Commercial LAw Review Cases Compilation (NIL)

G.R. No.
186063 January 15, 2014
PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SAN MIGUEL CORPORATION, Respondent.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari of the Decision1 and Resolution2 of the Court of Appeals (CA), dated
June 7 2008 and December 15, 2008, respectively, in CA-G.R. SP No. 01249-MIN.
The facts, as summarized by the CA, are as follows:
On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive Dealership Agreement
with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter was given by SMC the right to trade, deal,
market or otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter of credit. Thus,
Goroza applied for and was granted a letter of credit by the PNB in the amount of two million pesos (₱2,000,000.00).
Under the credit agreement, the PNB has the obligation to release the proceeds of Goroza's credit line to SMC upon
presentation of the invoices and official receipts of Goroza's purchases of SMC beer products to the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with PNB and started selling SMC's beer products x x x.
On February 11, 1997, Goroza applied for an additional credit line with the PNB. The latter granted Goroza a one (1) year
revolving credit line in the amount not exceeding two million four hundred thousand pesos (₱2,400,000.00). Thus,
Goroza's total credit line reached four million four hundred thousand pesos (₱4,400,000.00) x x x. Initially, Goroza was
able to pay his credit purchases with SMC x x x. Sometime in January 1998, however, Goroza started to become
delinquent with his accounts.
Demands to pay the amount of three million seven hundred twenty-two thousand four hundred forty pesos and 88/100
(₱3,722,440.88) were made by SMC against Goroza and PNB, but neither of them paid. Thus, on April 23, 2003, SMC
filed a Complaint for collection of sum of money against PNB and Goroza with the respondent Regional Trial Court
Branch 3, Butuan City.3
After summons, herein petitioner filed its Answer,4 while Goroza did not. Upon respondent's Motion to Declare
Defendant in Default,5 Goroza was declared in default.
Trial ensued insofar as Goroza was concerned and respondent presented its evidence ex parte against the former.
Respondent made a formal offer of its exhibits on April 6, 2004 and the trial court admitted them on June 16, 2004.
Thereafter, on January 21, 2005, pre-trial between PNB and SMC was held.6
On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:
WHEREFORE, the Court hereby renders judgment in favor of plaintiff [SMC] ordering defendant Rodolfo Goroza to pay
plaintiff the following:
1. The principal amount of ₱3,722,440.00;

2. The interest of 12% per annum on the principal amount reckoned from January 27, 1998 up to the time of
execution of the Judgment of this case;
3. Attorney's fees of ₱30,000.00;
4. Litigation expenses of ₱20,000.00.
SO ORDERED.8
Goroza filed a Notice of Appeal,9 while SMC filed a Motion for Reconsideration.10
On July 14, 2005, the RTC granted SMC's motion for reconsideration. The trial court amended its Decision by increasing
the award of litigation expenses to ₱90,652.50.11
Thereafter, on July 25, 2005, the RTC issued an Order,12 pertinent portions of which read as follows:
xxxx
Finding the Notice of Appeal filed within the reglementary period and the corresponding appeal fee paid, x x x. The same
is hereby given due course.
Considering that the case as against defendant PNB is still on-going, let the Record in this case insofar as defendant
Rodolfo R. Goroza is concerned, be reproduced at the expense of defendant-appellant so that the same can be
forwarded to the Court of Appeals, together with the exhibits and transcript of stenographic notes in the required
number of copies.
SO ORDERED.13
In the meantime, trial continued with respect to PNB.
On September 27, 2005, PNB filed an Urgent Motion to Terminate Proceedings14 on the ground that a decision was
already rendered on May 10, 2005 finding Goroza solely liable.
The RTC denied PNB's motion in its Resolution15 dated October 11, 2005.
On October 14, 2005, the RTC issued a Supplemental Judgment,16 thus:
The Court omitted by inadvertence to insert in its decision dated May 10, 2005 the phrase "without prejudice to the
decision that will be made against the other co-defendant, PNB, which was not declared in default."
WHEREFORE, the phrase "without prejudice to the decision made against the other defendant PNB which was not
declared in default" shall be inserted in the dispositive portion of said decision.
SO ORDERED.17
On even date, the RTC also issued an Amended Order,18 to wit:
The Court's Order dated July 25, 2005 is hereby amended to include the phrase "this appeal applies only to defendant
Rolando Goroza and without prejudice to the continuance of the hearing on the other defendant Philippine National
Bank".
SO ORDERED.19
PNB then filed a Motion for Reconsideration20 of the above-quoted Supplemental Judgment and Amended Order, but
the RTC denied the said motion via its Resolution21 dated July 6, 2006.
Aggrieved, PNB filed a special civil action for certiorari with the CA imputing grave abuse of discretion on the part of the
RTC for having issued its July 6, 2006 Resolution.22
On June 17, 2008, the CA rendered its questioned Decision denying the petition and affirming the assailed Resolution of
the RTC.
PNB filed a Motion for Reconsideration,23 but the CA denied it in its assailed Resolution. Hence, the instant petition with
the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT WAS CORRECT IN RENDERING A SUPPLEMENTAL
JUDGMENT AND AMENDED ORDER AGAINST THE BANK DESPITE THE PERFECTION OF APPEAL OF ONE OF THE
DEFENDANTS.
THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS MAY CONTINUE AGAINST PNB DESPITE THE COMPLETE
ADJUDICATION OF RELIEF IN FAVOR OF SMC.24
PNB contends that the CA erred in holding that the RTC was correct in rendering its Supplemental Judgment and
Amended Order despite the perfection of Goroza's appeal. PNB claims that when Goroza's appeal was perfected, the
RTC lost jurisdiction over the entire case making the assailed Supplemental Judgment and Amended Order void for
having been issued without or in excess of jurisdiction.
PNB also argues that the CA erred in ruling that proceedings against it may continue in the RTC, despite the trial court's
complete adjudication of relief in favor of SMC. PNB avers that the May 10, 2005 Decision of the RTC, finding Goroza
solely liable to pay the entire amount sought to be recovered by SMC, has settled the obligation of both Goroza and
PNB, and that there is no longer any ground to hold PNB for trial and make a separate judgment against it; otherwise,
SMC will recover twice for the same cause of action.
The petition lacks merit.
It is clear from the proceedings held before and the orders issued by the RTC that the intention of the trial court is to
conduct separate proceedings to determine the respective liabilities of Goroza and PNB, and thereafter, to render
several and separate judgments for or against them. While ideally, it would have been more prudent for the trial court
to render a single decision with respect to Goroza and PNB, the procedure adopted the RTC is, nonetheless, allowed
under Section 4, Rule 36 of the Rules of Court, which provides that "in an action against several defendants, the court
may, when a several judgment is proper, render judgment against one or more of them, leaving the action to proceed
against the others." In addition, Section 5 of the same Rule states that "when more than one claim for relief is presented
in an action, the court at any stage, upon a determination of the issues material to a particular claim and all
counterclaims arising out of the transaction or occurrence which is the subject matter of the claim may render a
separate judgment disposing of such claim." Further, the same provision provides that "the judgment shall terminate the
action with respect to the claim so disposed of and the action shall proceed as to the remaining claims." Thus, the
appeal of Goroza, assailing the judgment of the RTC finding him liable, will not prevent the continuation of the ongoing
trial between SMC and PNB. The RTC retains jurisdiction insofar as PNB is concerned, because the appeal made by
Goroza was only with respect to his own liability. In fact, PNB itself, in its Reply to respondent's Comment, admitted that
the May 10, 2005 judgment of the RTC was "decided solely against defendant Rodolfo Goroza."25
The propriety of a several judgment is borne by the fact that SMC's cause of action against PNB stems from the latter's
alleged liability under the letters of credit which it issued. On the other hand, SMC's cause of action against Goroza is the
latter's failure to pay his obligation to the former.1âwphi1 As to the separate judgment, PNB has a counterclaim against
SMC which is yet to be resolved by the RTC.
Indeed, the issues between SMC and PNB which are to be resolved by the RTC, as contained in the trial court's Pre-Trial
Order dated January 21, 2005, were not addressed by the RTC in its Decision rendered against Goroza. In particular, the
RTC judgment against Goroza did not make any determination as to whether or not PNB is liable under the letter of
credit it issued and, if so, up to what extent is its liability. In fact, contrary to PNB's claim, there is nothing in the RTC
judgment which ruled that Goroza is "solely liable" to pay the amount which SMC seeks to recover.
In this regard, this Court's disquisition on the import of a letter of credit, in the case ofTransfield Philippines, Inc. v. Luzon
Hydro Corporation,26 as correctly cited by the CA, is instructive, to wit:
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay
money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A
letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up
as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract
or disputes between the parties thereto.
xxxx
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever.
xxxx
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature
clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief,
the letter of credit is separate and distinct from the underlying transaction.27
In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza liable and
ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet to
be determined.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated June 17, 2008, and its
Resolution dated December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are AFFIRMED.
SO ORDERED.
G.R. No. 188363 February 27, 2013
ALLIED BANKING CORPORATION, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondents.
DECISION
VILLARAMA, JR., J.:
A collecting bank is guilty of contributory negligence when it accepted for deposit a post-dated check notwithstanding
that said check had been cleared by the drawee bank which failed to return the check within the 24-hour reglementary
period.
Petitioner Allied Banking Corporation appeals the Decision1 dated March 19, 2009 of the Court of Appeals (CA) in CA-
G.R. SP No. 97604 which set aside the Decision2 dated December 13, 2005 of the Regional Trial Court (RTC) of Makati
City, Branch 57 in Civil Case No. 05-418.
The factual antecedents:
On October 10, 2002, a check in the amount of ₱1,000,000.00 payable to "Mateo Mgt. Group International" (MMGI) was
presented for deposit and accepted at petitioner's Kawit Branch. The check, post-dated "Oct. 9, 2003", was drawn
against the account of Marciano Silva, Jr. (Silva) with respondent Bank of the Philippine Islands (BPI) Bel-Air Branch.
Upon receipt, petitioner sent the check for clearing to respondent through the Philippine Clearing House Corporation
(PCHC).3
The check was cleared by respondent and petitioner credited the account of MMGI with ₱1,000,000.00. On October 22,
2002, MMGI’s account was closed and all the funds therein were withdrawn. A month later, Silva discovered the debit of
₱1,000,000.00 from his account. In response to Silva’s complaint, respondent credited his account with the aforesaid
sum.4
On March 21, 2003, respondent returned a photocopy of the check to petitioner for the reason: "Postdated." Petitioner,
however, refused to accept and sent back to respondent a photocopy of the check. Thereafter, the check, or more
accurately, the Charge Slip, was tossed several times from petitioner to respondent, and back to petitioner, until on May
6, 2003, respondent requested the PCHC to take custody of the check. Acting on the request, PCHC directed the
respondent to deliver the original check and informed it of PCHC’s authority under Clearing House Operating Memo
(CHOM) No. 279 dated 06 September 1996 to split 50/50 the amount of the check subject of a "Ping-Pong" controversy
which shall be implemented thru the issuance of Debit Adjustment Tickets against the outward demands of the banks
involved. PCHC likewise encouraged respondent to submit the controversy for resolution thru the PCHC Arbitration
Mechanism.5
However, it was petitioner who filed a complaint6 before the Arbitration Committee, asserting that respondent should
solely bear the entire face value of the check due to its negligence in failing to return the check to petitioner within the
24-hour reglementary period as provided in Section 20.17 of the Clearing House Rules and Regulations8(CHRR) 2000.
Petitioner prayed that respondent be ordered to reimburse the sum of ₱500,000.00 with 12% interest per annum, and
to pay attorney’s fees and other arbitration expenses.
In its Answer with Counterclaims,9 respondent charged petitioner with gross negligence for accepting the post-dated
check in the first place. It contended that petitioner’s admitted negligence was the sole and proximate cause of the loss.
On December 8, 2004, the Arbitration Committee rendered its Decision10 in favor of petitioner and against the
respondent. First, it ruled that the situation of the parties does not involve a "Ping-Pong" controversy since the subject
check was neither returned within the reglementary time or through the PCHC return window, nor coursed through the
clearing facilities of the PCHC.
As to respondent’s direct presentation of a photocopy of the subject check, it was declared to be without legal basis
because Section 21.111 of the CHRR 2000 does not apply to post-dated checks. The Arbitration Committee further noted
that respondent not only failed to return the check within the 24-hour reglementary period, it also failed to institute any
formal complaint within the contemplation of Section 20.312 and it appears that respondent was already contented with
the 50-50 split initially implemented by the PCHC. Finding both parties negligent in the performance of their duties, the
Committee applied the doctrine of "Last Clear Chance" and ruled that the loss should be shouldered by respondent
alone, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Allied Banking Corporation and
against defendant Bank of the Philippine Islands, ordering the latter to pay the former the following:
(a) The sum of ₱500,000.00, plus interest thereon at the rate of 12% per annum counted from the date of filing
of the complaint;
(b) Attorney’s fees in the amount of ₱25,000.00;
(c) The sum of ₱2,090.00 as and by way of reimbursement of filing fees, plus the cost of suit.
SO ORDERED.13
Respondent filed a motion for reconsideration14 but it was denied by the PCHC Board of Directors under Board
Resolution No. 10-200515 dated April 22, 2005. The Board pointed out that what actually transpired was a "ping-pong"
"not of a check but of a Charge Slip (CS) enclosed in a carrier envelope that went back and forth through the clearing
system in apparent reaction by [petitioner] to the wrongful return via the PCHC clearing system." Respondent’s conduct
was held as a "gross and unmistakably deliberate violation" of Section 20.2,16 in relation to Section 20.1(e) of the CHRR
2000.17
On May 13, 2005, respondent filed a petition for review18 in the RTC claiming that PCHC erred in constricting the return
of a post-dated check to Section 20.1, overlooking the fact that Section 20.3 is also applicable which provision
necessarily contemplates defects that are referred to in Section 20.1 as both sections are subsumed under the general
provision (Section 20) on the return of regular items. Respondent also argued that assuming it to be liable, the PCHC
erred in holding it solely responsible and should bear entirely the consequent loss considering that while respondent
may have the "last" opportunity in proximity, it was petitioner which had the longest, fairest and clearest chance to
discover the mistake and avoid the happening of the loss. Lastly, respondent assailed the award of attorney’s fees,
arguing that PCHC’s perception of "malice" against it and misuse of the clearing machinery is clearly baseless and
unfounded.
In its Decision dated December 13, 2005, the RTC affirmed with modification the Arbitration Committee’s decision by
deleting the award of attorney’s fees. The RTC found no merit in respondent’s stance that through inadvertence it failed
to discover that the check was post-dated and that confirmation within 24 hours is often "elusive if not outright
impossible" because a drawee bank receives hundreds if not thousands of checks in an ordinary clearing day. Thus:
Petitioner admitted par. 4 in its Answer with Counterclaim and in its Memorandum, further adding that upon receipt of
the subject check "through inadvertence", it did not notice that the check was postdated, hence, petitioner did not
return the same to respondent."
These contradict petitioner’s belated contention that it discovered the defect only after the lapse of the reglementary
period. What the evidence on record discloses is that petitioner received the check on October 10, 2002, that it was
promptly sent for clearing, that through inadvertence, it did not notice that the check was postdated. Petitioner did not
even state when it discovered the defect in the subject check.
Likewise, petitioner’s contention that its discovery of the defect was a non-issue in view of the admissions made in its
Answer is unavailing. The Court has noted the fact that the PCHC Arbitration Committee conducted a clarificatory
hearing during which petitioner admitted that its standard operating procedure as regards confirmation of checks was
not followed. No less than petitioner’s witness admitted that BPI tried to call up the drawer of the check, as their
procedure dictates when it comes to checks in large amounts. However, having initially failed to contact the drawer, no
follow up calls were made nor other actions taken. Despite these, petitioner cleared the check. Having admitted making
said calls, it is simply impossible for petitioner to have missed the fact that the check was postdated.19 (Emphasis
supplied)
With the denial of its motion for partial reconsideration, respondent elevated the case to the CA by filing a petition for
review under Rule 42 of the 1997 Rules of Civil Procedure, as amended.
By Decision dated March 19, 2009, the CA set aside the RTC judgment and ruled for a 60-40 sharing of the loss as it
found petitioner guilty of contributory negligence in accepting what is clearly a post-dated check. The CA found that
petitioner’s failure to notice the irregularity on the face of the check was a breach of its duty to the public and a telling
sign of its lack of due diligence in handling checks coursed through it. While the CA conceded that the drawee bank has a
bigger responsibility in the clearing of checks, it declared that the presenting bank cannot take lightly its obligation to
make sure that only valid checks are introduced into the clearing system. According to the CA, considerations of public
policy and substantial justice will be served by allocating the damage on a 60-40 ratio, as it thus decreed:
WHEREFORE, the decision of the Regional Trial Court of Makati City (Branch 57) dated December 13, 2005 is ANNULLED
and SET ASIDE and judgment is rendered ordering petitioner to pay respondent Allied Banking Corporation the sum of
₱100,000.00 plus interest thereon at the rate of 6% from July 10, 2003, which shall become 12% per annum from finality
hereof, until fully paid, aside from costs.
SO ORDERED.20
Its motion for reconsideration having been denied by the CA, petitioner is now before the Court seeking a partial
reversal of the CA’s decision and affirmance of the December 13, 2005 Decision of the RTC.
Essentially, the two issues for resolution are: (1) whether the doctrine of last clear chance applies in this case; and (2)
whether the 60-40 apportionment of loss ordered by the CA was justified.
As well established by the records, both petitioner and respondent were admittedly negligent in the encashment of a
check post-dated one year from its presentment.
Petitioner argues that the CA should have sustained PCHC’s finding that despite the antecedent negligence of petitioner
in accepting the postdated check for deposit, respondent, by exercising reasonable care and prudence, might have
avoided injurious consequences had it not negligently cleared the check in question. It pointed out that in applying the
doctrine of last clear chance, the PCHC cited the case of Philippine Bank of Commerce v. Court of Appeals21 which ruled
that assuming the bank’s depositor, private respondent, was negligent in entrusting cash to a dishonest employee, thus
providing the latter with the opportunity to defraud the company, it cannot be denied that petitioner bank had the last
clear opportunity to avert the injury incurred by its client, simply by faithfully observing their self-imposed validation
procedure.
Petitioner underscores respondent’s failure to observe clearing house rules and its own standard operating procedure
which, the PCHC said constitute further negligence so much so that respondent should be solely liable for the loss.
Specifically, respondent failed to return the subject check within the 24-hour reglementary period under Section 20.1
and to institute any formal complaint within the contemplation of Section 20.3 of the CHRR 2000. The PCHC likewise
faulted respondent for not making follow-up calls or taking any other action after it initially attempted, without success,
to contact by telephone the drawer of the check, and clearing the check despite such lack of confirmation from its
depositor in violation of its own standard procedure for checks involving large amounts.
The doctrine of last clear chance, stated broadly, is that the negligence of the plaintiff does not preclude a recovery for
the negligence of the defendant where it appears that the defendant, by exercising reasonable care and prudence,
might have avoided injurious consequences to the plaintiff notwithstanding the plaintiff’s negligence.22The doctrine
necessarily assumes negligence on the part of the defendant and contributory negligence on the part of the plaintiff,
and does not apply except upon that assumption.23 Stated differently, the antecedent negligence of the plaintiff does
not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last
fair chance to prevent the impending harm by the exercise of due diligence.24Moreover, in situations where the doctrine
has been applied, it was defendant’s failure to exercise such ordinary care, having the last clear chance to avoid loss or
injury, which was the proximate cause of the occurrence of such loss or injury.25
In this case, the evidence clearly shows that the proximate cause of the unwarranted encashment of the subject check
was the negligence of respondent who cleared a post-dated check sent to it thru the PCHC clearing facility without
observing its own verification procedure. As correctly found by the PCHC and upheld by the RTC, if only respondent
exercised ordinary care in the clearing process, it could have easily noticed the glaring defect upon seeing the date
written on the face of the check "Oct. 9, 2003". Respondent could have then promptly returned the check and with the
check thus dishonored, petitioner would have not credited the amount thereof to the payee’s account. Thus,
notwithstanding the antecedent negligence of the petitioner in accepting the post-dated check for deposit, it can seek
reimbursement from respondent the amount credited to the payee’s account covering the check.
What petitioner omitted to mention is that in the cited case of Philippine Bank of Commerce v. Court of Appeals,26while
the Court found petitioner bank as the culpable party under the doctrine of last clear chance since it had, thru its teller,
the last opportunity to avert the injury incurred by its client simply by faithfully observing its own validation procedure,
it nevertheless ruled that the plaintiff depositor (private respondent) must share in the loss on account of
its contributory negligence. Thus:
The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent in not
checking its monthly statements of account. Had it done so, the company would have been alerted to the series of
frauds being committed against RMC by its secretary. The damage would definitely not have ballooned to such an
amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in their financial affairs. This
omission by RMC amounts to contributory negligence which shall mitigate the damages that may be awarded to the
private respondent under Article 2179 of the New Civil Code, to wit:
"x x x. When the plaintiff’s own negligence was the immediate and proximate cause of his injury, he cannot recover
damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the
defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be
awarded."
In view of this, we believe that the demands of substantial justice are satisfied by allocating the damage on a 60-40
ratio. Thus, 40% of the damage awarded by the respondent appellate court, except the award of ₱25,000.00 attorney’s
fees, shall be borne by private respondent RMC; only the balance of 60% needs to be paid by the petitioners. The award
of attorney’s fees shall be borne exclusively by the petitioners.27 (Italics in the original; emphasis supplied)
In another earlier case,28 the Court refused to hold petitioner bank solely liable for the loss notwithstanding the finding
that the proximate cause of the loss was due to its negligence. Since the employees of private respondent bank were
likewise found negligent, its claim for damages is subject to mitigation by the courts. Thus:
Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the forged
checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection and
supervision of their employees. It was the gross negligence of the employees of both banks which resulted in the fraud
and the subsequent loss. While it is true that petitioner BPI’s negligence may have been the proximate cause of the
loss, respondent CBC’s negligence contributed equally to the success of the impostor in encashing the proceeds of the
forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while respondent
CBC may recover its losses, such losses are subject to mitigation by the courts. x x x
Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are
satisfied by allocating the loss of ₱2,413,215.16 and the costs of the arbitration proceedings in the amount of ₱7,250.00
and the costs of litigation on a 60-40 ratio. Conformably with this ruling, no interests and attorney’s fees can be awarded
to either of the parties.29 (Emphasis supplied)
Apportionment of damages between parties who are both negligent was followed in subsequent cases involving banking
transactions notwithstanding the court’s finding that one of them had the last clear opportunity to avoid the occurrence
of the loss.
In Bank of America NT & SA v. Philippine Racing Club,30 the Court ruled:
In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence on the part of respondent
because, even if we concur that the latter was indeed negligent in pre-signing blank checks, the former had the last clear
chance to avoid the loss. To reiterate, petitioner’s own operations manager admitted that they could have called up the
client for verification or confirmation before honoring the dubious checks. Verily, petitioner had the final opportunity to
avert the injury that befell the respondent. x x x Petitioner’s negligence has been undoubtedly established and, thus,
pursuant to Art. 1170 of the NCC, it must suffer the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider respondent’s own negligence to mitigate
petitioner’s liability.1âwphi1 Article 2179 of the Civil Code provides:
xxxx
Explaining this provision in Lambert v. Heirs of Ray Castillon, the Court held:
"The underlying precept on contributory negligence is that a plaintiff who is partly responsible for his own injury should
not be entitled to recover damages in full but must bear the consequences of his own negligence. The defendant must
thus be held liable only for the damages actually caused by his negligence. xxx xxx xxx"
xxxx
Following established jurisprudential precedents, we believe the allocation of sixty percent (60%) of the actual damages
involved in this case (represented by the amount of the checks with legal interest) to petitioner is proper under the
premises. Respondent should, in light of its contributory negligence, bear forty percent (40%) of its own
loss.31 (Emphasis supplied)
In Philippine National Bank v. F.F. Cruz and Co., Inc.,32 the Court made a similar disposition, thus:
Given the foregoing, we find no reversible error in the findings of the appellate court that PNB was negligent in the
handling of FFCCI’s combo account, specifically, with respect to PNB’s failure to detect the forgeries in the subject
applications for manager’s check which could have prevented the loss. x x x PNB failed to meet the high standard of
diligence required by the circumstances to prevent the fraud. In Philippine Bank of Commerce v. Court of
Appeals and The Consolidated Bank & Trust Corporation v. Court of Appeals, where the bank’s negligence is the
proximate cause of the loss and the depositor is guilty of contributory negligence, we allocated the damages between
the bank and the depositor on a 60-40 ratio. We apply the same ruling in this case considering that, as shown above,
PNB’s negligence is the proximate cause of the loss while the issue as to FFCCI’s contributory negligence has been
settled with finality in G.R. No. 173278. Thus, the appellate court properly adjudged PNB to bear the greater part of the
loss consistent with these rulings.33
"Contributory negligence is conduct on the part of the injured party, contributing as a legal cause to the harm he has
suffered, which falls below the standard to which he is required to conform for his own protection."34 Admittedly,
petitioner’s acceptance of the subject check for deposit despite the one year postdate written on its face was a clear
violation of established banking regulations and practices. In such instances, payment should be refused by the drawee
bank and returned through the PCHC within the 24-hour reglementary period. As aptly observed by the CA, petitioner’s
failure to comply with this basic policy regarding post-dated checks was "a telling sign of its lack of due diligence in
handling checks coursed through it."35
It bears stressing that "the diligence required of banks is more than that of a Roman paterfamilias or a good father of a
family. The highest degree of diligence is expected,"36 considering the nature of the banking business that is imbued with
public interest. While it is true that respondent's liability for its negligent clearing of the check is greater, petitioner
cannot take lightly its own violation of the long-standing rule against encashment of post-dated checks and the injurious
consequences of allowing such checks into the clearing system.
Petitioner repeatedly harps on respondent's transgression of clearing house rules when the latter resorted to direct
presentment way beyond the reglementary period but glosses over its own negligent act that clearly fell short of the
conduct expected of it as a collecting bank. Petitioner must bear the consequences of its omission to exercise
extraordinary diligence in scrutinizing checks presented by its depositors.
Assessing the facts and in the light of the cited precedents, the Court thus finds no error committed by the CA in
allocating the resulting loss from the wrongful encashment of the subject check on a 60-40 ratio.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated March 19, 2009 of the Court of Appeals
in CA-G.R. SP No. 97604 is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 170281 January 18, 2008
REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEY LAUNDERING COUNCIL, petitioner,

vs.
GLASGOW CREDIT AND COLLECTION SERVICES, INC. and CITYSTATE SAVINGS BANK, INC., respondents.
DECISION
CORONA, J.:
This is a petition for review1 of the order2 dated October 27, 2005 of the Regional Trial Court (RTC) of Manila, Branch 47,
dismissing the complaint for forfeiture3 filed by the Republic of the Philippines, represented by the Anti-Money
Laundering Council (AMLC) against respondents Glasgow Credit and Collection Services, Inc. (Glasgow) and Citystate
Savings Bank, Inc. (CSBI).
On July 18, 2003, the Republic filed a complaint in the RTC Manila for civil forfeiture of assets (with urgent plea for
issuance of temporary restraining order [TRO] and/or writ of preliminary injunction) against the bank deposits in
account number CA-005-10-000121-5 maintained by Glasgow in CSBI. The case, filed pursuant to RA 9160 (the Anti-
Money Laundering Act of 2001), as amended, was docketed as Civil Case No. 03-107319.
Acting on the Republic’s urgent plea for the issuance of a TRO, the executive judge4 of RTC Manila issued a 72-hour TRO
dated July 21, 2003. The case was thereafter raffled to Branch 47 and the hearing on the application for issuance of a
writ of preliminary injunction was set on August 4, 2003.
After hearing, the trial court (through then Presiding Judge Marivic T. Balisi-Umali) issued an order granting the issuance
of a writ of preliminary injunction. The injunctive writ was issued on August 8, 2003.
Meanwhile, summons to Glasgow was returned "unserved" as it could no longer be found at its last known address.
On October 8, 2003, the Republic filed a verified omnibus motion for (a) issuance of alias summons and (b) leave of
court to serve summons by publication. In an order dated October 15, 2003, the trial court directed the issuance
of alias summons. However, no mention was made of the motion for leave of court to serve summons by publication.
In an order dated January 30, 2004, the trial court archived the case allegedly for failure of the Republic to serve
the alias summons. The Republic filed an ex parte omnibus motion to (a) reinstate the case and (b) resolve its pending
motion for leave of court to serve summons by publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and directed the Republic to serve
the alias summons on Glasgow and CSBI within 15 days. However, it did not resolve the Republic’s motion for leave of
court to serve summons by publication declaring:
Until and unless a return is made on the alias summons, any action on [the Republic’s] motion for leave of court
to serve summons by publication would be untenable if not premature.
On July 12, 2004, the Republic (through the Office of the Solicitor General [OSG]) received a copy of the sheriff’s return
dated June 30, 2004 stating that the alias summons was returned "unserved" as Glasgow was no longer holding office at
the given address since July 2002 and left no forwarding address.
Meanwhile, the Republic’s motion for leave of court to serve summons by publication remained unresolved. Thus, on
August 11, 2005, the Republic filed a manifestation and ex parte motion to resolve its motion for leave of court to serve
summons by publication.
On August 12, 2005, the OSG received a copy of Glasgow’s "Motion to Dismiss (By Way of Special Appearance)" dated
August 11, 2005. It alleged that (1) the court had no jurisdiction over its person as summons had not yet been served on
it; (2) the complaint was premature and stated no cause of action as there was still no conviction for estafa or other
criminal violations implicating Glasgow and (3) there was failure to prosecute on the part of the Republic.
The Republic opposed Glasgow’s motion to dismiss. It contended that its suit was an action quasi in rem where
jurisdiction over the person of the defendant was not a prerequisite to confer jurisdiction on the court. It asserted that
prior conviction for unlawful activity was not a precondition to the filing of a civil forfeiture case and that its complaint
alleged ultimate facts sufficient to establish a cause of action. It denied that it failed to prosecute the case.
On October 27, 2005, the trial court issued the assailed order. It dismissed the case on the following grounds: (1)
improper venue as it should have been filed in the RTC of Pasig where CSBI, the depository bank of the account sought
to be forfeited, was located; (2) insufficiency of the complaint in form and substance and (3) failure to prosecute. It lifted
the writ of preliminary injunction and directed CSBI to release to Glasgow or its authorized representative the funds in
CA-005-10-000121-5.
Raising questions of law, the Republic filed this petition.
On November 23, 2005, this Court issued a TRO restraining Glasgow and CSBI, their agents, representatives and/or
persons acting upon their orders from implementing the assailed October 27, 2005 order. It restrained Glasgow from
removing, dissipating or disposing of the funds in account no. CA-005-10-000121-5 and CSBI from allowing any
transaction on the said account.
The petition essentially presents the following issue: whether the complaint for civil forfeiture was correctly dismissed
on grounds of improper venue, insufficiency in form and substance and failure to prosecute.
The Court agrees with the Republic.
The Complaint Was Filed

In The Proper Venue
In its assailed order, the trial court cited the grounds raised by Glasgow in support of its motion to dismiss:
1. That this [c]ourt has no jurisdiction over the person of Glasgow considering that no [s]ummons has been
served upon it, and it has not entered its appearance voluntarily;
2. That the [c]omplaint for forfeiture is premature because of the absence of a prior finding by any tribunal that
Glasgow was engaged in unlawful activity: [i]n connection therewith[,] Glasgow argues that the [c]omplaint
states no cause of action; and
3. That there is failure to prosecute, in that, up to now, summons has yet to be served upon Glasgow.5
But inasmuch as Glasgow never questioned the venue of the Republic’s complaint for civil forfeiture against it, how
could the trial court have dismissed the complaint for improper venue? In Dacoycoy v. Intermediate Appellate
Court6(reiterated in Rudolf Lietz Holdings, Inc. v. Registry of Deeds of Parañaque City),7 this Court ruled:
The motu proprio dismissal of petitioner’s complaint by [the] trial court on the ground of improper venue is
plain error…. (emphasis supplied)
At any rate, the trial court was a proper venue.

On November 15, 2005, this Court issued A.M. No. 05-11-04-SC, the Rule of Procedure in Cases of Civil Forfeiture, Asset
Preservation, and Freezing of Monetary Instrument, Property, or Proceeds Representing, Involving, or Relating to an
Unlawful Activity or Money Laundering Offense under RA 9160, as amended (Rule of Procedure in Cases of Civil
Forfeiture). The order dismissing the Republic’s complaint for civil forfeiture of Glasgow’s account in CSBI has not yet
attained finality on account of the pendency of this appeal. Thus, the Rule of Procedure in Cases of Civil Forfeiture
applies to the Republic’s complaint.8 Moreover, Glasgow itself judicially admitted that the Rule of Procedure in Cases of
Civil Forfeiture is "applicable to the instant case."9
Section 3, Title II (Civil Forfeiture in the Regional Trial Court) of the Rule of Procedure in Cases of Civil Forfeiture
provides:
Sec. 3. Venue of cases cognizable by the regional trial court. – A petition for civil forfeiture shall be filed in any
regional trial court of the judicial region where the monetary instrument, property or proceeds representing,
involving, or relating to an unlawful activity or to a money laundering offense are located; provided,
however, that where all or any portion of the monetary instrument, property or proceeds is located outside the
Philippines, the petition may be filed in the regional trial court in Manila or of the judicial region where any
portion of the monetary instrument, property, or proceeds is located, at the option of the petitioner. (emphasis
supplied)
Under Section 3, Title II of the Rule of Procedure in Cases of Civil Forfeiture, therefore, the venue of civil forfeiture cases
is any RTC of the judicial region where the monetary instrument, property or proceeds representing, involving, or
relating to an unlawful activity or to a money laundering offense are located. Pasig City, where the account sought to be
forfeited in this case is situated, is within the National Capital Judicial Region (NCJR). Clearly, the complaint for civil
forfeiture of the account may be filed in any RTC of the NCJR. Since the RTC Manila is one of the RTCs of the NCJR,10 it
was a proper venue of the Republic’s complaint for civil forfeiture of Glasgow’s account.
The Complaint Was Sufficient In Form And Substance
In the assailed order, the trial court evaluated the Republic’s complaint to determine its sufficiency in form and
substance:
At the outset, this [c]ourt, before it proceeds, takes the opportunity to examine the [c]omplaint and determine
whether it is sufficient in form and substance.
Before this [c]ourt is a [c]omplaint for Civil Forfeiture of Assets filed by the [AMLC], represented by the Office of
the Solicitor General[,] against Glasgow and [CSBI] as necessary party. The [c]omplaint principally alleges the
following:
(a) Glasgow is a corporation existing under the laws of the Philippines, with principal office address at Unit 703,
7th Floor, Citystate Center [Building], No. 709 Shaw Boulevard[,] Pasig City;
(b) [CSBI] is a corporation existing under the laws of the Philippines, with principal office at Citystate Center
Building, No. 709 Shaw Boulevard, Pasig City;
(c) Glasgow has funds in the amount of P21,301,430.28 deposited with [CSBI], under CA 005-10-000121-5;
(d) As events have proved, aforestated bank account is related to the unlawful activities of Estafa and violation
of Securities Regulation Code;
(e) The deposit has been subject of Suspicious Transaction Reports;

(f) After appropriate investigation, the AMLC issued Resolutions No. 094 (dated July 10, 2002), 096 (dated July
12, 2002), 101 (dated July 23, 2002), and 108 (dated August 2, 2002), directing the issuance of freeze orders
against the bank accounts of Glasgow;
(g) Pursuant to said AMLC Resolutions, Freeze Orders Nos. 008-010, 011 and 013 were issued on different dates,
addressed to the concerned banks;
(h) The facts and circumstances plainly showing that defendant Glasgow’s bank account and deposit are related
to the unlawful activities of Estafa and violation of Securities Regulation Code, as well as to a money laundering
offense [which] [has] been summarized by the AMLC in its Resolution No. 094; and
(i) Because defendant Glasgow’s bank account and deposits are related to the unlawful activities of Estafa and
violation of Securities Regulation Code, as well as [to] money laundering offense as aforestated, and being the
subject of covered transaction reports and eventual freeze orders, the same should properly be forfeited in
favor of the government in accordance with Section 12, R.A. 9160, as amended.11
In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not the veracity, of the
material allegations.12 The determination is confined to the four corners of the complaint and nowhere else.13
In a motion to dismiss a complaint based on lack of cause of action, the question submitted to the court for
determination is the sufficiency of the allegations made in the complaint to constitute a cause of action and not
whether those allegations of fact are true, for said motion must hypothetically admit the truth of the facts
alleged in the complaint.
The test of the sufficiency of the facts alleged in the complaint is whether or not, admitting the facts alleged,
the court could render a valid judgment upon the same in accordance with the prayer of the
complaint.14 (emphasis ours)
In this connection, Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 4. Contents of the petition for civil forfeiture. - The petition for civil forfeiture shall be verified and contain
the following allegations:
(a) The name and address of the respondent;
(b) A description with reasonable particularity of the monetary instrument, property, or proceeds, and
their location; and
(c) The acts or omissions prohibited by and the specific provisions of the Anti-Money Laundering Act, as
amended, which are alleged to be the grounds relied upon for the forfeiture of the monetary
instrument, property, or proceeds; and
[(d)] The reliefs prayed for.
Here, the verified complaint of the Republic contained the following allegations:
(a) the name and address of the primary defendant therein, Glasgow;15
(b) a description of the proceeds of Glasgow’s unlawful activities with particularity, as well as the location
thereof, account no. CA-005-10-000121-5 in the amount of P21,301,430.28 maintained with CSBI;
(c) the acts prohibited by and the specific provisions of RA 9160, as amended, constituting the grounds for the
forfeiture of the said proceeds. In particular, suspicious transaction reports showed that Glasgow engaged in
unlawful activities of estafa and violation of the Securities Regulation Code (under Section 3(i)(9) and (13), RA
9160, as amended); the proceeds of the unlawful activities were transacted and deposited with CSBI in account
no. CA-005-10-000121-5 thereby making them appear to have originated from legitimate sources; as such,
Glasgow engaged in money laundering (under Section 4, RA 9160, as amended); and the AMLC subjected the
account to freeze order and
(d) the reliefs prayed for, namely, the issuance of a TRO or writ of preliminary injunction and the forfeiture of
the account in favor of the government as well as other reliefs just and equitable under the premises.
The form and substance of the Republic’s complaint substantially conformed with Section 4, Title II of the Rule of
Procedure in Cases of Civil Forfeiture.
Moreover, Section 12(a) of RA 9160, as amended, provides:
SEC. 12. Forfeiture Provisions. –
(a) Civil Forfeiture. – When there is a covered transaction report made, and the court has, in a petition filed for
the purpose ordered seizure of any monetary instrument or property, in whole or in part, directly or indirectly,
related to said report, the Revised Rules of Court on civil forfeiture shall apply.
In relation thereto, Rule 12.2 of the Revised Implementing Rules and Regulations of RA 9160, as amended, states:
RULE 12
Forfeiture Provisions
xxx xxx xxx
Rule 12.2. When Civil Forfeiture May be Applied. – When there is a SUSPICIOUS TRANSACTION REPORT OR A
COVERED TRANSACTION REPORT DEEMED SUSPICIOUS AFTER INVESTIGATION BY THE AMLC, and the court has,
in a petition filed for the purpose, ordered the seizure of any monetary instrument or property, in whole or in
part, directly or indirectly, related to said report, the Revised Rules of Court on civil forfeiture shall apply.
RA 9160, as amended, and its implementing rules and regulations lay down two conditions when applying for civil
forfeiture:
(1) when there is a suspicious transaction report or a covered transaction report deemed suspicious after
investigation by the AMLC and
(2) the court has, in a petition filed for the purpose, ordered the seizure of any monetary instrument or
property, in whole or in part, directly or indirectly, related to said report.
It is the preliminary seizure of the property in question which brings it within the reach of the judicial process.16 It is
actually within the court’s possession when it is submitted to the process of the court.17 The injunctive writ issued on
August 8, 2003 removed account no. CA-005-10-000121-5 from the effective control of either Glasgow or CSBI or their
representatives or agents and subjected it to the process of the court.
Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by several suspicious transaction reports and
(2) placed under the control of the trial court upon the issuance of the writ of preliminary injunction, the conditions
provided in Section 12(a) of RA 9160, as amended, were satisfied. Hence, the Republic, represented by the AMLC,
properly instituted the complaint for civil forfeiture.
Whether or not there is truth in the allegation that account no. CA-005-10-000121-5 contains the proceeds of unlawful
activities is an evidentiary matter that may be proven during trial. The complaint, however, did not even have to show or
allege that Glasgow had been implicated in a conviction for, or the commission of, the unlawful activities of estafa and
violation of the Securities Regulation Code.
A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture proceeding.
Stated otherwise, a finding of guilt for an unlawful activity is not an essential element of civil forfeiture.
Section 6 of RA 9160, as amended, provides:
SEC. 6. Prosecution of Money Laundering. –
(a) Any person may be charged with and convicted of both the offense of money laundering and the unlawful
activity as herein defined.
(b) Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any
offense or violation under this Act without prejudice to the freezing and other remedies provided. (emphasis
supplied)
Rule 6.1 of the Revised Implementing Rules and Regulations of RA 9160, as amended, states:
Rule 6.1. Prosecution of Money Laundering –
(a) Any person may be charged with and convicted of both the offense of money laundering and the unlawful
activity as defined under Rule 3(i) of the AMLA.
(b) Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any
offense or violation under the AMLA without prejudice to the application ex-parte by the AMLC to the Court of
Appeals for a freeze order with respect to the monetary instrument or property involved therein and resort to
other remedies provided under the AMLA, the Rules of Court and other pertinent laws and rules. (emphasis
supplied)
Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 27. No prior charge, pendency or conviction necessary. – No prior criminal charge, pendency of or
conviction for an unlawful activity or money laundering offense is necessary for the commencement or the
resolution of a petition for civil forfeiture. (emphasis supplied)
Thus, regardless of the absence, pendency or outcome of a criminal prosecution for the unlawful activity or for money
laundering, an action for civil forfeiture may be separately and independently prosecuted and resolved.
There Was No Failure

To Prosecute
The trial court faulted the Republic for its alleged failure to prosecute the case. Nothing could be more erroneous.
Immediately after the complaint was filed, the trial court ordered its deputy sheriff/process server to serve summons
and notice of the hearing on the application for issuance of TRO and/or writ of preliminary injunction. The subpoena to
Glasgow was, however, returned unserved as Glasgow "could no longer be found at its given address" and had moved
out of the building since August 1, 2002.
Meanwhile, after due hearing, the trial court issued a writ of preliminary injunction enjoining Glasgow from removing,
dissipating or disposing of the subject bank deposits and CSBI from allowing any transaction on, withdrawal, transfer,
removal, dissipation or disposition thereof.
As the summons on Glasgow was returned "unserved," and considering that its whereabouts could not be ascertained
despite diligent inquiry, the Republic filed a verified omnibus motion for (a) issuance of alias summons and (b) leave of
court to serve summons by publication on October 8, 2003. While the trial court issued an aliassummons in its order
dated October 15, 2003, it kept quiet on the prayer for leave of court to serve summons by publication.
Subsequently, in an order dated January 30, 2004, the trial court archived the case for failure of the Republic to cause
the service of alias summons. The Republic filed an ex parte omnibus motion to (a) reinstate the case and (b) resolve its
pending motion for leave of court to serve summons by publication.
In an order dated May 31, 2004, the trial court ordered the reinstatement of the case and directed the Republic to cause
the service of the alias summons on Glasgow and CSBI within 15 days. However, it deferred its action on the Republic’s
motion for leave of court to serve summons by publication until a return was made on the alias summons.
Meanwhile, the Republic continued to exert efforts to obtain information from other government agencies on the
whereabouts or current status of respondent Glasgow if only to save on expenses of publication of summons. Its efforts,
however, proved futile. The records on file with the Securities and Exchange Commission provided no information.
Other inquiries yielded negative results.
On July 12, 2004, the Republic received a copy of the sheriff’s return dated June 30, 2004 stating that the aliassummons
had been returned "unserved" as Glasgow was no longer holding office at the given address since July 2002 and left no
forwarding address. Still, no action was taken by the trial court on the Republic’s motion for leave of court to serve
summons by publication. Thus, on August 11, 2005, the Republic filed a manifestation and ex partemotion to resolve its
motion for leave of court to serve summons by publication.
It was at that point that Glasgow filed a motion to dismiss by way of special appearance which the Republic vigorously
opposed. Strangely, to say the least, the trial court issued the assailed order granting Glasgow’s motion.
Given these circumstances, how could the Republic be faulted for failure to prosecute the complaint for civil forfeiture?
While there was admittedly a delay in the proceeding, it could not be entirely or primarily ascribed to the Republic. That
Glasgow’s whereabouts could not be ascertained was not only beyond the Republic’s control, it was also attributable to
Glasgow which left its principal office address without informing the Securities and Exchange Commission or any official
regulatory body (like the Bureau of Internal Revenue or the Department of Trade and Industry) of its new address.
Moreover, as early as October 8, 2003, the Republic was already seeking leave of court to serve summons by
publication.
In Marahay v. Melicor,18 this Court ruled:
While a court can dismiss a case on the ground of non prosequitur, the real test for the exercise of such power is
whether, under the circumstances, plaintiff is chargeable with want of due diligence in failing to proceed with
reasonable promptitude. In the absence of a pattern or scheme to delay the disposition of the case or a
wanton failure to observe the mandatory requirement of the rules on the part of the plaintiff, as in the case at
bar, courts should decide to dispense with rather than wield their authority to dismiss. (emphasis supplied)
We see no pattern or scheme on the part of the Republic to delay the disposition of the case or a wanton failure to
observe the mandatory requirement of the rules. The trial court should not have so eagerly wielded its power to dismiss
the Republic’s complaint.
Service Of Summons
May Be By Publication
In Republic v. Sandiganbayan,19 this Court declared that the rule is settled that forfeiture proceedings are actions in rem.
While that case involved forfeiture proceedings under RA 1379, the same principle applies in cases for civil forfeiture
under RA 9160, as amended, since both cases do not terminate in the imposition of a penalty but merely in the
forfeiture of the properties either acquired illegally or related to unlawful activities in favor of the State.
As an action in rem, it is a proceeding against the thing itself instead of against the person.20 In actions in rem or quasi in
rem, jurisdiction over the person of the defendant is not a prerequisite to conferring jurisdiction on the court, provided
that the court acquires jurisdiction over the res.21 Nonetheless, summons must be served upon the defendant in order
to satisfy the requirements of due process.22 For this purpose, service may be made by publication as such mode of
service is allowed in actions in rem and quasi in rem.23
In this connection, Section 8, Title II of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 8. Notice and manner of service. - (a) The respondent shall be given notice of the petition in the same manner as
service of summons under Rule 14 of the Rules of Court and the following rules:
1. The notice shall be served on respondent personally, or by any other means prescribed in Rule 14 of the Rules
of Court;
2. The notice shall contain: (i) the title of the case; (ii) the docket number; (iii) the cause of action; and (iv) the
relief prayed for; and
3. The notice shall likewise contain a proviso that, if no comment or opposition is filed within the reglementary
period, the court shall hear the case ex parte and render such judgment as may be warranted by the facts
alleged in the petition and its supporting evidence.
(b) Where the respondent is designated as an unknown owner or whenever his whereabouts are
unknown and cannot be ascertained by diligent inquiry, service may, by leave of court, be effected
upon him by publication of the notice of the petition in a newspaper of general circulation in such
places and for such time as the court may order. In the event that the cost of publication exceeds the
value or amount of the property to be forfeited by ten percent, publication shall not be required.
(emphasis supplied)
WHEREFORE, the petition is hereby GRANTED. The October 27, 2005 order of the Regional Trial Court of Manila, Branch
47, in Civil Case No. 03-107319 is SET ASIDE. The August 11, 2005 motion to dismiss of Glasgow Credit and Collection
Services, Inc. is DENIED. And the complaint for forfeiture of the Republic of the Philippines, represented by the Anti-
Money Laundering Council, is REINSTATED.
The case is hereby REMANDED to the Regional Trial Court of Manila, Branch 47 which shall forthwith proceed with the
case pursuant to the provisions of A.M. No. 05-11-04-SC. Pending final determination of the case, the November 23,
2005 temporary restraining order issued by this Court is hereby MAINTAINED.
SO ORDERED.
G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a
stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium
may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from
the agreement if it discovers that what the other party has been doing all along is improper or illegal.
This Petition for Review on Certiorari questions the May 8, 2007 Decision of the Court of Appeals (CA) in CA-G.R. CV No. 79650,
1 2
which affirmed with modifications the February 28, 2003 Decision and the June 4, 2003 Order of the Regional Trial Court (RTC),
3 4
Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store and
buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking corporation organized and
existing under Philippine laws.
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real Estate
Mortgage over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the
5
credit line was increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million. 6
And in July 1989, a Supplement to the Existing Real Estate Mortgage was executed to cover the same credit line, which was increased
7
to ₱2.5 million, and additional security was given in the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners
issued eight Promissory Notes and signed a Credit Agreement. This July 1989 Credit Agreement contained a stipulation on interest
8 9
which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in advance every one
hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in
the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread
over the floating interest rate at any time depending on whatever policy it may adopt in the future. (Emphases supplied)
10
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest rates
"within the limits allowed by law or by the Monetary Board." 11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time depending on whatever
policy PNB may adopt in the future." 12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 – 19.5%;
2. 2nd Promissory Note dated November 22, 1989 – 23%;
3. 3rd Promissory Note dated March 21, 1990 – 22%;
4. 4th Promissory Note dated July 19, 1990 – 24%;
5. 5th Promissory Note dated December 17, 1990 – 28%;
6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and
8. 8th Promissory Note dated July 11, 1991 – 24%. 13
In August 1991, an Amendment to Credit Agreement was executed by the parties, with the following stipulation regarding interest:
14
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not
including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable
spread in effect as of the date of each Availment. (Emphases supplied)
15
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which petitioners
settled – except the last (the note covering the principal) – at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 – 26%;
2. 10th Promissory Note dated March 19, 1992 – 25%;
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
11. 19th Promissory Note dated April 10, 1995 – 21%;
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
13. 21st Promissory Note dated December 18, 1995 – 18.75%;
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%. 16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice, raise
within the limits allowed by law x x x." 17
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the 26th promissory note – carried the
following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest
Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central
Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest
rate fixed for any Interest Period, I/we shall have the option top repay the loan or credit facility without penalty within ten (10) calendar
days from the Interest Setting Date. (Emphasis supplied)
18
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously paying
the interests without objection or fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis.
Petitioners’ sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on
October 28, 1997 – became past due, and despite repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and in such
cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding
principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due and payable and shall
be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal amount. x x x (Emphasis
19
supplied)
PNB prepared a Statement of Account as of October 12, 1998, detailing the amount due and demandable from petitioners in the total
20
amount of ₱3,620,541.60, broken down as follows:
Principal P 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on January 14, 1999,
TCTs T-14250 and T-16208 were sold to it at auction for the amount of ₱4,324,172.96. The sheriff’s certificate of sale was registered
21
on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the foreclosure sale and an
accounting of the PNB credit. Petitioners theorized that after the first promissory note where they agreed to pay 19.5% interest, the
succeeding stipulations for the payment of interest in their loan agreements with PNB – which allegedly left to the latter the sole will to
determine the interest rate – became null and void. Petitioners added that because the interest rates were fixed by respondent without
their prior consent or agreement, these rates are void, and as a result, petitioners should only be made liable for interest at the legal
rate of 12%. They claimed further that they overpaid interests on the credit, and concluded that due to this overpayment of steep
interest charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of the secured amount, the same should be excluded from the foreclosure amount
or bid price, even if such penalties are provided for in the final Promissory Note, or PN 9707237. 22
In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00 made during the period August 21, 1991 to
March 5, 1998,resulting from respondent’s imposition of the alleged illegal and steep interest rates. They also prayed to be awarded
₱200,000.00 by way of attorney’s fees. 23
In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without prior notice, PNB may
24
modify interest rates depending on future policy adopted by it; and that the imposition of penalties was agreed upon in the Credit
Agreement. It added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate Mortgage agreement
which provides that the mortgage shall stand as security for any and all other obligations of whatever kind and nature owing to
respondent, which thus includes penalties imposed upon default or non-payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of ₱3,484,287.00; and 25
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter. 26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement, Real Estate
Mortgage and the Supplement thereto were all prepared by respondent PNB and were presented to her and her husband Eduardo only
for signature; that she was told by PNB that the latter alone would determine the interest rate; that as to the Amendment to Credit
Agreement, she was told that PNB would fill up the interest rate portion thereof; that at the time the parties executed the said Credit
Agreement, she was not informed about the applicable spread that PNB would impose on her account; that the interest rate portion of
all Promissory Notes she and Eduardo issued were always left in blank when they executed them, with respondent’s mere assurance
that it would be the one to enter or indicate thereon the prevailing interest rate at the time of availment; and that they agreed to such
arrangement. She further testified that the two Real Estate Mortgage agreements she signed did not stipulate the payment of penalties;
that she and Eduardo consulted with a lawyer, and were told that PNB’s actions were improper, and so on March 20, 2000, they wrote
to the latter seeking a recomputation of their outstanding obligation; and when PNB did not oblige, they instituted Civil Case No. 5975. 27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other individuals and
another bank; that it was only with banks that she was asked to sign loan documents with no indicated interest rate; that she did not
bother to read the terms of the loan documents which she signed; and that she received several PNB statements of account detailing
their outstanding obligations, but she did not complain; that she assumed instead that what was written therein is correct. 28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on cross-examination that
as a practice, the determination of the prime rates of interest was the responsibility solely of PNB’s Treasury Department which is
based in Manila; that these prime rates were simply communicated to all PNB branches for implementation; that there are a multitude of
considerations which determine the interest rate, such as the cost of money, foreign currency values, PNB’s spread, bank
administrative costs, profitability, and the practice in the banking industry; that in every repricing of each loan availment, the borrower
has the right to question the rates, but that this was not done by the petitioners; and that anything that is not found in the Promissory
Note may be supplemented by the Credit Agreement. 29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate at any time
depending on whatever policy it may adopt in the future, it likewise allows for the decrease at any time of the same. Thus,
such stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid, as was held in
31
Consolidated Bank and Trust Corporation (SOLIDBANK) v. Court of Appeals; 32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on prevailing
rates upon which to peg such variable interest rates; 33
3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the Credit Agreement and the Real
Estate Mortgage.
As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note prevail over those mentioned in
the Credit Agreement and the Real Estate Mortgage agreements; 34
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct; 35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made; 36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the principal, interest
and penalties.37
The dispositive portion of the trial court’s Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the petitioners by DISMISSING
the latter’s petition.
Costs against the petitioners.
SO ORDERED. 38
Petitioners moved for reconsideration. In an Order dated June 4, 2003, the trial court granted only a modification in the award of
39
attorney’s fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in the
amount of ₱356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as well as the extra-
judicial foreclosure proceedings and the Certificate of Sale. However, respondent is directed to refund to the petitioner the amount of
₱356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED. 40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the Regional Trial Court
per Order dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No. 9707237 should be
12% per annum;
2. [T]hat the attorney’s fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of ₱377,505.99 which is the difference
between the total amount due [PNB] and the amount of its bid price.
SO ORDERED. 41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its award of attorney’s fees. It
simply raised the issue in its appellee’s brief in the CA, and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners’ appeal to the following issues:
1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid. 42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of ₱3,027,324.60 in interest for
the period August 7, 1991 to August 6, 1997, over and above the ₱2.5 million principal obligation. And this is exclusive of payments for
insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the imposition of
interest; they in fact paid the same religiously and without fail for seven years. The appellate court ruled that petitioners are thus
estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest rate of 25.72%
instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated the inclusion of
the PN 9707237-stipulated 24% penalty in the amount to be secured by the mortgaged property, thus –
For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the MORTGAGEE and to secure
the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR, including interest and expenses,
and other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or secondary, as appearing
in the accounts, books and records of the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage
unto the MORTGAGEE x x x (Emphasis supplied)
43
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the mortgagor to the mortgagee" and
should thus be added to the amount secured by the mortgages. 44
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-14250 and T-16208, which came as
a necessary result of petitioners’ failure to pay the outstanding obligation upon demand. The CA saw fit to increase the trial court’s
45
award of 1% to 10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement which authorized the
collection of the higher rate.
46
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference between PNB’s bid price of
₱4,324,172.96 and petitioners’ total computed obligation as of January 14, 1999, or the date of the auction sale, in the amount of
₱3,946,667.87. 47
Hence, the present Petition.

Issues
The following issues are raised in this Petition:
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE INTEREST
RATE PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST RATE AND ITS
INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS
ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND
CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT DECLARING THAT
PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND
IN NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF ₱3,484,287.00, TO PAYMENT OF
THE PRINCIPAL OF ₱2,500,000.[00] LEAVING AN OVERPAYMENT OF₱984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL
ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE BEEN
EXCLUDED FROM [THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH REDUCED THE ATTORNEY’S
FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND
[AWARDING] 10% ATTORNEY’S FEES. 48
Petitioners’ Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement should be declared
null and void, for they relegated to PNB the sole power to fix interest rates based on arbitrary criteria or factors such as bank policy,
profitability, cost of money, foreign currency values, and bank administrative costs; spaces for interest rates in the two Credit
Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their consent or agreement to the interest rates
imposed thereafter was not obtained; the interest rate, which consists of the prime rate plus the bank spread, is determined not by
agreement of the parties but by PNB’s Treasury Department in Manila. Petitioners conclude that by this method of fixing the interest
rates, the principle of mutuality of contracts is violated, and public policy as well as Circular 905 of the then Central Bank had been
49
breached.
Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can proceed from an illegal act. Though
they failed to timely question the imposition of the alleged illegal interest rates and continued to pay the loan on the basis of these rates,
they cannot be deemed to have acquiesced, and hence could recover what they erroneously paid. 50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of July 1997; moreover,
it would appear that they even made an over payment to the bank in the amount of ₱984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the secured amount,
the penalty of 24% authorized in PN 9707237, such amount of ₱581,666.66 could not be made answerable by or collected from the
mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of Communications [PBCom] v. Court of
Appeals, petitioners insist that the phrase "and other obligations owing by the mortgagor to the mortgagee" in the mortgage
51 52
agreements cannot embrace the ₱581,666.66 penalty, because, as held in the PBCom case, "[a] penalty charge does not belong to the
species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty"; while the
53
mortgages are the accessory contracts, what items are secured may only be determined from the provisions of the mortgage contracts,
and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained, given that in foreclosures, a lawyer’s
work consists merely in the preparation and filing of the petition, and involves minimal study. To allow the imposition of a staggering
54
₱396,211.00 for such work would be contrary to equity. Petitioners state that the purpose of attorney’s fees in cases of this nature "is
not to give respondent a larger compensation for the loan than the law already allows, but to protect it against any future loss or
damage by being compelled to retain counsel x x x to institute judicial proceedings for the collection of its credit." And because the
55
instant case involves a simple extrajudicial foreclosure, attorney’s fees may be equitably tempered.
Respondent’s Arguments
For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it, taking relief in the CA pronouncement
that petitioners are deemed estopped by their failure to question the imposed rates and their continued payment thereof without
opposition. It adds that because the Credit Agreement and promissory notes contained both an escalation clause and a de-escalation
clause, it may not be said that the bank violated the principle of mutuality. Besides, the increase or decrease in interest rates have been
mutually agreed upon by the parties, as shown by petitioners’ continuous payment without protest. Respondent adds that the alleged
unilateral imposition of interest rates is not a proper subject for review by the Court because the issue was never raised in the lower
court.
As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1) the Credit Agreements and the
promissory notes were signed in blank; 2) interest rates were at short periods; 3) no interest rates could be charged where no
agreement on interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to its
choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate and arbitrary – PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank – Respondent claims that this issue was
never raised in the lower court. Besides, documentary evidence prevails over testimonial evidence; Lydia Silos’ testimony in
this regard is self-serving, unsupported and uncorroborated, and for being the lone evidence on this issue. The fact remains
that these documents are in proper form, presumed regular, and endure, against arbitrary claims by Silos – who is an
experienced business person – that she signed questionable loan documents whose provisions for interest rates were left
blank, and yet she continued to pay the interests without protest for a number of years. 56
b. That interest rates were at short periods – Respondent argues that the law which governs and prohibits changes in interest
rates made more than once every twelve months has been removed with the issuance of Presidential Decree No. 858.
57 58
c. That no interest rates could be charged where no agreement on interest rates was made in writing in violation of Article
1956 of the Civil Code, which provides that no interest shall be due unless it has been expressly stipulated in writing –
Respondent insists that the stipulated 25% per annum as embodied in PN 9707237 should be imposed during the interim, or
the period after the loan became due and while it remains unpaid, and not the legal interest of 12% as claimed by petitioners. 59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing – According to respondent,
interest rates were fixed taking into consideration increases or decreases as provided by law or by the Monetary Board, the
bank’s overall costs of funds, and upon agreement of the parties. 60
e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary – On this score, respondent
submits there are various factors that influence interest rates, from political events to economic developments, etc.; the cost of
money, profitability and foreign currency transactions may not be discounted. 61
On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial, petitioners admitted that the Statement of
Account as of October 12, 1998 – which detailed and included penalty charges as part of the total outstanding obligation owing to the
bank – was correct. Respondent justifies the imposition and collection of a penalty as a normal banking practice, and the standard rate
per annum for all commercial banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event of non-compliance. And the promissory note – being the principal
62
agreement as opposed to the mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of the
secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its ownership over TCTs T-
14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of properties covered by
TCTs T-14250 and T-16208 in a desperate move to retain ownership over these properties, because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046, where the propriety of the CA’s ruling on the following
63
issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237 should be 12% per
annum; and
2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99 which is the difference between the total
amount due to PNB and the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to re-examine or re-evaluate evidence adduced by the parties
in the proceedings below. The rule admits of certain well-recognized exceptions, though, as when the lower courts’ findings are not
supported by the evidence on record or are based on a misapprehension of facts, or when certain relevant and undisputed facts were
manifestly overlooked that, if properly considered, would justify a different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division denying respondent’s petition in G.R. No.
181046, due to late filing, failure to attach the required affidavit of service of the petition on the trial court and the petitioners, and
submission of a defective verification and certification of non-forum shopping. On June 25, 2008, the Court issued another Resolution
denying with finality respondent’s motion for reconsideration of the March 5, 2008 Resolution. And on August 15, 2008, entry of
judgment was made. This thus settles the issues, as above-stated, covering a) the interest rate – or 12% per annum– that applies upon
expiration of the first 30 days interest period provided under PN 9707237, and b)the CA’s decree that PNB should reimburse petitioner
the excess in the bid price of ₱377,505.09.
It appears that respondent’s practice, more than once proscribed by the Court, has been carried over once more to the petitioners. In a
number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or required of, its borrowers which
allow the bank to increase or decrease interest rates "within the limits allowed by law at any time depending on whatever policy it may
adopt in the future." Thus, in Philippine National Bank v. Court of Appeals, such stipulation and similar ones were declared in violation
64
of Article 1308 of the Civil Code. In a second case, Philippine National Bank v. Court of Appeals, the very same stipulations found in
65 66
the credit agreement and the promissory notes prepared and issued by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that —
(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it
may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of
12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that —
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the
life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for
its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement
which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it
may adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"),
as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest
agreed upon may be increased in the event that the applicable maximum rate of interest is increased bylaw or by the Monetary Board;
Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon
shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided further,
That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe the maximum rates of interest for loans
and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as
follows:
Sec. 1303. Interest and Other Charges.
— The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or
credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment
in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or
downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular
did not authorize either party to unilaterally raise the interest rate without the other’s consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties.
If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly
adjust the interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court
of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —
x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker
party’s (the debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition. (Emphases supplied)
67
Then again, in a third case, Spouses Almeda v. Court of Appeals, the Court invalidated the very same provisions in the respondent’s
68
prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising
from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential
equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise,
invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract
with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is
itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly
stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed
between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when
1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated
in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same
plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of
their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable.
Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (₱7,735,004.66) which was
applied to interest alone. By the time the spouses tendered the amount of ₱40,142,518.00 in settlement of their obligations; respondent
bank was demanding ₱58,377,487.00 over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable
and valid grounds. Here, as clearly demonstrated above, not only [are] the increases of the interest rates on the basis of the escalation
clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in
the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their
effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally
granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur business cannot be disputed. (Emphases supplied)
69
Still, in a fourth case, Philippine National Bank v. Court of Appeals, the above doctrine was reiterated:
70
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL
BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency, together
with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice, raise within
the limits allowed by law, and I/we also agree to pay jointly and severally ____% per annum penalty charge, by way of liquidated
damages should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all extensions hereof
that will leave any portion of the amount still unpaid after 730 days shall automatically convert the outstanding balance into a medium or
long-term obligation as the case may be and give the Bank the right to charge the interest rates prescribed under its policies from the
date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s ruling. The Court of Appeals nullified
the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but
because the absence of such provision made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that although P.D. No. 1684 is
not to be retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate the
one-sidedness of the escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the banks, our cases
after Banco Filipino have fashioned the rule that any increase in the rate of interest made pursuant to an escalation clause must be the
result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the stipulated interest per
annum" within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided, that the
interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or
by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This Court
declared the increases unilaterally imposed by [PNB] to be in violation of the principle of mutuality as embodied in Art.1308 of the Civil
Code, which provides that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
₱1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave
it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it
may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only
two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly
adjust the interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an
important modification in their agreement, and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with other
borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as
granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest
rate. Private respondents’ assent to the increases can not be implied from their lack of response to the letters sent by PNB, informing
them of the increases. For as stated in one case, no one receiving a proposal to change a contract is obliged to answer the
proposal. (Emphasis supplied)
71
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine National Bank, thus – 72
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to
increase interest rates, penalties and other charges at the latter’s sole discretion and without giving prior notice to and securing the
consent of the borrowers. This unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or unconscionable
rates charged for the use of money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure
statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending
Act. (Emphasis supplied)
73
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, the above pronouncements were reiterated to debunk
74
PNB’s repeated reliance on its invalidated contract stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and Spouses Basco.
Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the increased interest rates is no different
from the escalation clause assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per annum
rate to 42%. x x x
xxxx
On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest the increased interest rates that were
purportedly reflected in the statements of account and the demand letters sent by the bank amounted to their implied acceptance of the
increase – should likewise fail.
Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates prompted the lower courts to declare
excessive and illegal the interest rates imposed. Togo around this lower court finding, PNB alleges that the ₱206,297.47 deficiency
claim was computed using only the original 12% per annum interest rate. We find this unlikely. Our examination of PNB’s own ledgers,
included in the records of the case, clearly indicates that PNB imposed interest rates higher than the agreed 12% per annum rate. This
confirmatory finding, albeit based solely on ledgers found in the records, reinforces the application in this case of the rule that findings
of the RTC, when affirmed by the CA, are binding upon this Court. (Emphases supplied)
75
Verily, all these cases, including the present one, involve identical or similar provisions found in respondent’s credit agreements and
promissory notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent contained the following stipulation on
interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be payable in advance every one
hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in
Where the Bank has imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over the current floating
76
while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest rates "within the limits
allowed by law or the Monetary Board" and the Real Estate Mortgage agreement included the same right to increase or reduce interest
77
rates "at any time depending on whatever policy PNB may adopt in the future." 78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and respondent later on entered
their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 – 19.5%;
2nd Promissory Note dated November 22, 1989 – 23%;
3rd Promissory Note dated March 21, 1990 – 22%;
4th Promissory Note dated July 19, 1990 – 24%;
5th Promissory Note dated December 17, 1990 – 28%;
6th Promissory Note dated February 14, 1991 – 32%;
7th Promissory Note dated March 1, 1991 – 30%; and
8th Promissory Note dated July 11, 1991 – 24%. 79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding interest:
spread in effect as of the date of each Availment. (Emphases supplied)
80
and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory notes in blank, for the
respondent to later on enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 – 26%;
10th Promissory Note dated March 19, 1992 – 25%;
14th Promissory Note dated July 12, 1993 – 17.5%;
19th Promissory Note dated April 10, 1995 – 21%;
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated December 18, 1995 – 18.75%;
22nd Promissory Note dated April 22, 1996 – 18.5%;
23rd Promissory Note dated July 22, 1996 – 18.5%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%. 81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice, raise
within the limits allowed by law x x x." On the other hand, the 18th up to the 26th promissory notes – which includes PN 9707237 –
82
carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest
Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central
Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest
rate fixed for any Interest Period, I/we shall have the option to prepay the loan or credit facility without penalty within ten (10) calendar
days from the Interest Setting Date. (Emphasis supplied)
83
These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these cases is the lack
of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made obvious
by the fact that they signed the promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia in this
respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed
solely by its Treasury Department in Manila, which were then simply communicated to all PNB branches for implementation. If this were
the case, then this would explain why petitioners had to sign the promissory notes in blank, since the imposable interest rates have yet
to be determined and fixed by respondent’s Treasury Department in Manila.
Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as cost of money, foreign currency
values, bank administrative costs, profitability, and considerations which affect the banking industry – it can be seen that considerations
which affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose of his
borrowings, the effect of foreign currency values or fluctuations on his business or borrowing, etc. – these are not factors which
influence the fixing of interest rates to be imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed standard or
margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates
on the obligations of the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the
prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the lender. Moreover, UCPB may
apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much weight
as it desires to each of the following considerations: (1) the prevailing financial and monetary condition;(2) the rate of interest and
charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or(3) the resulting
profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the
case of the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both
options violate the principle of mutuality of contracts. (Emphases supplied)
84
To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made with
the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it
1âwphi1
affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree upon the
interest rate to be fixed; -instead, they are worded in such a way that the borrower shall agree to whatever interest rate respondent
fixes. In credit agreements covered by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it
may adopt in the future: Provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate. (Emphasis supplied)
85
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the Bank may adopt in
Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the current floating
86
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
spread in effect as of the date of each Availment. (Emphasis supplied)
87
Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely lacking, which
makes respondent’s unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for "[e]stoppel cannot be predicated on an illegal
act. As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy."
88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which was enacted "to protect x x x
citizens from a lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with a view of preventing
the uninformed use of credit to the detriment of the national economy." The law "gives a detailed enumeration of the specific
89
information required to be disclosed, among which are the interest and other charges incident to the extension of credit." Section 4
90
thereof provides that a disclosure statement must be furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of credit such as interest
or discounts, collection fees, credit investigation fees, attorney’s fees, and other service charges. The total finance charge represents
the difference between (1) the aggregate consideration (down payment plus installments) on the part of the debtor, and (2) the sum of
the cash price and non-finance charges. 91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally filling them up later on,
respondent violated the Truth in Lending Act, and was remiss in its disclosure obligations. In one case, which the Court finds applicable
here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution, then
they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to
the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from
the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their
loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions.
Upholding UCPB’s claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not sufficient
notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory notes. (Emphases supplied)
92
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently prescribed long ago,
or sometime in 2001, one year after petitioners received the March 2000 demand letter which contained the illegal charges.
The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure respondent’s
breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business
decision.93
Neither may the statements be considered proposals sent to secure the petitioners’ conformity; they were sent after the imposition and
application of the interest rate, and not before. And even if it were to be presumed that these are proposals or offers, there was no
acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to answer the
proposal." 94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually
accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally, without the
consent of the borrower, and depending on complex and subjective factors. Because they have been lured into these contracts by
initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties, surcharges and the like.
Being ordinary individuals or entities, they naturally dread legal complications and cannot afford court litigation; they succumb to
whatever charges the lenders impose. At the very least, borrowers should be charged rightly; but then again this is not possible in a
one-sided credit system where the temptation to abuse is strong and the willingness to rectify is made weak by the eternal desire for
profit.
Given the above supposition, the Court cannot subscribe to respondent’s argument that in every repricing of petitioners’ loan availment,
they are given the right to question the interest rates imposed. The import of respondent’s line of reasoning cannot be other than that if
one out of every hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then only the loan arrangement
with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable practice will
continue unchecked, and respondent will continue to reap the profits from such unscrupulous practice. The Court can no more condone
a view so perverse. This is exactly what the Court meant in the immediately preceding cited case when it said that "the belated
discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision;" as to the 99
95
borrowers who did not or could not complain, the illegal act shall have become a fait accompli– to their detriment, they have already
suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we have a
situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds himself in
petitioners’ position would dare question respondent’s power to arbitrarily modify interest rates at any time. In the second place, on
what basis could any borrower question such power, when the criteria or standards – which are really one-sided, arbitrary and
subjective – for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory notes, petitioners are
granted the option to prepay the loan or credit facility without penalty within 10 calendar days from the Interest Setting Date if they are
not agreeable to the interest rate fixed. It has been shown that the promissory notes are executed and signed in blank, meaning that by
the time petitioners learn of the interest rate, they are already bound to pay it because they have already pre-signed the note where the
rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue
with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence prevails over testimonial evidence;
that the credit documents are in proper form, presumed regular, and endure, against arbitrary claims by petitioners, experienced
business persons that they are, they signed questionable loan documents whose provisions for interest rates were left blank, and yet
they continued to pay the interests without protest for a number of years – deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to the
original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per annum.
This is the uniform ruling adopted in previous cases, including those cited here. The interests paid by petitioners should be applied first
96
to the payment of the stipulated or legal and unpaid interest, as the case may be, and later, to the capital or principal. Respondent
97
should then refund the excess amount of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to
that paid by petitioners when they had no obligation to do so." Thus, the parties’ original agreement stipulated the payment of 19.5%
98
interest; however, this rate was intended to apply only to the first promissory note which expired on November 21, 1989 and was paid
by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher interest rates have been declared
illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate
of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest
shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas-Monetary Board Circular
99
No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall constitute default,
and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed. Petitioners claim that this penalty
should be excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto did n ot
specifically include it as part of the secured amount. Respondent justifies its inclusion in the secured amount, saying that the purpose of
the penalty or a penal clause is to ensure the performance of the obligation and substitute for damages and the payment of interest in
the event of non-compliance. Respondent adds that the imposition and collection of a penalty is a normal banking practice, and the
100
standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as part of the secured amount in the mortgage
agreements is thus valid and necessary.
The Court sustains petitioners’ view that the penalty may not be included as part of the secured amount. Having found the credit
agreements and promissory notes to be tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage and a
note secured by it are deemed parts of one transaction and are construed together." Being so tainted and having the attributes of a
101
contract of adhesion as the principal credit documents, we must construe the mortgage contracts strictly, and against the party who
drafted it. An examination of the mortgage agreements reveals that nowhere is it stated that penalties are to be included in the secured
amount. Construing this silence strictly against the respondent, the Court can only conclude that the parties did not intend to include the
penalty allowed under PN 9707237 as part of the secured amount. Given its resources, respondent could have – if it truly wanted to –
conveniently prepared and executed an amended mortgage agreement with the petitioners, thereby including penalties in the amount to
be secured by the encumbered properties. Yet it did not.
With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it was not raised by the petitioners in
their appeal; it was the respondent that improperly brought it up in its appellee’s brief, when it should have interposed an appeal, since
the trial court’s Decision on this issue is adverse to it. It is an elementary principle in the subject of appeals that an appellee who does
not himself appeal cannot obtain from the appellate court any affirmative relief other than those granted in the decision of the court
below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make counter assignments of error in
ordinary actions, when the purpose is merely to defend himself against an appeal in which errors are alleged to have been committed
by the trial court both in the appreciation of facts and in the interpretation of the law, in order to sustain the judgment in his favor but not
when his purpose is to seek modification or reversal of the judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment. 102
Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no authority to pass upon it at the instance of
respondent. The ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor and to the petitioners who are entitled
to a refund as a consequence of overpayment considering that they paid more by way of interest charges than the 12% per
annum herein allowed – the case should be remanded to the lower court for proper accounting and computation, applying the
103
following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate of only 12% per
annum. Thus, interest payment made in excess of 12% on the 2nd promissory note shall immediately be applied to the
104
principal, and the principal shall be accordingly reduced. The reduced principal shall then be subjected to the 12% interest on
105
the 3rd promissory note, and the excess over 12% interest payment on the 3rd promissory note shall again be applied to the
principal, which shall again be reduced accordingly. The reduced principal shall then be subjected to the 12% interest on the
4th promissory note, and the excess over12% interest payment on the 4th promissory note shall again be applied to the
principal, which shall again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a) still have an
OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION
(principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest from October 28,
1997 until January 14, 1999, which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August 14, 1997 until January
14, 1999. But from this total penalty, the petitioners’ previous payment of penalties in the amount of ₱202,000.00made on
January 27, 1998 shall be DEDUCTED;
106
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1% attorney’s fees
shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) shall be DEDUCTED from the bid
price of ₱4,324,172.96. The penalties (5.) are not included because they are not included in the secured amount;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and 1% attorney’s fees
(6.)] shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an OVERPAYMENT,
the interest (4.), penalties (5.), and the award of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is
no outstanding balance/obligation precisely because petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorney’s fees (6.), the
excess shall be RETURNED to the petitioners, with legal interest, under the principle of solutio indebiti; 107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorney’s fees (6.), the trial court
shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) exceed petitioners’ overpayment, then
the excess shall be DEDUCTED from the bid price of ₱4,324,172.96;
14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1% attorney’s fees (6.)] shall be DELIVERED
TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding penalties, if any,
shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made payments exceeding what
they actually owe by way of principal, interest, and attorney’s fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent must refund the excess to
petitioners. In such case, the extrajudicial foreclosure and sale of the properties shall be declared null and void for obvious
1âwphi 1
lack of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners’ overpayments in
interests do not exceed their total obligation, then the respondent may consolidate its ownership over the properties, since the
period for redemption has expired. Its only obligation will be to return the difference between its bid price (₱4,324,172.96) and
petitioners’ total obligation outstanding – except penalties – after applying the latter’s overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED NULL AND VOID,
and such notes shall instead be subject to interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and
starting July 1, 2013, six percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts secured by the real
estate mortgages;
3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the computation of
overpayments made by petitioners spouses Eduardo and Lydia Silos to respondent Philippine National Bank, taking into
consideration the foregoing dispositions, and applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial foreclosure and sale,
declaring the same null and void in case of overpayment and ordering the release and return of Transfer Certificates of Title
Nos. T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the difference between the bid price
and the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to Transfer Certificates of
Title Nos. T-14250 and T-16208 until all the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent Philippine National Bank is ordered to
reimburse petitioners, should be HELD IN ABEYANCE until the true amount owing to or owed by the parties as against each
other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings, albeit uncomplicated, are
required, the trial court is ORDERED to proceed with dispatch.SO ORDERED.
G.R. No. 16454 September 29, 1921
GEORGE A. KAUFFMAN, plaintiff-appellee,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.

Ross and Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman, was the president of a
domestic corporation engaged chiefly in the exportation of hemp from the Philippine Islands and known as the
Philippine Fiber and Produce Company, of which company the plaintiff apparently held in his own right nearly the entire
issue of capital stock. On February 5, 1918, the board of directors of said company, declared a dividend of P100,000
from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount was
accordingly placed to his credit on the books of the company, and so remained until in October of the same year when
an unsuccessful effort was made to transmit the whole, or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce
Company, presented himself in the exchange department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber
and Produce Company. He was informed that the total cost of said transfer, including exchange and cost of message,
would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew
and delivered a check for that amount on the Philippine National Bank; and the same was accepted by the officer selling
the exchange in payment of the transfer in question. As evidence of this transaction a document was made out and
delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. This memorandum receipt is
in the following language:
October 9th, 1918.
CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18
Foreign Amount Rate

$45,000. 3/8 % P90,337.50
Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. Total P90,355.50. Account of
Philippine Fiber and Produce Company. Sold to Messrs. Philippine Fiber and Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL
BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a cable message in reply suggesting
the advisability of withholding this money from Kauffman, in view of his reluctance to accept certain bills of the
Philippine Fiber and Produce Company. The Philippine National Bank acquiesced in this and on October 11 dispatched to
its New York agency another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising
him that $45,000 had been placed to his credit in the New York agency of the Philippine National Bank; and in response
to this advice Kauffman presented himself at the office of the Philippine National Bank in New York City on October 15,
1918, and demanded the money. By this time, however, the message from the Philippine National Bank of October 11,
directing the withholding of payment had been received in New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of
Manila to recover said sum, with interest and costs; and judgment having been there entered favorably to the plaintiff,
the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-
mentioned, the Philippines Fiber and Produce Company did not have on deposit in the Philippine National Bank money
adequate to pay the check for P90,355.50, which was delivered in payment of the telegraphic order; but the company
did have credit to that extent, or more, for overdraft in current account, and the check in question was charged as an
overdraft against the Philippine Fiber and Produce Company and has remained on the books of the bank as an interest-
bearing item in the account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure of consideration with
respect to the amount paid for said telegraphic order. It is true that in the defendant's answer it is suggested that the
failure of the bank to pay over the amount of this remittance to the plaintiff in New York City, pursuant to its agreement,
was due to a desire to protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit was
secured at the bank by warehouse receipts on Philippine products; and it is alleged that after the exchange in question
was sold the bank found that it did not have sufficient to warrant payment of the remittance. In view, however, of the
failure of the bank to substantiate these allegations, or to offer any other proof showing failure of consideration, it must
be assumed that the obligation of the bank was supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the plaintiff
Kauffman was not a party to the contract with the bank for the transmission of this credit, no right of action can be
vested in him for the breach thereof. "In this situation," — we here quote the words of the appellant's brief, — "if there
exists a cause of action against the defendant, it would not be in favor of the plaintiff who had taken no part at all in the
transaction nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and Produce
Company, the party which contracted in its own name with the defendant."
The question thus placed before us is one purely of law; and at the very threshold of the discussion it can be stated that
the provisions of the Negotiable Instruments Law can come into operation there must be a document in existence of the
character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is
delivered. In the case before us there was an order, it is true, transmitted by the defendant bank to its New York branch,
for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or
"to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its
representative in New York City, there was no delivery in the sense intended in section 16 of the same Law. In this
connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the
telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it
affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the
Philippine Fiber and Produce Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in
New York City; and the question is whether the plaintiff can maintain an action against the bank for the nonperformance
of said undertaking. In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the
maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question is the second paragraph of
article 1257 of the Civil Code; and unless the present action can be maintained under the provision, the plaintiff
admittedly has no case. This provision states an exception to the more general rule expressed in the first paragraph of
the same article to the effect that contracts are productive of effects only between the parties who execute them; and
in harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340;
Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co. vs. Compañia
Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these words:
Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided
he has given notice of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257,
par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and
interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it would
be idle for us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case,
sums up its conclusions upon the conditions governing the right of the person for whose benefit a contract is made to
maintain an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third
person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of
the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must be settled by determining
whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in
their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this
question, of course, the ordinary rules of construction and interpretation of writings must be observed. (Uy Tam
and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That
no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third
person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is
undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a
stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that
promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the
money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money
implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were
not applicable to the facts now before us, it would be difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his
favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to
the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency
to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to as there used,
must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the
party purchasing he exchange.
In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597),
decided by the Court of Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable
transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be
considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said,
"Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the
balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his
correspondent at such point will make payment to the beneficiary described in the cable. All these transaction are
matters of purchase and sale create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of
the right of the beneficiary to maintain an action against the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be
affirmed. It is so ordered, with costs against the appellant. Interest will be computed as prescribed in section 510 of the
Code of Civil Procedure.
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government Service Insurance
System (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated April 14, 1958, in
connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A
parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City, co-
owned by said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also executed
a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY, promise
to pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P 11,500.00)
Philippine Currency, with interest at the rate of six (6%) per centum compounded monthly
payable in . . . (120)equal monthly installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under
which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of
the mortgage covering that portion of the land belonging to herein private respondents and which was
mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold
at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the
petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all other
documents executed in relation thereto in favor of the Government Service Insurance System" be declared null
and void. It was further prayed that they be allowed to recover said property, and/or the GSIS be ordered to
pay them the value thereof, and/or they be allowed to repurchase the land. Additionally, they asked for actual
and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-
owners who were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a
cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the
GSIS required their consent to the mortgage of the entire parcel of land which was covered with
only one certificate of title, with full knowledge that the loans secured thereby were solely for the
benefit of the appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having
foreclosed the mortgage without having given sufficient notice to them as required either as to
their delinquency in the payment of amortization or as to the subsequent foreclosure of the
mortgage by reason of any default in such payment. The notice published in the newspaper,
'Daily Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not the notice to which the
mortgagor is entitled upon the application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed that-
In view of all the foregoing, the judgment appealed from is hereby reversed, and another one
entered (1) declaring the foreclosure of the mortgage void insofar as it affects the share of the
appellants; (2) directing the GSIS to reconvey to appellants their share of the mortgaged
property, or the value thereof if already sold to third party, in the sum of P 35,000.00, and (3)
ordering the appellees Flaviano Lagasca and Esther Lagasca to pay the appellants the sum of
P 10,00.00 as moral damages, P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who
has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held
liable on the instrument to a holder for value although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note
hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable
instruments. These documents do not comply with the fourth requisite to be considered as such under Section
1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified
party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance
shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the documents
"only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the
loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be duly supported
by sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and deduct the
monthly amortizations on the loans from the salary as an army officer of Flaviano Lagasca without likewise
affecting deductions from the salary of Isabelo Racho who was also an army sergeant. Then there is also the
undisputed fact, as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage"
promising to exclude private respondents and their share of the mortgaged property from liability to the
mortgagee. There is no intimation that the former executed such instrument for a consideration, thus
confirming that they did so pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was no
objection in the court below regarding the admissibility of the testimony and documents that were presented to
prove that the private respondents signed the mortgage papers just to accommodate their co-owners, the
Lagasca spouses. Besides, the introduction of such evidence falls under the exception to said rule, there being
allegations in the complaint of private respondents in the court below regarding the failure of the mortgage
contracts to express the true agreement of the parties. 14
However, contrary to the holding of the respondent court, it cannot be said that private respondents are without
liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is
contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not
parties to the principal obligation may secure the latter by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses
would not invalidate the mortgage with respect to private respondents' share in the property. In consenting
thereto, even assuming that private respondents may not be assuming personal liability for the debt, their
share in the property shall nevertheless secure and respond for the performance of the principal obligation.
The parties to the mortgage could not have intended that the same would apply only to the aliquot portion of
the Lagasca spouses in the property, otherwise the consent of the private respondents would not have been
required.
The supposed requirement of prior demand on the private respondents would not be in point here since the
mortgage contracts created obligations with specific terms for the compliance thereof. The facts further show
that the private respondents expressly bound themselves as solidary debtors in the promissory note
hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent
court that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity
thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended, does
not require personal notice on the mortgagor, quoting the requirement on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at
least three public places of the municipality where the property is situated, and if such property
is worth more than four hundred pesos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the foreclosure sale
complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or the payment of the value thereof Indubitably,
whether or not private respondents herein benefited from the loan, the mortgage and the extrajudicial
foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of Appeals
and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.
PADILLA, J.:
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of
respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition
for certiorari prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the
Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps.
Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A
writ of attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy
Sheriff filed a return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan
City in the amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in
another case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig,
Metro Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the
Tibajia spouses to pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal,
the Court of Appeals modified the decision by reducing the award of moral and exemplary damages. The
decision having become final, Eden Tan filed the corresponding motion for execution and thereafter, the
garnished funds which by then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro
Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money
judgment in the following form:
Cashier's Check P262,750.00

Cash 135,733.70
————
Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead
insisted that the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila
be withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a
motion to lift the writ of execution on the ground that the judgment debt had already been paid. On 29 January
1991, the motion was denied by the trial court on the ground that payment in cashier's check is not payment in
legal tender and that payment was made by a third party other than the defendant. A motion for
reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari,
prohibition and injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April 1991
holding that payment by cashier's check is not payment in legal tender as required by Republic Act No. 529.
The motion for reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF
P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS
"LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER
OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU
AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY
OBLIGATION OF PETITIONERS-SPOUSES.1
The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's
check) is considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the
Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine
Islands, undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For
Payee's Account Only" and payable to private respondent Eden Tan, is considered legal tender, payment with
which operates to discharge their monetary obligation.2 Petitioners, to support their contention, cite the case
of New Pacific Timber and Supply Co., Inc. v. Señeris3 where this Court held through Mr. Justice Hermogenes
Concepcion, Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is
deemed as cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to
give the obligee the right to require payment in gold or in any particular kind of coin or currency
other than Philippine currency or in an amount of money of the Philippines measured thereby,
shall be as it is hereby declared against public policy null and void, and of no effect, and no
such provision shall be contained in, or made with respect to, any obligation thereafter incurred.
Every obligation heretofore and hereafter 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.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character — Checks representing deposit money do not have legal tender power
and their acceptance in the payment of debts, both public and private, is at the option of the
creditor: Provided, however, that a check which has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the
amount credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals4 and Roman Catholic Bishop of Malolos,
Inc. vs. Intermediate Appellate Court,5 this Court held that —
A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is
not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's
or personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case6 to support their
cause. The dissenting opinion however does not in any way support the contention that a check is legal tender
but, on the contrary, states that "If the PAL checks in question had not been encashed by Sheriff Reyes, there
would be no payment by PAL and, consequently, no discharge or satisfaction of its judgment
obligation."7 Moreover, the circumstances in the Philippine Airlines case are quite different from those in the
case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio
Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment
creditor.
In the more recent case of Fortunado vs. Court of Appeals,8 this Court stressed that, "We are not, by this
decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the
petitioners.
SO ORDERED.
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila,
Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question.
Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over
a more discerning and just approach? Should we not apply the ancient rule of statutory construction that laws
are to be interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against
the order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent
Amelia Tan, under the name and style of Able Printing Press commenced a complaint for damages before the
Court of First Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al.
v. Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P.
Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner
Philippine Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual
damages, with legal interest thereon from plaintiffs extra-judicial demand made by the letter of
July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the
unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon
from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for
moral damages, with legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and
for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R.
No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of
P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo,
p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a
motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for
reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment became final and executory and on May 31,
1977, judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed
a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of
Branch 13 of the Court of First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of
execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of
Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution
stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender
the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia
Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution"
with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order
which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of
Execution with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial
alias writ of execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment
rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement
thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy
was also ordered for the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return
of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already
been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of
the writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank
of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and
garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978.
Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE

ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF

EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT

DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:
The issuance of the questioned alias writ of execution under the circumstances here obtaining is
justified because even with the absence of a Sheriffs return on the original writ, the unalterable fact
remains that such a return is incapable of being obtained (sic) because the officer who is to make the
said return has absconded and cannot be brought to the Court despite the earlier order of the court for
him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking
cognizance of this circumstance, the order of May 11, 1978 directing the issuance of an alias writ was
therefore issued. (Annex D. Petition). The need for such a return as a condition precedent for the
issuance of an alias writ was justifiably dispensed with by the court below and its action in this regard
meets with our concurrence. A contrary view will produce an abhorent situation whereby the mischief of
an erring officer of the court could be utilized to impede indefinitely the undisputed and awarded rights
which a prevailing party rightfully deserves to obtain and with dispatch. The final judgment in this case
should not indeed be permitted to become illusory or incapable of execution for an indefinite and over
extended period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought
to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and
end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals,
8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A
judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested
rights were never intended to rest on the requirement of a return, the office of which is merely to inform the
court and the parties, of any and all actions taken under the writ of execution. Where such information can be
established in some other manner, the absence of an executing officer's return will not preclude a judgment
from being treated as discharged or being executed through an alias writ of execution as the case may be.
More so, as in the case at bar. Where the return cannot be expected to be forthcoming, to require the same
would be to compel the enforcement of rights under a judgment to rest on an impossibility, thereby allowing the
total avoidance of judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of
execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal
maxim that he who cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is
the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by
check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her
case should not be adjudged as having sued in vain. To decide otherwise would not only give her an empty but
a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won
her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared
as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she
should have been paid from the start, before 1967, without need of her going to court to enforce her rights. And
all because PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did
not operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person.
Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to
receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one
having apparent authority to receive the money will, as a rule, be treated as though actual authority had been
given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will
work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on
ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25;
Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks.
The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor
has no rights, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt
(Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized
to do so by law or by consent of the obligee a public officer has no authority to accept anything other than
money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the
sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument
does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan
Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt
is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended
until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no
payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that
she has received no value for what had been awarded her. Because the checks were drawn in the name of
Emilio Z. Reyes, neither has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We
should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash
in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer
being waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to
avoid the possibility of the money going to the wrong party. The situation is entirely different where a Sheriff
seizes a car, a tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid
with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt
but the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by
turning over huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash
would result in damage or interminable litigations each time a sheriff with huge amounts of cash in his hands
decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek provided
adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If
particularly big amounts are involved, escrow arrangements with a bank and carefully supervised by the court
would be the safer procedure. Actual transfer of funds takes place within the safety of bank premises. These
practices are perfectly legal. The object is always the safe and incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of
another. Making the checks payable to the judgment creditor would have prevented the encashment or the
taking of undue advantage by the sheriff, or any person into whose hands the checks may have fallen, whether
wrongfully or in behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made
possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the
petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about
the accepted procedures and resulting consequences of the checks drawn, nevertheless, in this
instance, without prudence, departed from what is generally observed and done, and placed as payee
in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner thereby
created a situation which permitted the said Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted,
the petitioner himself must bear the fault. The judicial guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the
one who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al.,
L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible
the loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of executing officers, of requiring
checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment
debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must
report the sheriff immediately to the court which ordered the execution or to the Supreme Court for appropriate
disciplinary action. Fees, commissions, and salaries are paid through regular channels. This improper
procedure also allows such officers, who have sixty (60) days within which to make a return, to treat the
moneys as their personal finds and to deposit the same in their private accounts to earn sixty (60) days
interest, before said finds are turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA
525 [1981]). Quite as easily, such officers could put up the defense that said checks had been issued to them
in their private or personal capacity. Without a receipt evidencing payment of the judgment debt, the
misappropriation of finds by such officers becomes clean and complete. The practice is ingenious but evil as it
unjustly enriches court personnel at the expense of litigants and the proper administration of justice. The
temptation could be far greater, as proved to be in this case of the absconding sheriff. The correct and prudent
thing for the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended payee, without the
latter's agreement or consent, are as many as the ways that an artful mind could concoct to get around the
safeguards provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would
not want the winning party to get what he won in the judgment. He would think of ways to delay the winning
party's getting what has been adjudged in his favor. We cannot condone that practice especially in cases
where the courts and their officers are involved.1âwphi1 We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money
judgment by levying on all the property, real and personal of every name and nature whatsoever, and
which may be disposed of for value, of the judgment debtor not exempt from execution, or on a
sufficient amount of such property, if they be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders
of the respondent judge granting the alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the
requisite of payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as
will satisfy the judgment and none such payment had been concededly made yet by the absconding
Sheriff to the private respondent Amelia Tan. The ultimate and essential step to complete the execution
of the judgment not having been performed by the City Sheriff, the judgment debt legally and factually
remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances
as those obtaining in this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d.
63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the
satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion
by sale of the debtor's property into an amount equal to that due, and, it may be done otherwise than upon an
execution (Section 47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the
satisfaction of a judgment when the same has already been realized in fact (Section 47, Rule 39). Execution is
for the sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39
merely provides the sheriff with his duties as executing officer including delivery of the proceeds of his levy on
the debtor's property to satisfy the judgment debt. It is but to stress that the implementing officer's duty should
not stop at his receipt of payments but must continue until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered
under the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks
and interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial
court's judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as
actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the
respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against
the petitioner is upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes.
The Court Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.
SO ORDERED.
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,

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

NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized
representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully
assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor
thirty (30) days after its maturity.
PILIPI
NAS
BANK
(By
Elizabe
th De
Villa
Illegible
Signatu
re)1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and
handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the
DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of
the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the
security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as
"maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking private respondent
Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's
demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial satisfaction of
DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it
had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and
exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to
date apparently remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for
damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas.5The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989,
the Court of Appeals denied the appeal and held:6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails
of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against
DMC PN No. 2731 when its entire face value was already obligated or earmarked for
set-off or compensation is difficult to comprehend and may have been motivated with
bad faith. Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due
course to the petition and required the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent
court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned
portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No.
2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to
pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that
the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-
vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third
relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance
has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship,
except to the extent it necessarily impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta
promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-
negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his
own name and cannot demand or receive payment (Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly
transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note,
was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance
as manifested by the word "non-negotiable" stamp across the face of the Note10 and because maker
Delta and payee Philfinance intended that this Note would be offset against the outstanding
obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not
against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner
took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No.
2731 against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from
the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof
coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of
negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability,
but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee taking subject to the equities
between the original parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-
assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in
part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in
full:
April
10,
1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria

SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note
No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-
terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very
Truly
Yours,
(Sgd.)
Florenc
io B.
Biagan
Senior
Vice
Preside
nt13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance
assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add
that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration
in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or
transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their
exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731,
both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and
the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected
without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner.14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC
PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred,15 must be clearly established by the
unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on
every point.16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an
entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in
money market transactions. In Perez v. Court of Appeals,17 the Court, speaking through Mme. Justice Herrera, made
the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not deal directly with each
other but through a middle manor a dealer in the open market." It involves "commercial papers"
which are instruments "evidencing indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to match and
bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The
money market is an "impersonal market", free from personal considerations. "The market
mechanism is intended to provide quick mobility of money and securities."
The impersonal character of the money market device overlooks the individuals or entities
concerned. The issuer of a commercial paper in the money market necessarily knows in advance
that it would be expenditiously transacted and transferred to any investor/lender without need of
notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on
an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing
public must be given adequate and effective protection in availing of the credit of a borrower in the
commercial paper market.18(Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the
relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-
terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a
valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July
1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC
PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It
is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the
assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the
equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at the time he gave his consent,
that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment.
(Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he
pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that
it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to
give his debt or notice.22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No.
2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from
collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9
February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC
PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance
the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731.
Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself
notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised
by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment
made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that
Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following
words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay
petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under
DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face
value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance;24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any time
during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or
a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt
remain outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into
an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other
time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731.25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the
Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under
article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires
solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner
argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under
the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent
Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas
as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreño as beneficiary of the custodianship or depository agreement. We do not consider
that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as
an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the
thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or
assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate
transactions in the money market by providing a basis for confidence on the part of the investors or placers that the
instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely
beyond their reach, that those instruments will be there available to the placers of funds should they have need of
them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of
the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may
have been established in the said contract.26 Accordingly, any stipulation in the contract of deposit or custodianship
that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any party that
needs the equalizing protection of the law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating interest revenues.27 The custodian bank, if it
is not related either in terms of equity ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance).
The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against
the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has
erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when
petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner Sesbreño at the time the money market placement with
Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by
arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing
deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not
Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC
PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal
interest of six percent (6%)per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may
have vis-a-vis Philfinance.
III.
The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be
treated as one corporate entity — need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial
court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition
before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to
cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were
administered and managed for the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195
dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that
such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent
Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision
and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
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
22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with
his purchased of fuel products from the latter (Original Record, p. 208).
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.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of
the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details
of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
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
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues
involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . 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;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to 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 court that the depositor reffered to in the CTDs is no other than
Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the
one who cause (sic) the amount.
Atty. Calida:
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.
G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,

vs.
JOSE M. ARUEGO, defendant-appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance
of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in
default, 1 and from the order of said court in the same case denying his motion to set aside the judgment
rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R.
NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one
consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated
appeal to the Supreme Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No.
42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17,
1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus
attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine
Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered
into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14,
1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a
periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit
accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal
Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft
being sent later to the defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a
trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals
and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to
answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December
14, 1959 defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16,
1959. 10At the hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a
motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of
action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the
amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving),
without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an
accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event
that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the
defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the
motion for reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and
set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the
order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according
to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the
defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as
yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint
interposing the following defenses: That he signed the document upon which the plaintiff sues in his capacity
as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed
that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that
the defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March
12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in
default. 18 The defendant learned of the order declaring him in default on March 21, 1960. On March 22, 1960
the defendant filed a motion to set aside the order of default alleging that although the order of the court dated
March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably
expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within
office hours, especially because the order of the court dated March 7, 1960 was brought to the attention of
counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good and
substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he
served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the
defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the
defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the
said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and
the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion
to set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on
appeal. The plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The
following day, May 14, 1960, the lower court dismissed defendant's appeal from the order dated March 25,
1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for
reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court
reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On
May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing
the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of
Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default
reiterating the same ground previously advanced by him in his motion for relief from the order of
default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion
to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his
notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal
bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25,
1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower
court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from
the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT

IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY
HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF

ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his mistake,
inadvertence, surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In
other words, in order to set aside the order of default, the defendant must not only show that his failure to
answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious
defense.
The record discloses that Aruego received a copy of the complaint together with the summons on December 2,
1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on
December 22, 1960 the lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a
motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court
issued an order setting aside the order of dismissal; that a copy of the order was received by the defendant on
March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the
following day, March 12, 1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting
aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible
for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in
the afternoon. Moreover, the defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable negligence,
he has failed to show that he has a meritorious defense. The defendant does not have a good and substantial
defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative
capacity, as the then President of the Philippine Education Foundation Company, publisher of "World Current
Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of
exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional
party obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of
exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by
the drawee, in the case in question, payment for the supposed bills of exchange were made before
acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not bills
of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof,
with the defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the
Philippine Education Foundation Company where he is president. Section 20 of the Negotiable Instruments
Law provides that "Where the instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent or as filing a representative
character, without disclosing his principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was
signing as a representative of the Philippine Education Foundation Company. 34 He merely signed as follows:
"JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally
liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party and as such, should
be made liable only after a showing that the drawer is incapable of paying. This contention is also without
merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving
value therefor and for the purpose of lending his name to some other person. Such person is liable on the
instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew
him to be only an accommodation party.35 In lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or
to raise money. He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a
drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant
who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance. This is also without merit. Under
the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to order or to bearer. 36 As long as a
commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange.
The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a
new trial which will serve no purpose and will just waste the time of the courts as well as of the parties because
the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila
denying the petition for relief from the judgment rendered in said case is hereby affirmed, without
pronouncement as to costs.
SO ORDERED.
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-
essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even
abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of
two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish
Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their respective payees,
followed by Gomez as second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in
Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special clearing.2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the
warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from
his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a
"valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the
amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was
P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually
collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau
of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously
withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro.5 After trial,
judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as
Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made
including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this petition for review on
the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for
warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the
latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not
negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving
Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to
allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings
would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances
belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account
with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity
of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its own deposit.7 It was only when Metrobank gave the go-
signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the personal
circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the
warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to
clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or
of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the
withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling — more than one
and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury
warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such
clearance — and notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice
— from the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also
wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the
lapse of one week."8 For a bank with its long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the
deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The
conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also applies to
checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due
to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden
Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or
not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been
imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor,
in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels
that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility
thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that
as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil
Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with
more or less rigor by the courts, according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given
by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury
warrants he had deposited Metrobank misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from
its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total
withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its
belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not
acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden
Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the
warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way
the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at
bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings
before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance
to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the
supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the
drawer corporation, has not been established.9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable
instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance,
it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or
promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that
the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion
conforms to Abubakar vs. Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled
to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words
"payable from the appropriation for food administration, is actually an Order for payment out of "a particular
fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable
instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were
"genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments
Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement
was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the
back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust
Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,12 but we feel this case is
inapplicable to the present controversy. That case involved checks whereas this case involves treasury warrants.
1âw phi 1
Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally,
the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was
authorized to indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the
petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to
withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be
charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the
balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to
withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To
also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that
it has already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive
portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as
garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. 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.
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.
G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
Quijano, Rosete and Lucena for appellant.

Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine National Bank.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M. Luciano for appellee Provincial
Treasurer of Misamis Oriental.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila against the Philippine
National Bank and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of Check
No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental to Mariano V. Ramos and
supposedly indorsed to Montinola. After hearing, the court rendered a decision dismissing the complaint with costs
against plaintiff-appellant. Montinola has appealed from that decision directly to this Court inasmuch as the amount
in controversy exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the Provincial Treasurer of
Misamis Oriental. As such Provincial Treasurer he was ex officio agent of the Philippine National Bank branch in the
province. Mariano V. Ramos worked under him as assistant agent in the bank branch aforementioned. In April of
that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet
been occupied by the Japanese invading forces, was the emergency currency which had been issued since
January, 1942 by the Mindanao Emergency Currency Board by authority of the late President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M. V. Ramos was
inducted into the United States Armed Forces in the Far East (USAFFE) as disbursing officer of an army division. As
such disbursing officer, M. V. Ramos on April 30, 1942, went to the neighboring Province Lanao to procure a cash
advance in the amount of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion,
Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in emergency notes
and a check for P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis
Oriental to encash the check for P500,000 which he had received from the Provincial Treasurer of Lanao. Laya did
not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check No. 1382
for P100,000 drawn on the Philippine National Bank. According to Laya he had previously deposited P500,000
emergency notes in the Philippine National Bank branch in Cebu and he expected to have the check issued by him
cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him,
the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942, the USAFFE forces to which he
was attached surrendered. Ramos was made a prisoner of war until February 12, 1943, after which, he was
released and he resumed his status as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly indorsed this
check No. 1382 to Enrique P. Montinola. The circumstances and conditions under which the negotiation or transfer
was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to buy foodstuffs and
medicine, offered to sell him the check; to be sure that it was genuine and negotiable, Montinola, accompanied by
his agents and by Ramos himself, went to see President Carmona of the Philippine National Bank in Manila about
said check; that after examining it President Carmona told him that it was negotiable but that he should not let the
Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of
the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check for P850,000 Japanese
military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in Japanese military notes
in five installments, and the balance of P400,000 was paid in kind, namely, four bottles of sulphatia sole, each bottle
containing 1,000 tablets, and each tablet valued at P100; that upon payment of the full price, M. V. Ramos duly
indorsed the check to him. This indorsement which now appears on the back of the document is described in detail
by trial court as follows:
The endorsement now appearing at the back of the check (see Exhibit A-1) may be described as follows:
The woods, "pay to the order of" — in rubber stamp and in violet color are placed about one inch from the
top. This is followed by the words "Enrique P. Montinola" in typewriting which is approximately 5/8 an inch below
the stamped words "pay to the order of". Below "Enrique P. Montinola", in typewriting are words and figures also in typewriting, "517 Isabel Street" and
about ¹/8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which,
according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads "M. V. Ramos" also in green ink but
made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand printed in green ink, under the
signature. According to Montinola, he asked Ramos to hand print it because Ramos' signature was not clear.
Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the
check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote
in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine
National Bank to the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese
military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of
P45,000. In this he was corroborated by Atty. Simeon Ramos Jr. who told the court that the agreement between
Ramos and Montinola was that the latter, for the sale to him of P30,000 of the check, was to pay Ramos P90,000 in
Japanese military notes; that when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a
document evidencing said payment of P20,000; that when the second check for P25,000 was issued by Montinola,
he (Simeon) prepared another document with two copies, one for Montinola and the other for Ramos, both signed
by Montinola and M. V. Ramos, evidencing said payment, with the understanding that the balance of P45,000 would
be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check,
Exhibit A, does not now appear at the back of said check. What appears thereon is the indosement testified to by
Montinola and described by the trial court as reproduced above. Before going into a discussion of the merits of the
version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a
further description of it as we shall later.
When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he
filed a supposed photostic copy. However, at the trial, he presented the check itself and had its face marked Exhibit
A and the back thereof Exhibit A-1. But the check is badly mutilated, bottled, torn and partly burned, and its
condition can best be appreciated by seeing it. Roughly, it may be stated that looking at the face of the check
(Exhibit A) we see that the left third portion of the paper has been cut off perpendicularly and severed from the
remaining 2/3 portion; a triangular portion of the upper right hand corner of said
remaining 2/3portion has been similarly cut off and severed, and to keep and attach this
triangular portion and the rectangular ¹/3 portion to the rest of the document, the entire
check is pasted on both sides with cellophane; the edges of the severed portions as well
as of the remaining major portion, where cut bear traces of burning and searing; there is a
big blot with indelible ink about the right middle portion, which seems to have penetrated
to the back of the check (Exhibit A-1), which back bears a larger smear right under the
blot, but not black and sharp as the blot itself; finally, all this tearing, burning, blotting and
smearing and pasting of the check renders it difficult if not impossible to read some of the
words and figures on the check.
In explanation of the mutilation of the check Montinola told the court that several months after indorsing and
delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily
harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the non-
delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the
mutilation of the document.
As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check,
we agree with trial court that the original writing of Ramos on the back of the check was to the effect that he was
assigning only P30,000 of the value of the document and that he was instructing the bank to deposit to his credit the
balance. This writing was in some mysterious way obliterated, and in its place was placed the present indorsement
appearing thereon. Said present indorsement occupies a good portion of the back of the check. It has already been
described in detail. As to how said present indorsement came to be written, the circumstances surrounding its
preparation, the supposed participation of M. V. Ramos in it and the writing originally appearing on the reverse side
of the check, Exhibit A-1, we quote with approval what the trial court presided over by Judge Conrado V. Sanchez,
in its well-prepared decision, says on these points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000 only. The
balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-according to the latter-does
not now appear at the back of the check. A different indorsement, as aforesaid, now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as consideration for the
check? The following observations are in point:
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of the words
"Enrique P. Montinola" and the line in the form of cane handle crossing the word "street" in the words and
figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him, and that as far as he could
remember this writing did not appear on the instrument and he had no knowledge as to how it happened to
be there. Obviously Cortado had no recollection as to how such marks ever were stamped at the back of the
check.
(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check (Exh. A-1)
stated that Ramos typewrote these words outside of the premises of Montinola, that is, a nearby house.
Montinola, on the other hand, testified that Ramos typewrote the words "Enrique P. Montinola 517 Isabel
Street", in his own house. Speaking of the rubber stamp used at the back of the check and which produced
the words "pay to the order of", Cortado stated that when he (Cortado), Atadero, Montinola and Ramos
returned in group to the house of Montinola, the rubber stamp was already in the house of Montinola, and it
was on the table of the upper floor of the house, together with the stamp pad used to stamp the same.
Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber stamp as well as the
ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of the check and the discrepancies in the
versions of Montinola and his witness Cortado just noted, create doubts as to whether or not really Ramos
made the indorsement as it now appears at the back of Exhibit A. One thing difficult to understand is why
Ramos should go into the laborious task of placing the rubber stamp "Pay to the order of" and afterwards
move to the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign
his name too far below the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he acquired the full
value of the check and paid the full consideration therefor is the present condition of said check. It is now so
unclean and discolored; it is pasted in cellophane, bottled with ink on both sides torn three parts, and with
portions thereof burned-all done by plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and valuable to him, and which according to
him involves his life savings, approximate intentional cancellation. The only reason advanced by plaintiff as
to why tore check, burned the torn edges and bottled out the registration at the back, is found in the
following: That Ramos came to his house, armed with a revolver, threatened his life and demanded from him
the return of the check; that when he informed Ramos that he did not have it in the house, but in some
deposit outside thereof and that Ramos promised to return the next day; that the same night he tore the
check into three parts, burned the sides with a parrafin candle to show traces of burning; and that upon the
return of Ramos the next day he showed the two parts of the check, the triangle on the right upper part and
the torn piece on the left part, and upon seeing the condition thereof Ramos did not bother to get the check
back. He also said that he placed the blots in indelible ink to prevent Ramos — if he would be forced to
surrender the middle part of the check — from seeing that it was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why should Montinola be afraid of Ramos?
Montinola claims that Ramos went there about April, 1945, that is, during liberation. If he believed he was
standing by his rights, he could have very well sought police protection or transferred to some place where
Ramos could not bother him. And then, really Ramos did not have anything more to do with this check for
the reason that Montinola had obtained in full the amount thereof, there could not be any reason why Ramos
should have threatened Montinola as stated by the latter. Under the circumstances, the most logical
conclusion is that Ramos wanted the check at all costs because Montinola did not acquire the check to such
an extent that it borders on intentional cancellation thereof (see Sections 119-123 Negotiable Instruments
Law) there is room to believe that Montinola did not have so much investments in that check as to adopted
an "what do I care?" attitude.
And there is the circumstance of the alleged loss of the check. At the time of the filing of the complaint the
check was allegedly lost, so much so that a photostatic copy thereof was merely attached to the complaint
(see paragraph 7 of the complaint). Yet, during the trial the original check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check reveals discrepancies between the
two. The condition of the check as it was produced is such that it was partially burned, partially blotted, badly
mutilated, discolored and pasted with cellophane. What is worse is that Montinola's excuse as to how it was
lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his life
savings, and that before the alleged loss, he took extreme pains and precautions to save the check from the
possible ravages of the war, had it photographed, registered said check with the General Auditing Office and
he knew that Ramos, since liberation, was hot after the possession of that check.
(d) It seems that Montinola was not so sure as to what he had testified to in reference to the consideration
he paid for the check. In court he testified that he paid P450,000 in cash from June to December 1944, and
P400,000 worth of sulphatiazole in January 1945 to complete the alleged consideration of P850,000. When
Montinola testified this way in court, obviously he overlooked a letter he wrote to the provincial treasurer of
Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told
Provincial Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for
goods in kind, medicine, etc., received by him for the use of the guerrillas." In said letter Exhibit 3, Montinola
did not mention the cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola came into the possession of the check in
question about the end of December 1944 by reason of the fact that M. V. Ramos sold to him P30,000 of the
face value thereof in consideration of the sum of P90,000 Japanese money, of which only one-half or
P45,000 (in Japanese money) was actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of
Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo D. Laya was ex
officio agent of the Philippine National Bank branch in that province. On the face of the check (Exh. A) we now find
the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya, purportedly showing that he
issued the check as agent of the Philippine National Bank. It this is true, then the bank is not only drawee but also a
drawer of the check, and Montinola evidently is trying to hold the Philippine National Bank liable in that capacity of
drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet
avoid payment.
Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the words in
parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he
issued the same. In this he was corroborated by the payee M. V. Ramos who equally assured the court that when
he received the check and then delivered it to Montinola, those words did not appear under the signature of Ubaldo
D. Laya. We again quote with approval the pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added after Laya
had issued the check. In a straightforward manner and without vacillation Laya positively testified that the
check Exhibit A was issued by him in his capacity as Provincial Treasurer of Misamis Oriental and that the
words "Agent, Phil. National Bank" which now appear on the check Exhibit A were not typewritten below his
signature when he signed the said check and delivered the same to Ramos. Laya assured the court that
there could not be any mistake as to this. For, according to Laya, when he issued check in his capacity as
agent of the Misamis Oriental agency of the Philippine National Bank the said check must be countersigned
by the cashier of the said agency — not by the provincial auditor. He also testified that the said check was
issued by him in his capacity as provincial treasurer of Misamis Oriental and that is why the same was
countersigned by Provincial Auditor Flores. The Provincial Auditor at that time had no connection in any
capacity with the Misamis Oriental agency of the Philippine National Bank. Plaintiff Montinola on the other
hand testified that when he received the check Exhibit A it already bore the words "Agent, Phil. National
Bank" below the signature of Laya and the printed words "Provincial Treasurer".
After considering the testimony of the one and the other, the court finds that the preponderance of the
evidence supports Laya's testimony. In the first place, his testimony was corroborated by the payee M. V.
Ramos. But what renders more probable the testimony of Laya and Ramos is the fact that the money for
which the check was issued was expressly for the use of the USAFFE of which Ramos was then disbursing
officer, so much so that upon the delivery of the P400,000 in emergency notes and the P100,000 check to
Ramos, Laya credited his depository accounts as provincial treasurer with the corresponding credit entry. In
the normal course of events the check could not have been issued by the bank, and this is borne by the fact
that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. And then, too
there is the circumstance that this check was issued by the provincial treasurer of Lanao to Ramos who
requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The check, Exhibit A is not
what we may term in business parlance, "certified check" or "cashier's check."
Besides, at the time the check was issued, Laya already knew that Cebu and Manila were already occupied.
He could not have therefore issued the check-as a bank employee-payable at the central office of the
Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National Bank' below the
signature of Ubaldo D. Laya and the printed words "Provincial Treasurer" were added in the check after the
same was issued by the Provincial Treasurer of Misamis Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank" now appearing
on the face of the check (Exh. A) were added or placed in the instrument after it was issued by Provincial Treasurer
Laya to M. V. Ramos. There is no reason known to us why Provincial Treasurer Laya should issue the check (Exh.
A) as agent of the Philippine National Bank. Said check for P100,000 was issued to complete the payment of the
other check for P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for
the USAFFE in Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds,
not of the bank but of the Provincial Treasury. Said USAFFE were being financed not by the Bank but by the
Government and, presumably, one of the reasons for the issuance of the emergency notes in Mindanao was for this
purpose. As already stated, according to Provincial Treasurer Laya, upon receiving a relatively considerable amount
of these emergency notes for his office, he deposited P500,000 of said currency in the Philippine National Bank
branch in Cebu, and that in issuing the check (Exh. A), he expected to have it cashed at said Cebu bank branch
against his deposit of P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer and as an
official of the Government which was under obligation to provide the USAFFE with advance funds, and not by the
Philippine National Bank which has no such obligation. The very Annex C, made part of plaintiff's complaint, and
later introduced in evidence for him as Exhibit E states that Laya issued the check "in his capacity as Provincial
Treasurer of Misamis Oriental", obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the check to
Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been working as assistant of
Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the Philippine National Bank. Naturally, Ramos
must have known the procedure followed there as to the issuance of checks, namely, that when a check is issued
by the Provincial Treasurer as such, it is countersigned by the Provincial Auditor as was done on the check (Exhibit
A), but that if the Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is
countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank cashier, which was
not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil.
National Bank" after he received the check, because he should have realized that following the practice already
described, the check having been issued by Laya as Provincial Treasurer, and not as agent of the bank, and since
the check bears the countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words
"Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical to
believe and to find that the addition of those words was made after the check had been transferred by Ramos to
Montinola. Moreover, there are other facts and circumstances involved in the case which support this view.
Referring to the mimeographed record on appeal filed by the plaintiff-appellant, we find that in transcribing and
copying the check, particularly the face of it (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now
appearing on the face of the check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in
making this copy or transcription in the complaint committed a serious omission which is decisive as far as the bank
is concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on the face of the
check. That probably was the reason why the bank in its motion to dismiss dated September 2, 1947, contended
that if the check in question had been issued by the provincial treasurer in his capacity as agent of the Philippine
National Bank, said treasurer would have placed below his signature the words "Agent of the Philippine National
Bank". The plaintiff because of the alleged loss of the check, allegedly attached to the complaint a photostatic copy
of said check and marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase
"Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer. We tried to verify this
discrepancy by going over the original records of the Court of First Instance so as to compare the copy of Annex A
in the complaint, with the original Annex A, the photostatic copy, but said original Annex A appears to be missing
from the record. How it disappeared is not explained. Of course, now we have in the list of exhibit a photostatic copy
marked Annex A and Exhibit B, but according to the manifestation of counsel for the plaintiff dated October 15,
1948, said photostatic copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in compliance
with the verbal order of the trial court. It is therefore evident that the Annex A now available is not the same original
Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is the photostatic
copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said photostatic copy should be a
faithful and accurate reproduction of the check, particularly of the phrase "Agent, Phil. National Bank" now
appearing under the signature of the Provincial Treasurer on the face of the original check (Exhibit A). But a minute
examination of and comparison between Annex A, the photostatic copy also marked Exhibit B and the face of the
check, Exhibit A, especially with the aid of a handlens, show notable differences and discrepancies. For instance, on
Exhibit A, the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the signature of
Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and "Treasurer"; but
the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the same letter "a" in
Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the lower right hand
corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B is on the very border line itself or
even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and appears to be
double instead of one single line; this same ")" on Exhibit B appears in a single line and is relatively nearer to the
border line.
There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit B, as regards
the relative position of the phrase "Agent, Phil. National Bank", with the title Provincial Treasurer, giving ground to
the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial Treasurer of Misamis
Oriental as drawer on the Philippine National Bank as drawee. Ramos sold P30,000 of the check to Enrique P.
Montinola for P90,000 Japanese military notes, of which only P45,000 was paid by Montinola. The writing made by
Ramos at the back of the check was an instruction to the bank to pay P30,000 to Montinola and to deposit the
balance to his (Ramos) credit. This writing was obliterated and in its place we now have the supposed indorsement
appearing on the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, or the first
days of January, 1945, the check which, being a negotiable instrument, was payable on demand, was long overdue
by about 2 ½ years. It may therefore be considered, even then, a stable check. Of course, Montinola claims that
about June, 1944 when Ramos supposedly approached him for the purpose of negotiating the check, he (Montinola)
consulted President Carmona of the Philippine National Bank who assured him that the check was good and
negotiable. However, President Carmona on the witness stand flatly denied Montinola's claim and assured the court
that the first time that he saw Montinola was after the Philippine National Bank, of which he was President,
reopened, after liberation, around August or September, 1945, and that when shown the check he told Montinola
that it was stale. M. V. Ramos also told the court that it is not true that he ever went with Montinola to see President
Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the complaint of Montinola cannot prosper.
The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer
and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the
parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable Instruments Law). The
check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law
provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as a negotiation of
the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a mere
assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses
available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be
considered as a holder in due course because section 52 of said law defines a holder in due course as a holder who
has taken the instrument under certain conditions, one of which is that he became the holder before it was overdue.
When Montinola received the check, it was long overdue. And, Montinola is not even a holder because section 191
of the same law defines holder as the payee or indorsee of a bill or note and Montinola is not a payee. Neither is he
an indorsee for as already stated, at most he can be considered only as assignee. Neither could it be said that he
took it in good faith. As already stated, he has not paid the full amount of P90,000 for which Ramos sold him
P30,000 of the value of the check. In the second place, as was stated by the trial court in its decision, Montinola
speculated on the check and took a chance on its being paid after the war. Montinola must have known that at the
time the check was issued in May, 1942, the money circulating in Mindanao and the Visayas was only the
emergency notes and that the check was intended to be payable in that currency. Also, he should have known that
a check for such a large amount of P100,000 could not have been issued to Ramos in his private capacity but rather
in his capacity as disbursing officer of the USAFFE, and that at the time that Ramos sold a part of the check to him,
Ramos was no longer connected with the USAFFE but already a civilian who needed the money only for himself
and his family.
As already stated, as a mere assignee Montinola is subject to all the defenses available against assignor Ramos.
And, Ramos had he retained the check may not now collect its value because it had been issued to him as
disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos not as a person but M. V.
Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was
negotiated in breach of trust, hence he transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed from, the same is hereby affirmed
with costs.
In the prayer for relief contained at the end of the brief for the Philippine National Bank dated September 27, 1949,
we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City Fiscal's Office
for appropriate criminal action against the plaintiff-appellant if the facts so warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27, 1950, he asked this
Court to allow him to withdraw the original check (Exh. A) for him to keep, expressing his willingness to submit it to
the court whenever needed for examination and verification. The bank on March 2, 1950 opposed the said petition
on the ground that inasmuch as the appellant's cause of action in this case is based on the said check, it is
absolutely necessary for the court to examine the original in order to see the actual alterations supposedly made
thereon, and that should this Court grant the prayer contained in the bank's brief that the check be later referred to
the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed to withdraw
said document. In view of said opposition this Court resolution of March 6, 1950, denied said petition for withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes final, let the
Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent papers and documents in this
case, for any action he may deem proper in the premises.

Commercial LAw Review Cases Compilation (NIL)

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Commercial LAw Review Cases Compilation (NIL)

Caricato da

Copyright:

Formati disponibili

G.R. No.

186063 January 15, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

The facts, as summarized by the CA, are as follows:

On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:

1. The principal amount of ₱3,722,440.00;

3. Attorney's fees of ₱30,000.00;

4. Litigation expenses of ₱20,000.00.

In the meantime, trial continued with respect to PNB.

On October 14, 2005, the RTC issued a Supplemental Judgment,16 thus:

On even date, the RTC also issued an Amended Order,18 to wit:

The petition lacks merit.

ALLIED BANKING CORPORATION, Petitioner,

VILLARAMA, JR., J.:

The factual antecedents:

(b) Attorney’s fees in the amount of ₱25,000.00;

In Bank of America NT & SA v. Philippine Racing Club,30 the Court ruled:

REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEY LAUNDERING COUNCIL, petitioner,

Raising questions of law, the Republic filed this petition.

The Court agrees with the Republic.

The Complaint Was Filed

At any rate, the trial court was a proper venue.

The Complaint Was Sufficient In Form And Substance

(e) The deposit has been subject of Suspicious Transaction Reports;

(a) The name and address of the respondent;

[(d)] The reliefs prayed for.

Moreover, Section 12(a) of RA 9160, as amended, provides:

SEC. 12. Forfeiture Provisions. –

xxx xxx xxx

Section 6 of RA 9160, as amended, provides:

SEC. 6. Prosecution of Money Laundering. –

Rule 6.1. Prosecution of Money Laundering –

Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:

There Was No Failure

In Marahay v. Melicor,18 this Court ruled:

G.R. No. 181045 July 2, 2014

DEL CASTILLO, J.:

Branch 6 of Kalibo, Aklan in Civil Case No. 5975.

which provides as follows:

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

8. 8th Promissory Note dated July 11, 1991 – 24%. 13

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

7. 15th Promissory Note dated November 17, 1993 – 21%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

THREE HUNDRED SIXTY FIVE DAYS AFTER DATE