. Court of Appeals. 11 Our precise ruling in that case was that
"[I]t is not incumbent upon the garnishee to inquire or to judge for itself
whether or not the order for the advance execution of a judgment is
valid." But that is invoking only the general rule. We have also
established therein the compelling reasons, as exceptions thereto,
which were not taken into account by the trial court, e.g., a defect on
the face of the writ or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to note that the
ruling referred to the validity of advance execution of judgments, but
a careful scrutiny of that case and similar cases reveals that it was
applicable to a notice of garnishment as well. In the case at bench, it
was incumbent upon petitioner to inquire into the validity of the notice
of garnishment as he had actual knowledge of the non-entitlement of
private respondent to the checks in question. Consequently, we find no
difficulty concluding that the trial court exceeded its jurisdiction in
issuing the notice of garnishment concerning the salary checks of
Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March
1993 and 20 April 1993 of the Regional Trial Court of Cebu City, Br.
17, subject of the petition are SET ASIDE. The notice of garnishment
served on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Ka
THIRD DIVISION
[G. R. No. 126568. April 30, 2003]
QUIRINO GONZALES LOGGING
CONCESSIONAIRE, QUIRINO GONZALES and
EUFEMIA GONZALES, petitioners, vs. THE COURT
OF APPEALS (CA) and REPUBLIC PLANTERS
BANK, respondents.
DECISION
CARPIO-MORALES, J.:
In the expansion of its logging business, petitioner Quirino
Gonzales Logging Concessionaire (QGLC), through its proprietor,
general manager - co-petitioner Quirino Gonzales, applied on October
15, 1962 for credit accommodations[1] with respondent Republic Bank
(the Bank), later known as Republic Planters Bank.
The Bank approved QGLCs application on December 21, 1962,
granting it a credit line of P900,000.00[2] broken into an overdraft line
of P500,000.00 which was later reduced to P450,000.00 and a Letter
of Credit (LC) line of P400,000.00.[3]
Pursuant to the grant, the Bank and petitioners QGLC and the
spouses Quirino and Eufemia Gonzales executed ten documents: two
denominated Agreement for Credit in Current Account,[4] four
denominated Application and Agreement for Commercial Letter of
Credit,[5] and four denominated Trust Receipt.[6]
Petitioners obligations under the credit line were secured by a
real estate mortgage on four parcels of land: two in Pandacan, Manila,
one in Makati (then part of Rizal), and another in Diliman, Quezon
City.[7]
In separate transactions, petitioners, to secure certain advances
from the Bank in connection with QGLCs exportation of logs,
executed a promissory note in 1964 in favor of the Bank.They were to
execute three more promissory notes in 1967.
In 1965, petitioners having long defaulted in the payment of their
obligations under the credit line, the Bank foreclosed the mortgage and
bought the properties covered thereby, it being the highest bidder in
the auction sale held in the same year. Ownership over the properties
was later consolidated in the Bank on account of which new titles
thereto were issued to it.[8]
On January 27, 1977, alleging non-payment of the balance of
QGLCs obligation after the proceeds of the foreclosure sale were
applied thereto, and non-payment of the promissory notes despite
repeated demands, the Bank filed a complaint for sum of money (Civil
Case No. 106635) against petitioners before the Regional Trial Court
(RTC) of Manila.
 The complaint listed ten causes of action. The first concerns the
overdraft line under which the Bank claimed that petitioners withdrew
amounts (unspecified) at twelve percent per annum which were unpaid
at maturity and that after it applied the proceeds of the foreclosure sale
to the overdraft debt, there remained an unpaid balance
of P1,224,301.56.
The Banks second to fifth causes of action pertain to the LC line
under which it averred that on the strength of the LCs it issued, the
beneficiaries thereof drew and presented sight drafts to it which it all
paid after petitioners acceptance; and that it delivered the tractors and
equipment subject of the LCs to petitioners who have not paid either
the full or part of the face value of the drafts.
Specifically with respect to its second cause of action, the Bank
alleged that it issued LC No. 63-0055D on January 15, 1963 in favor
of Monark International Incorporated[9] covering the purchase of a
tractor[10] on which the latter allegedly drew a sight draft with a face
value of P71,500.00,[11] which amount petitioners have not, however,
paid in full.
Under its third cause of action, the Bank charged that it issued
LC No. 61-1110D on December 27, 1962 also in favor of Monark
International covering the purchase of another tractor and other
equipment;[12] and that Monark International drew a sight draft with a
face value of P80,350.00,[13] and while payments for the value thereof
had been made by petitioners, a balance of P68,064.97 remained.
Under the fourth cause of action, the Bank maintained that it
issued LC No. 63-0182D on February 11, 1963 in favor of J.B.L.
Enterprises, Inc.[14] covering the purchase of two tractors,[15] and J.B.L.
Enterprises drew on February 13, 1963 a sight draft on said LC in the
amount of P155,000.00 but petitioners have not paid said amount.
On its fifth cause of action, the Bank alleged that it issued LC
No. 63-0284D on March 14, 1963 in favor of Super Master Auto
Supply (SMAS) covering the purchase of Eight Units GMC (G.I.)
Trucks; that on March 14, 1963, SMAS drew a sight draft with a face
value of P64,000.00[16] on the basis of said LC; and that the payments
made by petitioners for the value of said draft were deficient
by P45,504.74.
The Bank thus prayed for the settlement of the above-stated
obligations at an interest rate of eleven percent per annum, and for the
award of trust receipt commissions, attorneys fees and other fees and
costs of collection.
The sixth to ninth causes of action are anchored on the
promissory notes issued by petitioners allegedly to secure certain
advances from the Bank in connection with the exportation of logs as
reflected above.[17] The notes were payable 30 days after date and
provided for the solidary liability of petitioners as well as attorneys
fees at ten percent of the total amount due[18]in the event of their non-
payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action,
has a face value of P55,000.00 with interest rate of twelve percent per
annum;[19] that dated July 7, 1967 subject of the seventh has a face
value of P20,000.00;[20] that dated July 18, 1967 subject of the eighth
has a face value of P38,000.00;[21] and that dated August 23, 1967
subject of the ninth has a face value of P11,000.00.[22] The interest rate
of the last three notes is pegged at thirteen percent per annum.[23]
On its tenth and final cause of action, the Bank claimed that it
has accounts receivable from petitioners in the amount of P120.48.
In their Answer[24] of March 3, 1977, petitioners admit the
following: having applied for credit accommodations
totaling P900,000.00 to secure which they mortgaged real
properties;opening of the LC/Trust Receipt Line; the issuance by the
Bank of the various LCs; and the foreclosure of the real estate
mortgage and the consolidation of ownership over the mortgaged
properties in favor of the Bank. They deny, however, having availed
of the credit accommodations and having received the value of the
promissory notes, as they do deny having physically received the
tractors and equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint
states no cause of action, and assuming that it does, the same is/are
barred by prescription or null and void for want of consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC
attached the preferred shares of stocks of the spouses Quirino and
Eufemia Gonzales with the Bank with a total par value of P414,000.00.
Finding for petitioners, the trial court rendered its Decision of
April 22, 1992 the dispositive portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in the first to
the tenth causes of action of its complaint are denied for the reasons
earlier mentioned in the body of this decision;
2. As regards the claims of defendants pertaining to their counterclaim
(Exhibits 1, 2 and 3), they are hereby given ten (10) years from the date
of issuance of the torrens title to plaintiff and before the transfer thereof
in good faith to a third party buyer within which to ask for the
reconveyance of the real properties foreclosed by plaintiff,
3. The order of attachment which was issued against the preferred
shares of stocks of defendants-spouses Quirino Gonzales and Eufemia
Gonzales with the Republic Bank now known as Republic Planters
Bank dated March 21, 1977 is hereby dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and for
attorneys fees, with costs against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court ratiocinated:[25]
Art. 1144 of the Civil Code states that an action upon a written contract
prescribes in ten (10) years from the time the right of action accrues.
Art. 1150 states that prescription starts to run from the day the action
may be brought. The obligations allegedly created by the written
contracts or documents supporting plaintiffs first to the sixth causes of
action were demandable at the latest in 1964. Thus when the complaint
was filed on January 27, 1977 more than ten (10) years from 1964
[when the causes of action accrued] had already lapsed. The first to the
sixth causes of action are thus barred by prescription. . . .
As regards the seventh and eight causes of action, the authenticity of
which documents were partly in doubt in the light of the categorical
and uncontradicted statements that in 1965, defendant Quirino
Gonzales logging concession was terminated based on the policy of the
government to terminate logging concessions covering less than
20,000 hectares. If this is the case, the Court is in a quandary why there
were log exports in 1967? Because of the foregoing, the Court does
not find any valid ground to sustain the seventh and eight causes of
action of plaintiffs complaint.
As regards the ninth cause of action, the Court is baffled why plaintiff
extended to defendants another loan when defendants according to
plaintiffs records were defaulting creditors? The above facts and
circumstances has (sic) convinced this Court to give credit to the
testimony of defendants witnesses that the Gonzales spouses signed
the documents in question in blank and that the promised loan was
never released to them. There is therefore a total absence of consent
since defendants did not give their consent to loans allegedly procured
, the proceeds of which were never received by the alleged debtors,
defendants herein. . . .
Plaintiff did not present evidence to support its tenth cause of action.
For this reason, it must consequently be denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they seek the return
of the real and personal properties which they have given in good faith
to plaintiff. Again, prescription may apply. The real properties of
defendants acquired by plaintiff were foreclosed in 1965 and
consequently, defendants had one (1) year to redeem the property or
ten (10) years from issuance of title on the ground that the obligation
foreclosed was fictitious.
xxx
On appeal,[26] the Court of Appeals (CA) reversed the decision
of the trial court by Decision[27] of June 28, 1996 which disposed as
follows:[28]
WHEREFORE, premises considered, the appealed decision (dated
April 22, 1992) of the Regional Trial Court (Branch 36) in Manila in
Civil Case No. 82-4141 is hereby REVERSED---and let the case be
remanded back to the court a quo for the determination of the
amount(s) to be awarded to the [the Bank]-appellant relative to its
claims against the appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld
the contention of the Bank that the notices of foreclosure sale were
tantamount to demand letters upon the petitioners which interrupted
the running of the prescriptive period.[29]
As regards the seventh to ninth causes of action, the CA also
upheld the contention of the Bank that the written agreements-
promissory notes prevail over the oral testimony of petitioner Quirino
Gonzales that the cancellation of their logging concession in 1967
made it unbelievable for them to secure in 1967 the advances reflected
in the promissory notes.[30]
With respect to petitioners counterclaim, the CA agreed with the
Bank that:[31]
Certainly, failure on the part of the trial court to pass upon and
determine the authenticity and genuineness of [the Banks]
documentary evidence [the trial court having ruled on the basis of
prescription of the Banks first to sixth causes of action] makes it
impossible for the trial court to eventually conclude that the obligation
foreclosed (sic) was fictitious. Needless to say, the trial courts ruling
averses (sic) the well-entrenched rule that courts must render verdict
on their findings of facts. (China Banking Co. vs. CA, 70 SCRA 398)
Furthermore, the defendants-appellees [herein petitioners]
counterclaim is basically an action for the reconveyance of their
properties, thus, the trial courts earlier ruling that the defendants-
appellees counterclaim has prescribed is itself a ruling that the
defendants-appellees separate action for reconveyance has also
prescribed.
The CA struck down the trial courts award of attorneys fees for
lack of legal basis.[32]
Hence, petitioners now press the following issues before this
Court by the present petition for review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPONDENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK[S] FIRST, SECOND, THIRD, FOURTH, FIFTH
AND SIXTH CAUSES OF ACTION HAVE NOT PRESCRIBED
CONTRARY TO THE FINDINGS OF THE LOWER COURT, RTC
BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE
ALREADY PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT RESPODNENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK[S] SEVENTH, EIGHT AND NINTH CAUSES
OF ACTION APPEARS (SIC.) TO BE IMPRESSED WITH MERIT
CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID
GROUND TO SUSTAIN [THEM] AND FOR LACK OF
EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN
REVERSING THE FINDINGS OF THE REGIONAL TRIAL
COURT BRANCH 36 OF MANILA THAT PETITIONERS-
APPELLANT (SIC.) MAY SEEK THE RETURN OF THE REAL
AND PERSONAL PROPERTIES WHICH THEY MAY HAVE
GIVEN IN GOOD FAITH AS THE SAME IS BARRED BY
PRESCRIPTION AND THAT PETITIONERS-APPELLANT (SIC.)
HAD ONE (1) YEAR TO REDEEM THE PROPERTY OR TEN (10)
YEARS FROM ISSUANCE OF THE TITLE ON THE GROUND
THAT THE OBLIGATION FORECLOSED WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO
HOLDING THAT PEITIONERS-APPELLANTS [SIC] ARE NOT
ENTITLED TO AN AWARD OF ATTORNEYS FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon a
written contract, an obligation created by law, and a judgment must be
brought within ten years from the time the right of action accrues.[33]
The finding of the trial court that more than ten years had elapsed
since the right to bring an action on the Banks first to sixth causes had
arisen[34] is not disputed. The Bank contends, however, that the notices
of foreclosure sale in the foreclosure proceedings of 1965 are
tantamount to formal demands upon petitioners for the payment of
their past due loan obligations with the Bank, hence, said notices of
foreclosure sale interrupted/forestalled the running of the prescriptive
period.[35]
The Banks contention does not impress. Prescription of actions
is interrupted when they are filed before the court, when there is a
written extrajudicial demand by the creditors, and when there is any
written acknowledgment of the debt by the debtor. [36]
The law specifically requires a written extrajudicial demand
by the creditors which is absent in the case at bar. The contention that
the notices of foreclosure are tantamount to a written extrajudicial
demand cannot be appreciated, the contents of said notices not having
been brought to light.
But even assuming arguendo that the notices interrupted the
running of the prescriptive period, the argument would still not lie for
the following reasons:
With respect to the first to the fifth causes of action, as gleaned
from the complaint, the Bank seeks the recovery of the deficient
amount of the obligation after the foreclosure of the mortgage. Such
suit is in the nature of a mortgage action because its purpose is
precisely to enforce the mortgage contract.[37] A mortgage action which were mortgaged and foreclosed be returned to them.[49] Such,
prescribes after ten years from the time the right of action accrued.[38] however, does not lie. It is not disputed that the properties were
foreclosed under Act No. 3135 (An Act to Regulate the Sale of
The law gives the mortgagee the right to claim for the deficiency Property under Special Powers Inserted in or Annexed to Real Estate
resulting from the price obtained in the sale of the property at public Mortgages), as amended. Though the Banks action for deficiency is
auction and the outstanding obligation at the time of the foreclosure barred by prescription, nothing irregular attended the foreclosure
proceedings.[39] In the present case, the Bank, as mortgagee, had the proceedings to warrant the reconveyance of the properties covered
right to claim payment of the deficiency after it had foreclosed the thereby.
mortgage in 1965.[40] In other words, the prescriptive period started to
run against the Bank in 1965. As it filed the complaint only on January As for petitioners prayer for moral and exemplary damages, it
27, 1977, more than ten years had already elapsed, hence, the action not having been raised as issue before the courts below, it can not now
on its first to fifth causes had by then prescribed. No other conclusion be considered. Neither can the award attorneys fees for lack of legal
can be reached even if the suit is considered as one upon a written basis.
contract or upon an obligation to pay the deficiency which is created
by law,[41] the prescriptive period of both being also ten years.[42] WHEREFORE, the CA Decision is hereby AFFIRMED with
MODIFICATION.
As regards the promissory note subject of the sixth cause of
action, its period of prescription could not have been interrupted by the Republic Banks Complaint with respect to its first to sixth causes
notices of foreclosure sale not only because, as earlier discussed, of action is hereby DISMISSED. Its complaint with respect to its
petitioners contention that the notices of foreclosure are tantamount to seventh to ninth causes of action is REMANDED to the court of origin,
written extra-judicial demand cannot be considered absent any the Manila Regional Trial Court, Branch 36, for it to determine the
showing of the contents thereof, but also because it does not appear amounts due the Bank thereunder.
from the records that the said note is covered by the mortgage contract. SO ORDERED.
Coming now to the second issue, petitioners seek to evade
liability under the Banks seventh to ninth causes of action by claiming
that petitioners Quirino and Eufemia Gonzales signed the promissory
notes in blank; that they had not received the value of said notes, and Republic of the Philippines
that the credit line thereon was unnecessary in view of their money SUPREME COURT
deposits, they citing Exhibits 2 to 2-B,[43] in, and unremitted proceeds Manila
on log exports from, the Bank. In support of their claim, they also urge
this Court to look at Exhibits B (the Banks recommendation for SECOND DIVISION
approval of petitioners application for credit accommodations), P (the
Application and Agreement for Commercial Letter of Credit dated
January 16, 1963) and T (the Application and Agreement for
Commercial Letter of Credit dated February 14, 1963).
G.R. No. 85419 March 9, 1993
The genuineness and due execution of the notes had, however,
been deemed admitted by petitioners, they having failed to deny the
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
same under oath.[44] Their claim that they signed the notes in blank
vs.
does not thus lie.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY,
Petitioners admission of the genuineness and due execution of SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
the promissory notes notwithstanding, they raise want of CORPORATION and PRODUCERS BANK OF THE
consideration[45] thereof. The promissory notes, however, appear to be PHILIPPINES, defendants-respondents.
negotiable as they meet the requirements of Section 1 [46] of the
Negotiable Instruments Law. Such being the case, the notes are prima Yngson & Associates for petitioner.
facie deemed to have been issued for consideration.[47] It bears noting
that no sufficient evidence was adduced by petitioners to show
Henry A. Reyes & Associates for Samso Tung & Asian Industrial
otherwise.
Plastic Corporation.
Exhibits 2 to 2-B to which petitioners advert in support of their
claim that the credit line on the notes was unnecessary because they Eduardo G. Castelo for Sima Wei.
had deposits in, and remittances due from, the Bank deserve scant
consideration. Said exhibits are merely claims by petitioners under
Monsod, Tamargo & Associates for Producers Bank.
their then proposals for a possible settlement of the case dated February
3, 1978. Parenthetically, the proposals were not even signed by
petitioners but by certain Attorneys Osmundo R. Victoriano and Rafael S. Santayana for Mary Cheng Uy.
Rogelio P. Madriaga.
In any case, it is no defense that the promissory notes were
signed in blank as Section 14[48] of the Negotiable Instruments Law
concedes the prima facie authority of the person in possession of CAMPOS, JR., J.:
negotiable instruments, such as the notes herein, to fill in the blanks.
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
As for petitioners reliance on Exhibits B, P and T, they have
brevity) filed a complaint for a sum of money against respondents Sima
failed to show the relevance thereof to the seventh up to the ninth
Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
causes of action of the Bank.
Industrial Plastic Corporation (Plastic Corporation for short) and the
On the third issue, petitioners asseverate that with the trial courts Producers Bank of the Philippines, on two causes of action:
dismissal of the Banks complaint and the denial of its first to
sixth causes of action, it is but fair and just that the real properties
 (1) To enforce payment of the balance of
P1,032,450.02 on a promissory note executed by
respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by
Sima Wei, payable to petitioner, and drawn against
the China Banking Corporation, to pay the balance
due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no cause
of action. The trial court granted the defendants' Motions to Dismiss.
The Court of Appeals affirmed this decision, * to which the petitioner
Bank, represented by its Legal Liquidator, filed this Petition for
Review by Certiorari, assigning the following as the alleged errors of
the Court of Appeals:1
(1) THE COURT OF APPEALS ERRED IN
HOLDING THAT THE PLAINTIFF-
PETITIONER HAS NO CAUSE OF ACTION
AGAINST DEFENDANTS-RESPONDENTS
HEREIN.
(2) THE COURT OF APPEALS ERRED IN
HOLDING THAT SECTION 13, RULE 3 OF
THE REVISED RULES OF COURT ON
ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent
Sima Wei, the latter executed and delivered to the former a promissory
note, engaging to pay the petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance
of P1,032,450.02. On November 18, 1983, Sima Wei issued two
crossed checks payable to petitioner Bank drawn against China
Banking Corporation, bearing respectively the serial numbers 384934,
for the amount of P550,000.00 and 384935, for the amount of
P500,000.00. The said checks were allegedly issued in full settlement
of the drawer's account evidenced by the promissory note. These two
checks were not delivered to the petitioner-payee or to any of its
authorized representatives. For reasons not shown, these checks came
into the possession of respondent Lee Kian Huat, who deposited the
checks without the petitioner-payee's indorsement (forged or
otherwise) to the account of respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy,
Branch Manager of the Balintawak branch of Producers Bank, relying
on the assurance of respondent Samson Tung, President of Plastic
Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit
them to the account of said Plastic Corporation, inspite of the fact that
the checks were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential elements
are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of
said legal right.2
The normal parties to a check are the drawer, the payee and the drawee
bank. Courts have long recognized the business custom of using
printed checks where blanks are provided for the date of issuance, the
name of the payee, the amount payable and the drawer's signature. All
the drawer has to do when he wishes to issue a check is to properly fill
up the blanks and sign it. However, the mere fact that he has done these
does not give rise to any liability on his part, until and unless the check
is delivered to the payee or his representative. A negotiable instrument,
of which a check is, is not only a written evidence of a contract right
but is also a species of property. Just as a deed to a piece of land must
be delivered in order to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to evidence its existence
as a binding contract. Section 16 of the Negotiable Instruments Law,
which governs checks, provides in part:
Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto.
...
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him.3Delivery of an instrument
means transfer of possession, actual or constructive, from one person
to another.4 Without the initial delivery of the instrument from the
drawer to the payee, there can be no liability on the instrument.
Moreover, such delivery must be intended to give effect to the
instrument.
The allegations of the petitioner in the original complaint show that the
two (2) China Bank checks, numbered 384934 and 384935, were not
delivered to the payee, the petitioner herein. Without the delivery of
said checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of
action, founded on said checks, whether against the drawer Sima Wei
or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent
Sima Wei on the promissory note, and the alternative defendants,
including Sima Wei, on the two checks. On appeal from the orders of
dismissal of the Regional Trial Court, petitioner Bank alleged that its
cause of action was not based on collecting the sum of money
evidenced by the negotiable instruments stated but on quasi-delict —
a claim for damages on the ground of fraudulent acts and evident bad
faith of the alternative respondents. This was clearly an attempt by the
petitioner Bank to change not only the theory of its case but the basis
of his cause of action. It is well-settled that a party cannot change his
theory on appeal, as this would in effect deprive the other party of his
day in court.5
Notwithstanding the above, it does not necessarily follow that the
drawer Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her. Her allegation
that she has paid the balance of her loan with the two checks payable
to petitioner Bank has no merit for, as We have earlier explained, these
checks were never delivered to petitioner Bank. And even granting,
without admitting, that there was delivery to petitioner Bank, the
delivery of checks in payment of an obligation does not constitute
payment unless they are cashed or their value is impaired through the
fault of the creditor.6 None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due
thereon.

However, insofar as the other respondents are concerned, petitioner

Bank has no privity with them. Since petitioner Bank never received
the checks on which it based its action against said respondents, it
never owned them (the checks) nor did it acquire any interest therein.
Thus, anything which the respondents may have done with respect to
said checks could not have prejudiced petitioner Bank. It had no right
or interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima
Wei, the drawer, who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.

With respect to the second assignment of error raised by petitioner

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

In the light of the foregoing, the judgment of the Court of Appeals

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

SO ORDERED.