PHILIPPINE NATIONAL BANK v. ERLANDO T.

RODRIGUEZ and NORMA

RODRIGUEZ
September 26, 2008
WHEN the payee of the check is not intended to be the true recipient of its
proceeds, is it payable to order or bearer? What is the fictitious-payee rule
and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of the
Amended Decision[1] of the Court of Appeals (CA) which affirmed with
modification that of the Regional Trial Court (RTC).[2]

The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner
Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They
maintained savings and demand/checking accounts, namely, PNBig Demand
Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit
(Checking/Current Account No. 810480-4 under the account name Erlando T.
Rodriguez).
The spouses were engaged in the informal lending business. In line with their
business, they had a discounting[3] arrangement with the Philnabank
Employees Savings and Loan Association (PEMSLA), an association of PNB
employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with
petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would
rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would replace
the postdated checks with their own checks issued in the name of the
members.
It was PEMSLAs policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a
scheme to obtain additional loans despite their outstanding loan accounts.
They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these
loans were then given to the spouses for rediscounting. The officers carried
this out by forging the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the
name of the members and delivered the checks to an officer of PEMSLA. The
PEMSLA checks, on the other hand, were deposited by the spouses to their
account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its
savings account without any indorsement from the named payees. This was
an irregular procedure made possible through the facilitation of Edmundo

Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It
appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty
nine (69) checks, in the total amount of P2,345,804.00. These were payable
to forty seven (47) individual payees who were all members of PEMSLA.[4]
Petitioner PNB eventually found out about these fraudulent acts. To put a
stop to this scheme, PNB closed the current account of PEMSLA. As a result,
the PEMSLA checks deposited by the spouses were returned or dishonored for
the reason Account Closed. The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were
duly debited from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a
civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative
of Philnabankers (MCP), and petitioner PNB. They sought to recover the value
of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB
credited the checks to the PEMSLA account even without indorsements, PNB
violated its contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of
action. PNB argued that the claim for damages should come from the payees
of the checks, and not from spouses Rodriguez. Since there was no demand
from the said payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion to
dismiss.
In its Answer,[5] PNB claimed it is not liable for the checks which it paid to
the PEMSLA account without any indorsement from the payees. The bank
contended that spouses Rodriguez, the makers, actually did not intend for
the named payees to receive the proceeds of the checks. Consequently, the
payees were considered as fictitious payees as defined under the
Negotiable Instruments Law (NIL). Being checks made to fictitious payees
which are bearer instruments, the checks were negotiable by mere delivery.
PNBs Answer included its cross-claim against its co-defendants PEMSLA and
the MCP, praying that in the event that judgment is rendered against the
bank, the cross-defendants should be ordered to reimburse PNB the amount
it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value of the
checks. All counterclaims and cross-claims were dismissed. The dispositive
portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as
follows:

1.
Defendant is hereby ordered to pay the plaintiffs the total amount of
P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the PNBig
Demand Deposit Checking/Current Account No. 810480-4 of Erlando T.
Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit,
Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be computed from the filing
of this complaint until fully paid;
2.
The defendant PNB is hereby ordered to pay the plaintiffs the
following reasonable amount of damages suffered by them taking into
consideration the standing of the plaintiffs being sugarcane planters, realtors,
residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount of
P4,000,000.00, as a result of their having incurred great dificulty (sic)
especially in the residential subdivision business, which was not pushed
through and the contractor even threatened to file a case against the
plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorneys fees in the amount of P150,000.00 considering that this case
does not involve very complicated issues; and for the
(e) Costs of suit.
3.

Other claims and counterclaims are hereby dismissed.[6]

CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground
that the disputed checks should be considered as payable to bearer and not
to order.
In a Decision[7] dated July 22, 2004, the CA reversed and set aside the RTC
disposition. The CA concluded that the checks were obviously meant by the
spouses to be really paid to PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses
Rodriguez) that their cause of action arose from the alleged breach of
contract by the defendant-appellant (PNB) when it paid the value of the
checks to PEMSLA despite the checks being payable to order. Rather, we are
more convinced by the strong and credible evidence for the defendantappellant with regard to the plaintiffs-appellees and PEMSLAs business
arrangement that the value of the rediscounted checks of the plaintiffsappellees would be deposited in PEMSLAs account for payment of the loans
it has approved in exchange for PEMSLAs checks with the full value of the
said loans. This is the only obvious explanation as to why all the disputed
sixty-nine (69) checks were in the possession of PEMSLAs errand boy for
presentment to the defendant-appellant that led to this present controversy.

It also appears that the teller who accepted the said checks was PEMSLAs
officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is
that the checks were never meant to be paid to order, but instead, to
PEMSLA. We thus find no breach of contract on the part of the defendantappellant.
According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA
allegedly issued post-dated checks to its qualified members who had applied
for loans. However, because of PEMSLAs insufficiency of funds, PEMSLA
approached the plaintiffs-appellees for the latter to issue rediscounted checks
in favor of said applicant members. Based on the investigation of the
defendant-appellant, meanwhile, this arrangement allowed the plaintiffsappellees to make a profit by issuing rediscounted checks, while the officers
of PEMSLA and other members would be able to claim their loans, despite the
fact that they were disqualified for one reason or another. They were able to
achieve this conspiracy by using other members who had loaned lesser
amounts of money or had not applied at all. x x x.[8] (Emphasis added)
The CA found that the checks were bearer instruments, thus they do
not require indorsement for negotiation; and that spouses Rodriguez and
PEMSLA conspired with each other to accomplish this money-making scheme.
The payees in the checks were fictitious payees because they were not the
intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia,
that the checks on their faces were unquestionably payable to order; and that
PNB committed a breach of contract when it paid the value of the checks to
PEMSLA without indorsement from the payees. They also argued that their
cause of action is not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the
last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffsappellees Sps. Rodriguez for the following:
1.
Actual damages in the amount of P2,345,804 with interest at 6% per
annum from 14 May 1999 until fully paid;
2.

Moral damages in the amount of P200,000;

3.

Attorneys fees in the amount of P100,000; and

4.

Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered

by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil
Case No. 99-10892, as set forth in the immediately next preceding paragraph
hereof, and SETTING ASIDE Our original decision promulgated in this case on
22 July 2004.

SO ORDERED.[9]
The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the claim of
the spouses Rodriguez that they really intended the checks to be received by
the specified payees. Thus, PNB is liable for the value of the checks which it
paid to PEMSLA without indorsements from the named payees. The award for
damages was deemed appropriate in view of the failure of PNB to treat the
Rodriguez account with the highest degree of care considering the fiduciary
nature of their relationship, which constrained respondents to seek legal
action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to
order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed
checks, they did not intend for the named payees to receive the proceeds.
Thus, they are bearer instruments that could be validly negotiated by mere
delivery. Further, testimonial and documentary evidence presented during
trial amply proved that spouses Rodriguez and the officers of PEMSLA
conspired with each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous
judgment attaining finality to the prejudice of innocent parties. A court
discovering an erroneous judgment before it becomes final may, motu proprio
or upon motion of the parties, correct its judgment with the singular objective
of achieving justice for the litigants.[10]
However, a word of caution to lower courts, the CA in Cebu in this particular
case, is in order. The Court does not sanction careless disposition of cases by
courts of justice. The highest degree of diligence must go into the study of
every controversy submitted for decision by litigants. Every issue and factual
detail must be closely scrutinized and analyzed, and all the applicable laws
judiciously studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient
of the proceeds, the check is considered as a bearer instrument. A check is
a bill of exchange drawn on a bank payable on demand.[11] It is either an
order or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order where it
is drawn payable to the order of a specified person or to him or his order. It
may be drawn payable to the order of
(a)

A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f)
The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. The instrument is payable to bearer
(a)
When it is expressed to be so payable; or
(b)
When it is payable to a person named therein or bearer; or
(c)
When it is payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable; or
(d)
When the name of the payee does not purport to be the name of any
person; or
(e)
Where the only or last indorsement is an indorsement in blank.[12]
(Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A
bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it
is transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the indorsement of the holder
completed by delivery.
A check that is payable to a specified payee is an order instrument.
However, under Section 9(c) of the NIL, a check payable to a specified payee
may nevertheless be considered as a bearer instrument if it is payable to the
order of a fictitious or non-existing person, and such fact is known to the
person making it so payable. Thus, checks issued to Prinsipe Abante or Si
Malakas at si Maganda, who are well-known characters in Philippine
mythology, are bearer instruments because the named payees are fictitious
and non-existent.
We have yet to discuss a broader meaning of the term fictitious as used in
the NIL. It is for this reason that We look elsewhere for guidance. Court
rulings in the United States are a logical starting point since our law on
negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.[13]
A review of US jurisprudence yields that an actual, existing, and living payee
may also be fictitious if the maker of the check did not intend for the payee
to in fact receive the proceeds of the check. This usually occurs when the
maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity.[14] Thus, a check made expressly payable to a
non-fictitious and existing person is not necessarily an order instrument. If
the payee is not the intended recipient of the proceeds of the check, the

payee is considered a fictitious payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and
the drawer bears the loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be negotiated by delivery.
The underlying theory is that one cannot expect a fictitious payee to
negotiate the check by placing his indorsement thereon. And since the
maker knew this limitation, he must have intended for the instrument to be
negotiated by mere delivery. Thus, in case of controversy, the drawer of the
check will bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the check to
always deny the validity of the indorsement. This despite the fact that the
fictitious payee was purposely named without any intention that the payee
should receive the proceeds of the check.[15]
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty
Insurance Bank.[16] In the said case, the corporation Mueller & Martin was
defrauded by George L. Martin, one of its authorized signatories. Martin drew
seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the
corporation without authority from the latter. Martin was also an officer of
the GSFCBA but did not have signing authority. At the back of the checks,
Martin placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance
Bank for his own personal profit. When the corporation filed an action against
the bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the
check so payable did not intend for the specified payee to have any part in
the transactions, the payee is considered as a fictitious payee. The check is
then considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as
drawee, was authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine or not.[17]
The more recent Getty Petroleum Corp. v. American Express Travel Related
Services Company, Inc.[18] upheld the fictitious-payee rule. The rule
protects the depositary bank and assigns the loss to the drawer of the check
who was in a better position to prevent the loss in the first place. Due care is
not even required from the drawee or depositary bank in accepting and
paying the checks. The effect is that a showing of negligence on the part of
the depositary bank will not defeat the protection that is derived from this
rule.
However, there is a commercial bad faith exception to the fictitious-payee
rule. A showing of commercial bad faith on the part of the drawee bank, or
any transferee of the check for that matter, will work to strip it of this
defense. The exception will cause it to bear the loss. Commercial bad faith is
present if the transferee of the check acts dishonestly, and is a party to the
fraudulent scheme. Said the US Supreme Court in Getty:
Consequently, a transferees lapse of wary vigilance, disregard of suspicious
circumstances which might have well induced a prudent banker to investigate
and other permutations of negligence are not relevant considerations under

Section 3-405 x x x. Rather, there is a commercial bad faith exception to

UCC 3-405, applicable when the transferee acts dishonestly where it has
actual knowledge of facts and circumstances that amount to bad faith, thus
itself becoming a participant in a fraudulent scheme. x x x Such a test finds
support in the text of the Code, which omits a standard of care requirement
from UCC 3-405 but imposes on all parties an obligation to act with honesty
in fact. x x x[19] (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified
payees. It is unrefuted that the 69 checks were payable to specific persons.
Likewise, it is uncontroverted that the payees were actual, existing, and living
persons who were members of PEMSLA that had a rediscounting arrangement
with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons,
were fictitious in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must show that
the makers did not intend for the named payees to be part of the transaction
involving the checks. At most, the banks thesis shows that the payees did
not have knowledge of the existence of the checks. This lack of knowledge
on the part of the payees, however, was not tantamount to a lack of intention
on the part of respondents-spouses that the payees would not receive the
checks proceeds. Considering that respondents-spouses were transacting
with PEMSLA and not the individual payees, it is understandable that they
relied on the information given by the officers of PEMSLA that the payees
would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because,
as found by both lower courts, PNB failed to present sufficient evidence to
defeat the claim of respondents-spouses that the named payees were the
intended recipients of the checks proceeds. The bank failed to satisfy a
requisite condition of a fictitious-payee situation that the maker of the
check intended for the payee to have no interest in the transaction.
Because of a failure to show that the payees were fictitious in its broader
sense, the fictitious-payee rule does not apply. Thus, the checks are to be
deemed payable to order. Consequently, the drawee bank bears the loss.[20]
PNB was remiss in its duty as the drawee bank. It does not dispute the fact
that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears
stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its
operations.[21] This Court has recognized the unique public interest
possessed by the banking industry and the need for the people to have full
trust and confidence in their banks.[22] For this reason, banks are minded to

treat their customers accounts with utmost care, confidence, and honesty.
[23]
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the
check. It should charge to the drawers accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the
drawers account.[24]
In the case at bar, respondents-spouses were the banks depositors. The
checks were drawn against respondents-spouses accounts. PNB, as the
drawee bank, had the responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks in
strict accordance with the instructions of the drawers. Petitioner miserably
failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA
absent any type of indorsement, forged or otherwise. The facts clearly show
that the bank did not pay the checks in strict accordance with the instructions
of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party
to the transaction between the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to be
extra vigilant in the management and supervision of their employees. In
Bank of the Philippine Islands v. Court of Appeals,[25] this Court cautioned
thus:
Banks handle daily transactions involving millions of pesos. By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater
than those of ordinary clerks and employees. For obvious reasons, the banks
are expected to exercise the highest degree of diligence in the selection and
supervision of their employees.[26]
PNBs tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. Indeed,
when it is the gross negligence of the bank employees that caused the loss,
the bank should be held liable.[27]
PNBs argument that there is no loss to compensate since no demand for
payment has been made by the payees must also fail. Damage was caused
to respondents-spouses when the PEMSLA checks they deposited were
returned for the reason Account Closed. These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not
encash the PEMSLA checks, respondents-spouses were unable to collect
payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its

negligence. Being issued to named payees, PNB was duty-bound by law and
by banking rules and procedure to require that the checks be properly
indorsed before accepting them for deposit and payment. In fine, PNB should
be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNBs cross-claim
against its co-defendants PEMSLA and MPC. The records are bereft of any
pleading filed by these two defendants in answer to the complaint of
respondents-spouses and cross-claim of PNB. The Rules expressly provide
that failure to file an answer is a ground for a declaration that defendant
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA
and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs
cross-claim has no basis. Thus, this judgment shall be without prejudice to
whatever action the bank might take against its co-defendants in the trial
court.
To PNBs credit, it became involved in the controversial transaction not
of its own volition but due to the actions of some of its employees.
Considering that moral damages must be understood to be in concept of
grants, not punitive or corrective in nature, We resolve to reduce the award of
moral damages to P50,000.00.[29]
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to P50,000.00,
and that this is without prejudice to whatever civil, criminal, or administrative
action PNB might take against PEMSLA, MPC, and the employees involved.
SO ORDERED.
SPOUSES CARLOS and TERESITA RUSTIA,
Petitioners,

- versus -

EMERITA RIVERA,

Respondent.

G.R. No. 156903

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and

GARCIA, JJ.
Promulgated:
November 24, 2006
x-----------------------------------------------------------------------------------------x
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under
Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision[1] of the Court of Appeals, dated August 29, 2002, in CA-G.R. SP No.
63265.
In September 1995, Emerita Rivera, respondent, filed with the
Metropolitan Trial Court (MeTC), Branch 36, Quezon City, a complaint for sum
of money against spouses Carlos and Teresita Rustia, petitioners, and
Rosemarie F. Rocha. The complaint was docketed as Civil Case No. 0206.
Respondent alleged therein that petitioners obtained from her a loan of
P130,000.00, payable within thirty (30) days without need of prior demand.
As security for the loan, petitioners executed a promissory note, with
Rosemarie Rocha as their co-maker. The loan bears an interest of five
percent (5%) per month. Petitioners paid the interest corresponding to the
period from January 1991 to March 1994. Thereafter, despite respondents
written demands, they failed to pay any interest or the principal obligation.
Respondent then prayed that judgment be rendered ordering petitioners to
pay the loan, the accrued interest thereon, and attorneys fees.
After the courts denial of their motion to dismiss the complaint,
petitioners filed their answer admitting that respondent extended to them a
loan of P130,000.00. However, they denied having agreed to pay interest
thereon. While they paid respondent P6,500.00 every month, however, it was
for the settlement of the principal obligation. In fact, they overpaid
P123,500.00. They prayed that the case be dismissed and that respondent
be ordered to refund to them their overpayment plus damages, attorneys
fees, and litigation expenses.
During the hearing, respondent offered in evidence petitioners
promissory note and petitioner Teresita Rustias letter addressed to
respondent agreeing to pay 5% monthly interest.
Teresita denied having borrowed P130,000.00 from respondent; that
respondent delivered the said amount to petitioners as investment in the
latters business; and that the monthly payment of P6,500.00 they tendered
to respondent corresponds to her share in the profits.

On June 11, 1999, the trial court rendered its Decision,[2] the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, as follows:
1.
Ordering the defendants to pay, jointly and severally, the plaintiff the
sum of P130,000.00 plus accrued interest of 5% per month to be reckoned
from April 1994 until the same is fully paid;
2.
Ordering the defendants to pay, jointly and severally, the sum of
P10,000.oo as and for attorneys fees;
3.

Ordering the defendants to pay the costs of suit.

SO ORDERED.

On appeal by petitioners, the Regional Trial Court (RTC), Branch 77, Quezon
City affirmed the MeTCs Decision in toto.
Petitioners filed a motion for reconsideration but it was denied by the RTC as
it does not contain a notice of the time and place of hearing required by
Sections 4 and 5, Rule 15 of the 1997 Rules of Civil Procedure, as amended.
Petitioners filed with the Court of Appeals a petition for review, docketed as
CA-G.R. SP No. 63265, but it was denied in a Decision dated August 29, 2002.
Their motion for reconsideration was likewise denied.
Hence, the instant petition raising the following issues:
1.
Whether the Court of Appeals erred in holding that the motion
for reconsideration filed with the RTC by petitioners is but a mere scrap of
paper for lack of notice of hearing;
2.
Whether the Court of Appeals erred when it failed to apply Article
1956 of the Civil Code providing that no interest shall be due unless it has
been expressly stipulated in writing;
On the first issue, Sections 4 and 5, Rule 15 of the 1997 Rules of Civil
Procedure, as amended, provide:
SEC. 4. Hearing of motion. Except for motions which the court may act upon
without prejudicing the rights of the adverse party, every written motion shall
be set for hearing by the applicant.
Every written motion required to be heard and the notice of the hearing
thereof shall be served in such a manner as to ensure its receipt by the other
party at least three (3) days before the date of hearing, unless the court for
good cause sets the hearing on shorter notice.
SEC. 5. Notice of hearing. The notice of hearing shall be addressed to all
parties concerned, and shall specify the time and date of the hearing which
must not be later than ten (10) days after the filing of the motion.

Section 4 lays the general rule that all written motions shall be set for hearing
by the movant, except the non-litigated motions or those which may be acted
upon by the court without prejudicing the rights of the adverse party. These
ex parte motions include a motion for extension of time to file pleadings,[3]
motion for extension of time to file an answer,[4] and a motion for extension
of time to file a record on appeal.[5] In Manila Surety and Fidelity Co., Inc. v.
Bath Construction and Company,[6] we ruled that a notice of time and place
of hearing is mandatory for motions for new trial or motion for
reconsideration, as in this case. We have reiterated this doctrine in Magno v.
Ortiz,[7] Calero v. Yaptichay,[8] Vda. de Azarias v. Maddela,[9] Phil.
Advertising Counselors, Inc. v. Revilla,[10] Sacdalan v. Bautista,[11] New
Japan Motors, Inc. v. Perucho,[12] Firme v. Reyes, et al.,[13] and others.
More recently, in National Commercial Bank of Saudi Arabia v. Court of
Appeals,[14] we reaffirmed the rule that the requirement of notice under
Sections 4 and 5, Rule 15 is mandatory and the lack thereof is fatal to a
motion for reconsideration.
We thus hold that the Court of Appeals did not err when it affirmed the RTC
ruling that petitioners motion for reconsideration is but a mere scrap of
paper because it does not comply with Sections 4 and 5, Rule 15.
Anent the second issue, contrary to petitioners contention, the trial court
found that petitioner Teresita Rustia sent respondent a letter begging the
latters indulgence regarding her difficulty and that of her husband in paying
the 5% monthly interest on their P130,000.00 loan. This finding by the trial
court was upheld by the RTC and the Court of Appeals. Indeed, such letter
proves that petitioners agreed to pay interest. It is basic that findings of fact
by the trial court, when affirmed by the Court of Appeals, are binding and
conclusive upon this Court.[15] Verily, the Court of Appeals did not err when
it sustained the lower courts finding that respondent is entitled to the
payment of interests on the subject loan.
WHEREFORE, we DENY the petition. The challenged Decision of
the Court of Appeals dated August 29, 2002 in CA-G.R. SP No. 63265 is
AFFIRMED IN TOTO. Costs against petitioners.
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 Agreement 3 dated February 4, 1981, and a Detached

Assignment 4 dated 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 Mandamus 5 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 Interpleader 6 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 Decision 8 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.

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. 93073

December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,

vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the
decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic
Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al.,
Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the
decision ** in Civil Case No. 82-5448 except that it completely absolved
Fermin Canlas from liability under the promissory notes and reduced the
award for damages and attorney's fees. The RTC decision, rendered on June
20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing
Corporation (formerly Worldwide Garment Manufacturing, Inc.) and
defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally,
the plaintiff bank the following sums with interest thereon at 16% per annum
from the dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest
from January 29, 1981 until fully paid; under promissory note (Exhibit "B"),
the sum of P40,000.00 with interest from November 27, 1980; under the
promissory note (Exhibit "C"), the sum of P166,466.00 which interest from
January 29, 1981; under the promissory note (Exhibit "E"), the sum of
P86,130.31 with interest from January 29, 1981; under the promissory note
(Exhibit "G"), the sum of P12,703.70 with interest from November 27, 1980;
under the promissory note (Exhibit "H"), the sum of P281,875.91 with interest
from January 29, 1981; and under the promissory note (Exhibit "I"), the sum

of P200,000.00 with interest from January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing
Corporation (formerly named Worldwide Garment Manufacturing, Inc.), and
Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank
the sum of P367,000.00 with interest of 16% per annum from January 29,
1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly
Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with
interest at 16% per annum from November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff
the sum of P231,120.81 with interest at 12% per annum from July 1, 1981,
until fully paid and the sum of P331,870.97 with interest from March 28,
1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff
the sum of P100,000.00 as and for reasonable attorney's fee and the further
sum equivalent to 3% per annum of the respective principal sums from the
dates above stated as penalty charge until fully paid, plus one percent (1%)
of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then
Intermediate Court (now the Court Appeals). His contention was that
inasmuch as he signed the promissory notes in his capacity as officer of the
defunct Worldwide Garment Manufacturing, Inc, he should not be held
personally liable for such authorized corporate acts that he performed. It is
now the contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi,
jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo
Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi
and private respondent Fermin Canlas were President/Chief Operating Officer
and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By
virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo
Yamaguchi and private respondent Fermin Canlas were authorized to apply
for credit facilities with the petitioner Republic Planters Bank in the forms of
export advances and letters of credit/trust receipts accommodations.
Petitioner bank issued nine promissory notes, marked as Exhibits A to I
inclusive, each of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise
to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures

of Shozo Yamaguchi and Fermin Canlas above their printed names with the
phrase "and (in) his personal capacity" typewritten below. At the bottom of
the promissory notes appeared: "Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line
which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide
Garment Manufacturing, Inc. was apparently rubber stamped above the
signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to
change its corporate name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of
sums of money covered among others, by the nine promissory notes with
interest thereon, plus attorney's fees and penalty charges. The complainant
was originally brought against Worldwide Garment Manufacturing, Inc. inter
alia, but it was later amended to drop Worldwide Manufacturing, Inc. as
defendant and substitute Pinch Manufacturing Corporation it its place.
Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not
file an Amended Answer and failed to appear at the scheduled pre-trial
conference despite due notice. Only private respondent Fermin Canlas filed
an Amended Answer wherein he, denied having issued the promissory notes
in question since according to him, he was not an officer of Pinch
Manufacturing Corporation, but instead of Worldwide Garment Manufacturing,
Inc., and that when he issued said promissory notes in behalf of Worldwide
Garment Manufacturing, Inc., the same were in blank, the typewritten entries
not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this
appeal is whether private respondent Fermin Canlas is solidarily liable with
the other defendants, namely Pinch Manufacturing Corporation and Shozo
Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of
the promissory notes bearing his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by
the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the
face of promissory notes are makers and are liable as such. 3 By signing the
notes, the maker promises to pay to the order of the payee or any holder 4
according to the tenor thereof. 5 Based on the above provisions of law, there
is no denying that private respondent Fermin Canlas is one of the co-makers
of the promissory notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two
or more persons, they are deemed to be jointly and severally liable thereon. 6
An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay,
when signed by two or more persons, makes them solidarily liable. 7 The fact
that the singular pronoun is used indicates that the promise is individual as to
each other; meaning that each of the co-signers is deemed to have made an
independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is
made clearer and certain, without reason for ambiguity, by the presence of
the phrase "joint and several" as describing the unconditional promise to pay
to the order of Republic Planters Bank. A joint and several note is one in
which the makers bind themselves both jointly and individually to the payee
so that all may be sued together for its enforcement, or the creditor may
select one or more as the object of the suit. 8 A joint and several obligation in
common law corresponds to a civil law solidary obligation; that is, one of
several debtors bound in such wise that each is liable for the entire amount,
and not merely for his proportionate share. 9 By making a joint and several
promise to pay to the order of Republic Planters Bank, private respondent
Fermin Canlas assumed the solidary liability of a debtor and the payee may
choose to enforce the notes against him alone or jointly with Yamaguchi and
Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity"
below the signatures of the makers in the notes will affect the liability of the
makers, We do not find it necessary to resolve and decide, because it is
immaterial and will not affect to the liability of private respondent Fermin
Canlas as a joint and several debtor of the notes. With or without the
presence of said phrase, private respondent Fermin Canlas is primarily liable
as a co-maker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an
amendment in a corporation's Articles of Incorporation effecting a change of
corporate name, in this case from Worldwide Garment manufacturing Inc to
Pinch Manufacturing Corporation extinguished the personality of the original
corporation.
The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect changed.
10
A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no affect on the
identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all
debts or other liabilities which it had previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear no
personal liability for acts done or contracts entered into by officers of the
corporation, if duly authorized. Inasmuch as such officers acted in their
capacity as agent of the old corporation and the change of name meant only
the continuation of the old juridical entity, the corporation bearing the same

name is still bound by the acts of its agents if authorized by the Board. Under
the Negotiable Instruments Law, the liability of a person signing as an agent
is specifically provided for as follows:
Sec. 20.
Liability of a person signing as agent and so forth. 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 filling a representative character,
without disclosing his principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he
disclosed the fact that he is acting in a representative capacity or the name
of the third party for whom he might have acted as agent, the agent is
personally liable to take holder of the instrument and cannot be permitted to
prove that he was merely acting as agent of another and parol or extrinsic
evidence is not admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were
delivered to him in blank for his signature, we rule otherwise. A careful
examination of the notes in question shows that they are the stereotype
printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed notes
are incomplete because there are blank spaces to be filled up on material
particulars such as payee's name, amount of the loan, rate of interest, date of
issue and the maturity date. The terms and conditions of the loan are printed
on the note for the borrower-debtor 's perusal. An incomplete instrument
which has been delivered to the borrower for his signature is governed by
Section 14 of the Negotiable Instruments Law which provides, in so far as
relevant to this case, thus:
Sec. 14.
Blanks: when may be filled. Where the instrument is wanting
in any material particular, the person in possesion thereof has a prima facie
authority to complete it by filling up the blanks therein. ... In order, however,
that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled
up strictly in accordance with the authority given and within a reasonable
time...
Proof that the notes were signed in blank was only the self-serving testimony
of private respondent Fermin Canlas, as determined by the trial court, so that
the trial court ''doubts the defendant (Canlas) signed in blank the promissory
notes". We chose to believe the bank's testimony that the notes were filled
up before they were given to private respondent Fermin Canlas and
defendant Shozo Yamaguchi for their signatures as joint and several
promissors. For signing the notes above their typewritten names, they bound
themselves as unconditional makers. We take judicial notice of the customary
procedure of commercial banks of requiring their clientele to sign promissory
notes prepared by the banks in printed form with blank spaces already filled
up as per agreed terms of the loan, leaving the borrowers-debtors to do
nothing but read the terms and conditions therein printed and to sign as
makers or co-makers. When the notes were given to private respondent
Fermin Canlas for his signature, the notes were complete in the sense that
the spaces for the material particular had been filled up by the bank as per

agreement. The notes were not incomplete instruments; neither were they
given to private respondent Fermin Canlas in blank as he claims. Thus,
Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in
reducing the interest rate on the promissory notes from 16% to 12% per
annum does not squarely apply to the instant petition. In the abovecited
case, the rate of 12% was applied to forebearances of money, goods or credit
and court judgemets thereon, only in the absence of any stipulation between
the parties.
In the case at bar however , it was found by the trial court that the rate of
interest is 9% per annum, which interest rate the plaintiff may at any time
without notice, raise within the limits allowed law. And so, as of February 16,
1984 , the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the Civil
Code, on the other hand, governs interests by way of damages. 15 This fine
distinction was not taken into consideration by the appellate court, which
instead made a general statement that the interest rate be at 12% per
annum.
Inasmuch as this Court had declared that increases in interest rates are not
subject to any ceiling prescribed by the Usury Law, the appellate court erred
in limiting the interest rates at 12% per annum. Central Bank Circular No.
905, Series of 1982 removed the Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the
statute and jurisprudence on the matter, the decision of the respondent:
Court of Appeals absolving private respondent Fermin Canlas is REVERSED
and SET ASIDE. Judgement is hereby rendered declaring private respondent
Fermin Canlas jointly and severally liable on all the nine promissory notes
with the following sums and at 16% interest per annum from the dates
indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with
interest from January 29, 1981 until fully paid; under promissory note marked
as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980:
under the promissory note denominated as Exhibit C, the amount of
P166,466.00 with interest from January 29, 1981; under the promissory note
denominated as Exhibit D, the amount of P367,000.00 with interest from
January 29, 1981 until fully paid; under the promissory note marked as
Exhibit E, the amount of P86,130.31 with interest from January 29, 1981;
under the promissory note marked as Exhibit F, the sum of P140,000.00 with
interest from November 27, 1980 until fully paid; under the promissory note
marked as Exhibit G, the amount of P12,703.70 with interest from November
27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91
with interest from January 29, 1981; and the promissory note marked as
Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having

appealed from the decision of the trial court, shall be adjudged in accordance
with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private
respondent Fermin Canlas is hereby held jointly and solidarity liable with
defendants for the amounts found, by the Court a quo. With costs against
private respondent.
SO ORDERED.
G.R. No. 89252

May 24, 1993

RAUL SESBREO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.

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

Metro Manila
February 9, 1981

VALUE DATE
TO

Raul Sesbreo

April 6, 1981

MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of
PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody
the following securities to you [sic] the extent herein indicated.
SERIAL
NUMBER

MAT. FACE ISSUED

REGISTEREDAMOUNT
DATE VALUEBY
HOLDER PAYEE

2731 4-6-81
UNDERWRITERS
FINANCE CORP.

2,300,833.34

DMC PHIL. 307,933.33

We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the
above securities fully assigned to you should this Denominated Custodianship
Receipt remain outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding, and
that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
the Philfinance as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note was stamped
"NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of
participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981, 2 again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's

demand letters to Philfinance for written instructions, as has been supposedly

agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas
never released DMC PN No. 2731, nor any other instrument in respect
thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private
respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining
that Philfinance, as payee thereof, had assigned to him said Note to the
extent of P307,933.33. Delta, however, denied any liability to petitioner on
the promissory note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730)
against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and exchange commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date
apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed
on 28 September 1982 an action for damages with the Regional Trial Court
("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action,
with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195.
In a Decision dated 21 March 1989, the Court of Appeals denied the appeal
and held: 6
Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of 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 Note 10 and because maker Delta and payee
Philfinance intended that this Note would be offset against the outstanding
obligation of Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;
(2)

that the assignment of DMC PN No. 2731 by Philfinance was without

Delta's consent, if not against its instructions; and

(3)
assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took the Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731 against
Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from 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.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably
construed as a prohibition upon Philfinance assigning or transferring all or
part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary
to add that, even had this "Letter of Agreement" set forth an explicit
prohibition of transfer upon Philfinance, such a prohibition cannot be invoked
against an assignee or transferee of the Note who parted with valuable
consideration in good faith and without notice of such prohibition. It is not
disputed that petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance and Delta were
doing by their exchange of their promissory notes was this: Delta invested, by
making a money market placement with Philfinance, approximately
P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed
back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated
10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only
P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC
PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite
mistaken. Conventional subrogation, which in the first place is never lightly
inferred, 15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old
obligations on every point. 16 Nothing of the sort is present in the instant
case.
It is in fact difficult to be impressed with Delta's complaint, since it released
its DMC PN No. 2731 to Philfinance, an entity engaged in the business of
buying and selling debt instruments and other securities, and more generally,
in money market transactions. In Perez v. Court of Appeals, 17 the Court,
speaking through Mme. Justice Herrera, made the following important
statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market
dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other
but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any
person or entity. . ., which are issued, endorsed, sold or transferred or in any
manner conveyed to another person or entity, with or without recourse". The
fundamental function of the money market device in its operation is to match

and bring together in a most impersonal manner both the "fund users" and
the "fund suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to provide quick
mobility of money and securities."
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. 143A 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 Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act
of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreo as beneficiary of the custodianship or
depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into
by petitioner with Philfinance. Petitioner bought a portion of DMC PN No.
2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor.
Indeed, the constituting of the depositary or custodianship agreement was
equivalent to constructive delivery of the Note (to the extent it had been sold
or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by
providing a basis for confidence on the part of the investors or placers that
the instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have
need of them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in the
presented case, of the beneficiary) of the contract, even though a term for
such return may have been established in the said contract. 26 Accordingly,
any stipulation in the contract of deposit or custodianship that runs counter
to the fundamental purpose of that agreement or which was not brought to
the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of
public policy. If there is any party that needs the equalizing protection of the
law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating
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 Sesbreo. The
ostensible term written into the DCR (i.e., "should this [DCR] remain
outstanding in your favor thirty [30] days after its maturity") was not a
defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreo at the time the money market placement with Philfinance
was made; secondly, such term runs counter to the very purpose of the
custodianship or depositary agreement as an integral part of a money market
transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of
the Civil Code noted above. Indeed, in principle, petitioner became entitled to
demand physical delivery of the Note held by Pilipinas as soon as petitioner's
money market placement matured on 13 March 1981 without payment from
Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to
petitioner for damages sustained by arising out of its breach of duty. By
failing to deliver the Note to the petitioner as depositor-beneficiary of the
thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the
Note deposited with it. Whether or not Pilipinas itself benefitted from such
conversion or unlawful deprivation inflicted upon petitioner, is of no moment
for present purposes. Prima facie, the damages suffered by petitioner
consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%) per annum containing
from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right
of reimbursement as Pilipinas may 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. 200250, August 06, 2014
UPSI PROPERTY HOLDINGS, INC., Petitioner, v. DIESEL CONSTRUCTION CO.,
INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court filed
by UPSI Property Holdings, Inc. (UPSI) assails the November 11, 2011
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 110926, and its
January 17, 2012 Resolution2 denying its petition for certiorari.
The present controversy stemmed from a complaint filed by respondent
Diesel Construction Co., Inc. (Diesel) against UPSI before the Construction
Industry Arbitration Commission (CIAC) for collection of unpaid balance of the
contract price and retention money under their construction agreement,
damages for unjustified refusal to grant extension of time, interest, and
attorneys fees.
On December 4, 2001, Arbitral award3 was rendered by the CIAC in favor of
Diesel, to wit:chanRoblesvirtualLawlibrary
Summary of Awards:cralawlawlibrary
Wherefore, judgment is hereby rendered and the AWARD of monetary claims
is made as follows:cralawlawlibrary

CLAIMANT:
Description
Amount Claimed
Award
Unpaid Balance of Construction
Agreement
P3,943,000.00
P3,661,692.60
Additional Labor Costs
1,509,756.00 0.00
Interest
690,942.23
Attorneys Fees
1,000,000.00
366,169.00
Total
P7,143,698.23
P4,027,861.60
RESPONDENT:
Description
Amount Claimed
Award
Cost to Complete the Project
P1,321,500.92
P 0.00
Liquidated Damages
4,340,000.00
0.00
Attorneys Fees
900,000.00
0.00
Total
P6,561,500.92
0.00
Net Award to Claimant:
P4,027,861.60
Claimant, Diesel Construction Corporation, Inc., is hereby awarded the
amount of FOUR MILLION TWENTY-SEVEN THOUSAND EIGHT HUNDRED SIXTYONE PESOS AND SIXTY CENTAVOS plus legal interest of six percent (6%) per
annum on the said amount computed from June 4, 2001 and at the rate of
twelve percent (12%) per annum from the date of finality of the decision
herein until fully paid.
Respondent is further ordered to pay the full cost of arbitration in the amount
of TWO HUNDRED NINETY-EIGHT THOUSAND FOUR HUNDRED SIX PESOS AND
THREE CENTAVOS and to reimburse the Claimant of all advances made in this
regard.
SO ORDERED.4chanrobleslaw
The CIAC judgment became the subject of a petition for review before the CA,
which rendered a decision, dated April 16, 2002, quoted as

follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the petition is GRANTED and the
questioned Decision is MODIFIED in this wise:cralawlawlibrary
a. The claim of petitioner UPSI for liquidated damages is GRANTED to the
extent of PESOS: ONE MILLION THREE HUNDRED NINE THOUSAND AND FIVE
HUNDRED (P1,309,500.00) representing forty-five (45) days of delay at
P29,100 per diem;chanroblesvirtuallawlibrary
b. We hold that respondent [Diesel] substantially complied with the
Construction Contract and is therefore entitled to one hundred percent
(100%) payment of the contract price. Therefore, the claim of respondent
Diesel for an unpaid balance of PESOS: TWO MILLION FOUR HUNDRED FORTYONE THOUSAND FOUR HUNDRED EIGHTY-TWO and SIXTY-FOUR centavos
(P2,441,482.64), which amount already includes the retention on the
additional works or Change Orders, is GRANTED, minus liquidated damages.
In sum, petitioner UPSI is held liable to respondent Diesel in the amount of
PESOS: ONE MILLION ONE HUNDRED THIRTY-ONE THOUSAND NINE HUNDRED
EIGHTY-TWO and sixty four centavos (P1,131,982.64), with legal interest until
the same is fully paid;chanroblesvirtuallawlibrary
c. The parties are liable equally for the payment of arbitration
costs;chanroblesvirtuallawlibrary
d. All claims for attorneys fees are DISMISSED;
andChanRoblesVirtualawlibrary
e. Since there is still due and owing from UPSI an amount of money in favor of
Diesel, respondent FGU is DISCHARGED as surety for Diesel.
Costs de officio.
SO ORDERED.5chanrobleslaw
UPSI filed its Motion for Partial Reconsideration,6 dated May 6, 2002, while
Diesel filed its Motion for Reconsideration,7 dated May 7, 2002. The CA
denied that of UPSI, but partially granted that of Diesel.
Thus:chanRoblesvirtualLawlibrary
WHEREFORE, the Motion for Reconsideration of respondent Diesel
Construction Co., Inc. is partially GRANTED. The liquidated damages are
hereby reduced to P1,146,519.00 (45 days multiplied by P25,478.20 per
diem). However, in accordance with the main opinion, We hold that petitioner
is liable to respondent Diesel for the total amount of P3,661,692.64,
representing the unpaid balance of the contract price plus the ten-percent
retention, from which the liquidated damages, must, of course, be deducted.
Thus, in sum, as amended, We hold that petitioner is still liable to respondent
Diesel in the amount of P2,515,173.64, with legal interest until the same is
fully paid.
The main opinion, in all other respects, STANDS.
SO ORDERED.8chanrobleslaw

Unsatisfied, Diesel and UPSI filed their separate petitions for review before
the Court, docketed as G.R. No. 154885 and G.R. No. 154937, respectively,
which were later consolidated. The Court then rendered judgment on March
24, 2008, the dispositive portion of which reads:chanRoblesvirtualLawlibrary
WHEREFORE, Diesels petition is PARTIALLY GRANTED and UPSIs Petition is
DENIED with qualification. The assailed Decision dated April 16, 2002 and
Resolution dated August 21, 2002 of the CA are MODIFIED, as
follows:cralawlawlibrary
(1)
The award for liquidated damages is DELETED;
(2)
The award to Diesel for the unpaid balance of the contract price of PhP
3,661,692.64 is AFFIRMED;
(3)
UPSI shall pay the costs of arbitration before the CIAC in the amount of PhP
298,406.03;
(4)
Diesel is awarded attorneys fees in the amount of PhP 366,169; and
(5)
UPSI is awarded damages in the amount of PhP 310,834.01, the same to be
deducted from the retention money, if there still be any, and, if necessary,
from the amount referred to in item (2) immediately above.
In summary, the aggregate award to Diesel shall be PhP 3,717,027.64. From
this amount shall be deducted the award of actual damages of PhP
310,834.01 to UPSI which shall pay the costs of arbitration in the amount of
PhP 298,406.03.
FGU is released from liability for the performance bond that it issued in favor
of Diesel.
No costs.
SO ORDERED.9chanrobleslaw
UPSI moved for a reconsideration10 and Diesel filed its Motion for Leave to
File and Admit Attached Comment and/or Opposition (to UPSI Property
Holdings, Inc.s Motion for Reconsideration) with Motion for Clarification.11 In
its Resolution,12 dated August 20, 2008, the Court denied with finality the
motion filed by UPSI and granted that of Diesels.
On October 8, 2008, the March 24, 2008 Decision of the Court became final
and executory.
Eventually, Diesel filed the Motion for Issuance of Writ of Execution with the
CIAC.
On February 17, 2009, despite numerous pleadings filed by UPSI opposing the
execution of the Courts decision, the CIAC granted13 the execution sought
by Diesel. Still unsatisfied, UPSI questioned by certiorari the execution
granted by the CIAC before the CA, docketed as CA-G.R. SP No. 108423. On

July 9, 2009, the CA denied14 the UPSI petition and later its motion for
reconsideration.
Meanwhile, pending the resolution of the petition for certiorari in CA-G.R. SP
No. 108423, Diesel sought the amendment of the writ of execution before the
CIAC so that the payment of legal interest be included in the writ as well as in
the reimbursement of half of the arbitration costs. Despite the opposition by
UPSI, CIAC partially granted Diesels motion in its Order,15 dated July 29,
2009, which considered the interest being claimed by Diesel. But as far as
the reimbursement of half of the arbitration costs was concerned, the CIAC
denied it. UPSI questioned the CIAC order via a petition for certiorari with the
CA, docketed as CA-G.R. SP 110926, arguing that the CIAC gravely abused its
discretion when it substantially modified the writ of execution by holding that
Diesel was entitled to legal interest. The CA, however, denied the petition in
its ruling that:chanRoblesvirtualLawlibrary
Hence, the issue of legal interest was never raised, nor quibbled about by the
petitioner, making it final and binding regardless of what the principal award
may turn out to be.
An incisive scrutiny of the portion of the Supreme Courts Decision stating
that, [The] award to Diesel for the unpaid balance of the contract price of
Php3,661,692.64 is AFFIRMED. only goes to show that such amount
represents the balance of the contract price plus the ten-percent retention,
from which the liquidated damages must be deducted; the difference or the
net amount of which bears legal interest until fully paid as awarded by this
Court. Hence, the confirmation by the Supreme Court that the final award
should indeed be P3,661,692.64 addressed the question as to what should be
the unpaid balance due to the private respondent. Logically, whatever the
amount is awarded necessarily bears the legal interest as awarded previously
by this Court.
We disagree with petitioners contention that the Supreme Court deleted the
legal interest by its silence on that matter. If such was its intention, it should
have also expressly declared its deletion together with its express mandate
to remove the award of liquidated damages to herein petitioner.16
The CA further explained that there was no substantial variance between the
assailed judgment and the writ of execution rendered to enforce it because
the whole context of the controversy pointed to the rightful provision of legal
interest in the total execution of the final judgment.17cralawred
UPSI subsequently filed a motion for reconsideration, but it was likewise
denied.
Hence, the present petition assigning the following
ERRORS:
THE COURT OF APPEAL SERIOUSLY ERRED AND DECIDED IN A MANNER NOT
IN ACCORDANCE WITH THE LAW AND PREVAILING JURISPRUDENCE WHEN IT
RULED THAT:cralawlawlibrary
CIAC IS ALLEGEDLY CORRECT IN ISSUING THE ASSAILED ORDER SINCE THE

ISSUE OF LEGAL INTEREST WAS SUPPOSEDLY NEVER RAISED BY PETITIONER

BEFORE THE SUPREME COURT IN ITS EARLIER PETITION, THEREBY
CONSIDERING THE MATTER ALLEGEDLY AS ALREADY A SETTLED ISSUE. ON
THE CONTRARY, PETITIONER HAS CONSISTENTLY PUT IN ISSUE CIACS
ERRONEOUS IMPOSITION OF LEGAL INTEREST AS EARLY AS 28 DECEMBER
2001 IN ITS PETITION FOR REVIEW FILED BEFORE THE HONORABLE COURT OF
APPEALS.
IT WAS ALLEGEDLY CORRECT AND PROPER THAT CIAC SUPPOSEDLY
CLARIFIED THE PROVISION ON PAYMENT OF INTEREST IN THE WRIT OF
EXECUTION IT ISSUED ALLEGEDLY PURSUANT TO THE CONTEXT OF THE FINAL
JUDGMENT RENDERED BY THE SUPREME COURT. ON THE CONTRARY, CIAC
PURPOSELY CHANGED THE PROVISIONS OF THE SUPREME COURTS DECISION
TO FAVOR RESPONDENT DIESEL.18
The crucial issue for resolution revolves around the propriety of the inclusion
of the legal interest in the writ of execution despite the silence of the Court
in the dispositive portion of its judgment which has become final and
executory.
Before ruling on the propriety of the assailed CA decision, the issue of forum
shopping has been brought to the attention of the Court as Diesel pointed out
in its Comment,19 as well as in its Memorandum,20 that UPSI likewise sought
the exclusion of legal interest in another separate petition for certiorari
before the CA, docketed as CA-G.R. SP No. 122827 while CA-G.R. SP No.
110926 was still pending before it. For said reason, Diesel prays that the
subject petition be summarily dismissed with prejudice pursuant to Section 5,
Rule 7 of the Rules of Court.
UPSI refutes the above allegation and avers that it has been in good faith as
it even disclosed that CA-G.R. SP No. 122827 was still pending before the CA
when it filed this petition, as evidenced by the Verification and Certification of
Non-Forum Shopping.21cralawred
Forum shopping exists when, as a result of an adverse decision in one forum,
or in anticipation thereof, a party seeks a favorable opinion in another forum
through means other than appeal or certiorari. There is forum shopping when
the elements of litis pendencia are present or where a final judgment in one
case will amount to res judicata in another. They are as follows: (a) identity of
parties, or at least such parties that represent the same interests in both
actions, (b) identity of rights or causes of action, and (c) identity of relief
sought.22cralawred
If at all, it would be the second petition filed before the CA which should be
dismissed being an offshoot of the first petition which, based on the records,
was what happened as the CA rendered its judgment23 in CA-G.R. SP No.
122827 dismissing it for being violative of the rule against forum shopping.
Thus, there is no legal impediment of any kind that would bar full resolution
of the present controversy.
Did the CA correctly uphold the CIAC in concluding that the legal interest was
deemed included in the amounts awarded by the Court in G.R. Nos. 154885
and 154937?

The Court rules in the affirmative.

It is true that a decision that has attained finality becomes immutable and
unalterable and cannot be modified in any respect, even if the modification
was meant to correct erroneous conclusions of fact and law, and whether the
modification was made by the court that rendered it or by this Court as the
highest court of the land.24 Any attempt on the part of the x x x entities
charged with the execution of a final judgment to insert, change or add
matters not clearly contemplated in the dispositive portion violates the rule
on immutability of judgments."25cralawred
UPSI argues that it has consistently questioned the issue of the imposition of
legal interest and, that even assuming without admitting that the issue of
legal interest was not raised, the Court was clothed with authority to review
matters even if not assigned as errors on appeal if it finds this consideration
necessary in arriving at a just decision of the case.26 The failure of Diesel to
timely move for reconsideration resulted in the finality of the March 24, 2008
Decision of the Court where the Court was silent on the award of legal
interest.
Further, UPSI claims that the Motion for Clarification filed by Diesel, which
was merely noted by the Court, was an admission on its part that the subject
decision did not include the award of legal interest. Therefore, no one,
including the CA, can avoid assuming that the 24 March 2008 decision
necessarily includes the award of legal interest.27 The writ of execution must
conform to the judgment promulgated and not to the CIAC Decision nor the
April 16, 2002 Decision and August 21, 2002 Resolution of the CA. In
unilaterally interpreting the judgment as one which included payment of legal
interest despite the fact that nowhere in the dispositive portion of the
decision can be found any grant of legal interest, the CIAC caused a
substantial variance between the final and executory decision and the writ of
execution to enforce it.28cralawred
On the other hand, Diesel counters that the legal interest imposed by the
CIAC on the judgment in its favor accrued upon finality of the said judgment.
The legal interest became applicable as a matter of law upon finality. There
was no need for it to be awarded or declared in the judgment
itself.29cralawred
Moreover, Diesel avers that UPSI never raised the issue of legal interest. Not
being an issue, the propriety of the imposition of legal interest, was not the
subject of the Courts decision.30cralawred
The Courts Ruling
The rule is that in case of ambiguity or uncertainty in the dispositive portion
of a decision, the body of the decision may be scanned for guidance in
construing the judgment.31 After scrutiny of the subject decision, nowhere
can it be found that the Court intended to delete the award of legal interest
especially that, as Diesel argues, it was never raised. In fact, what the Court
carefully reviewed was the principal amount awarded as well as the
liquidated damages because they were specifically questioned. Recall that
the CA modified the awards granted by the CIAC, but not the legal interest. In
finally resolving the controversy, the Court affirmed the amount of unpaid

balance of the contract price in favor of Diesel but expressly deleted the
award of liquidated damages. There being no issue as to the legal interest,
the Court did not find it necessary anymore to disturb the imposition of such.
As correctly observed by the CA:chanRoblesvirtualLawlibrary
x x x. A panoramic view of the case from its inception in the arbitral level to
this Court and then to the Supreme Court reveals the context of the decisions
rendered by the three (3) tribunals in its totality. The Supreme Court already
took into context the previous decisions of public respondent CIAC and this
Court which consistently included the payment of legal interest in their
dispositive portions. Hence, the Supreme Court merely ruled on the current
issues presented by petitioner which did not include legal interest. It is
already an act of redundancy for it to repeat what had already been
adequately settled and explained by public respondent CIAC and this
Court.32
Thus, contrary to UPSIs argument, there is no substantial variance between
the March 24, 2008 final and executory decision of the Court and the writ of
execution issued by the CIAC to enforce it. The Courts silence as to the
payment of the legal interests in the dispositive portion of the decision is not
tantamount to its deletion or reversal. The CA was correct in holding that if
such was the Courts intention, it should have also expressly declared its
deletion together with its express mandate to remove the award of liquidated
damages to UPSI.33cralawred
It is likewise observed that the CIAC itself is very mindful of the rule on
immutability of judgment. The motion of Diesel to modify and/or amend the
writ of execution involved not only the payment of legal interest but also the
reimbursement of arbitration costs. The CIAC, however, denied the
reimbursement, declaring that:chanRoblesvirtualLawlibrary
It will be noted that the award made by this Arbitral Tribunal for payment by
the Respondent to the Claimant of the P298,406.03 costs of arbitration had
been affirmed by the Supreme Court and that the latter decision has attained
finality and immutability. Thus, even if there had been any error on the
matter (on which this Arbitral Tribunal does not concede), it is much too late
in the day to make the corresponding adjustments thereon.34chanrobleslaw
Corollarily, had the inclusion of the legal interest in the writ been violative of
the rule on immutability of judgment, the CIAC would not have granted it.
Consequently, the Court, in Nacar vs. Gallery Frames,35
instructs:chanRoblesvirtualLawlibrary
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:cralawlawlibrary
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and

compensatory damages, the rate of interest, as well as the accrual thereof, is

imposed, as follows:chanRoblesvirtualLawlibrary
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until
the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
Following the foregoing ruling by the Court, the legal interest remains at 6%
and 12% per annum, as the case may be, since the judgment subject of the
execution became final on March 24, 2008. Interests accruing after July 1,
2013, however, shall be at the rate of 6% per annum.
As a final note, it is herein reiterated that the manner of the execution of a
final judgment is not a matter of "choice." As to how a judgment should be
satisfied does not revolve upon the pleasure or discretion of a party unless
the judgment itself expressly provides for such discretion. Foremost rule in
execution of judgments is that "a writ of execution must conform strictly to
every essential particular of the judgment promulgated, and may not vary
the terms of the judgment it seeks to enforce, nor may it go beyond the
terms of the judgment sought to be executed." As a corollary rule, the Court
has clarified that "a judgment is not confined to what appears on the face of
the decision, but extends as well to those necessarily included therein or
necessary thereto."36cralawred
WHEREFORE, the petition is DENIED.
G.R. No. L-11872
December 1, 1917

DOMINGO MERCADO and JOSEFA MERCADO, plaintiffs-appellants,

vs.
JOSE ESPIRITU, administrator of the estate of the deceased Luis Espiritu,
defendant-appellee.
Perfecto Salas Rodriguez for appellants.
Vicente Foz for appellee.

TORRES, J.:
This is an appeal by bill of exceptions, filed by the counsel for the plaintiffs
from the judgment of September 22, 1914, in which the judge of the Seventh
Judicial District dismissed the complaint filed by the plaintiffs and ordered
them to keep perpetual silence in regard to the litigated land, and to pay the
costs of the suit.
By a complaint dated April 9, 1913, counsel for Domingo and Josefa Mercado
brought suit in the Court of First Instance of Bulacan, against Luis Espiritu,
but, as the latter died soon thereafter, the complaint was amended by being
directed against Jose Espiritu in his capacity of his administrator of the estate
of the deceased Luis Espiritu. The plaintiffs alleged that they and their sisters
Concepcion and Paz, all surnamed Mercado, were the children and sole heirs
of Margarita Espiritu, a sister of the deceased Luis Espiritu; that Margarita
Espiritu died in 1897, leaving as her paraphernal property a tract of land of
48 hectares in area situated in the barrio of Panducot, municipality of
Calumpit, Bulacan, and bounded as described in paragraph 4 of the amended
complaint, which hereditary portion had since then been held by the plaintiffs
and their sisters, through their father Wenceslao Mercado, husband of
Margarita Espiritu; that, about the year 1910, said Luis Espiritu, by means of
cajolery, induced, and fraudulently succeeded in getting the plaintiffs
Domingo and Josefa Mercado to sign a deed of sale of the land left by their
mother, for the sum of P400, which amount was divided among the two
plaintiffs and their sisters Concepcion and Paz, notwithstanding the fact that
said land, according to its assessment, was valued at P3,795; that one-half of
the land in question belonged to Margarita Espiritu, and one-half of this
share, that is, one-fourth of said land , to the plaintiffs, and the other onefourth, to their two sisters Concepcion and Paz; that the part of the land
belonging to the two plaintiffs could produce 180 cavanes of rice per annum,
at P2.50 per cavan, was equivalent to P450 per annum; and that Luis Espiritu
had received said products from 1901 until the time of his death. Said
counsel therefore asked that judgment be rendered in plaintiffs' favor by
holding to be null and void the sale they made of their respective shares of
their land, to Luis Espiritu, and that the defendant be ordered to deliver and
restore to the plaintiffs the shares of the land that fell to the latter in the
partition of the estate of their deceased mother Margarita Espiritu, together
with the products thereof, uncollected since 1901, or their equivalent, to wit,
P450 per annum, and to pay the costs of the suit.
In due season the defendant administrator answered the aforementioned
complaint, denying each and all of the allegations therein contained, and in
special defense alleged that the land, the subject-matter of the complaint,
had an area of only 21 cavanes of seed rice; that, on May 25, 1894, its owner,

the deceased Margarita Espiritu y Yutoc, the plaintiffs' mother, with the due
authorization of her husband Wenceslao Mercado y Arnedo Cruz sold to Luis
Espiritu for the sum of P2,000 a portion of said land, to wit, an area such as is
usually required for fifteen cavanes of seed; that subsequently, on May 14,
1901, Wenceslao Mercado y Arnedo Cruz, the plaintiffs' father, in his capacity
as administrator of the property of his children sold under pacto de retro to
the same Luis Espiritu at the price of P375 the remainder of the said land, to
wit, an area covered by six cavanes of seed to meet the expenses of the
maintenance of his (Wenceslao's) children, and this amount being still
insufficient the successively borrowed from said Luis Espiritu other sums of
money aggregating a total of P600; but that later, on May 17,1910, the
plaintiffs, alleging themselves to be of legal age, executed, with their sisters
Maria del Consejo and Maria dela Paz, the notarial instrument inserted
integrally in the 5th paragraph of the answer, by which instrument, ratifying
said sale under pacto de retro of the land that had belonged to their mother
Margarita Espiritu, effected by their father Wenceslao Mercado in favor of Luis
Espiritu for the sum of P2,600, they sold absolutely and perpetually to said
Luis Espiritu, in consideration of P400, the property that had belonged to their
deceased mother and which they acknowledged having received from the
aforementioned purchaser. In this cross-complaint the defendant alleged that
the complaint filed by the plaintiffs was unfounded and malicious, and that
thereby losses and damages in the sum of P1,000 had been caused to the
intestate estate of the said Luis Espiritu. He therefore asked that judgment be
rendered by ordering the plaintiffs to keep perpetual silence with respect to
the land in litigation and, besides, to pay said intestate estate P1,000 for
losses and damages, and that the costs of the trial be charged against them.
In reply to the cross-complaint, the plaintiffs denied each and all of the facts
therein set forth, and in special defense alleged that at the time of the
execution of the deed of sale inserted in the cross-complaint the plaintiffs
were still minors, and that since they reached their majority the four years
fixed by law for the annulment of said contract had not yet elapsed. They
therefore asked that they be absolved from the defendant's cross-complaint.
After trial and the introduction of evidence by both parties, the court
rendered the judgment aforementioned, to which the plaintiffs excepted and
in writing moved for a reopening of the case and a new trial. This motion was
overruled, exception was taken by the petitioners, and the proper bill of
exceptions having been presented, the same was approved and transmitted
to the clerk of this court.
As the plaintiffs assailed the validity of the deed of sale, Exhibit 3, executed
by them on May 17, 1910, on the ground that they were minors when they
executed it, the questions submitted to the decision of this court consist in
determining whether it is true that the plaintiffs were then minors and
therefore incapable of selling their property on the date borne by the
instrument Exhibit 3; and in case they then were such, whether a person who
is really and truly a minor and, notwithstanding, attests that he is of legal
age, can, after the execution of the deed and within legal period, ask for the
annulment of the instrument executed by him, because of some defect that
invalidates the contract, in accordance with the law (Civ. Code, arts. 1263
and 1300), so that he may obtain the restitution of the land sold.
The records shows it to have been fully proven that in 1891 Lucas Espiritu

obtained title by composition with the State, to three parcels of land,

adjoining each other, in the sitio of Panducot of the pueblo of Calumpit,
Bulacan, containing altogether an area of 75 hectares, 25 ares, and 59
centares, which facts appear in the title Exhibit D; that, upon Luis Espiritu's
death, his said lands passed by inheritance to his four children named
Victoria, Ines, Margarita, and Luis; and that, in the partition of said decedent's
estate, the parcel of land described in the complaint as containing fortyseven and odd hectares was allotted to the brother and sister Luis and
Margarita, in equal shares. Margarita Espiritu, married to Wenceslao Mercado
y Ardeno Cruz, had by this husband five children, Maria Consejo, Maria de la
Paz, Domingo, Josefa, and Amalia, all surnamed Mercado y Espiritu, who, at
the death of their mother in 1896 inherited, by operation of law, one-half of
the land described in the complaint.
The plaintiffs' petition for annulment of the sale and the consequent
restitution to them of two-fourths of the land left by their mother, that is, of
one-fourth of all the land described in the complaint, and which, they stated,
amounts to 11 hectares, 86 ares and 37 centares. To this claim the defendant
excepted, alleging that the land in question comprised only an area such as is
customarily covered by 21 cavanes of seed.
It was also duly proven that, by a notarial instrument of May 25, 1894, the
plaintiffs' mother conveyed by actual and absolute sale for the sum of
P2,000, to her brother Luis Espiritu a portion of the land now on litigation, or
an area such as is usually covered by about 15 cavanes of seed; and that, on
account of the loss of the original of said instrument, which was on the
possession of the purchaser Luis Espiritu, and furthermore because, during
the revolution, the protocols or registers of public documents of the Province
of Bulacan were burned, Wenceslao Mercado y Arnedo Cruz, the widower of
the vendor and father of the plaintiffs, executed, at the instance of the
interested party Luis Espiritu, the notarial instrument Exhibit 1, of the date of
May 20, 1901, in his own name and those of his minor children Maria Consejo,
Maria de la Paz, Domingo, Josefa, and Amalia, and therein set forth that it was
true that the sale of said portion of land had been made by his
aforementioned wife, then deceased, to Luis Espiritu in 1894.
However, even prior to said date, to wit, on May 14th of the same year, 1901,
the widower Wenceslao Mercado, according to the private document Exhibit
2, pledged or mortgaged to the same man, Luis Espiritu, for P375, a part, or
an area covered by six cavanes of seed, of the land that had belonged to this
vendor's deceased wife, to the said Luis Espiritu and which now forms a part
of the land in question a transaction which Mercado was obliged to make in
order to obtain funds with which "to cover his children's needs." Wenceslao
Mercado, the plaintiffs' father, having died, about the year 1904, the plaintiffs
Domingo and Josefa Mercado, together with their sisters Consejo and Paz,
declaring themselves to be of legal age and in possession of the required
legal status to contract, executed and subscribed before a notary the
document Exhibit 3, on May 17, 1910, in which referring to the previous sale
of the land, effected by their deceased mother for the sum of P2,600 and with
her husband's permission and authorization, they sold absolutely and in
perpetuity to Luis Espiritu, for the sum of P400 "as an increase" of the
previous purchase price, the land described in said instrument and situated in
Panducot, pueblo of Calumpit, Bulacan, of an area equal to that usually sown
with 21 cavanes of seed bounded on the north by the lands of Flaviano Abreu

and the heirs of Pedro Espiritu, on the east by those of Victoria Espiritu and
Ines Espiritu, on the south by those of Luis Espiritu, and on the west by those
of Hermogenes Tan-Toco and by the Sapang-Maitu stream.
In this status of the case the plaintiffs seek the annulment of the deed Exhibit
3, on the ground that on the date of its execution they were minors without
legal capacity to contract, and for the further reason that the deceased
purchaser Luis Espiritu availed himself of deceit and fraud in obtaining their
consent for the execution of said deed.
As it was proven by the testimony of the clerk of the parochial church of
Apalit (plaintiffs were born in Apalit) that the baptismal register books of that
parish pertaining to the years 1890-1891, were lost or burned, the witness
Maria Consejo Mercado recognized and identified the book Exhibit A, which
she testified had been kept and taken care of by her deceased father
Wenceslao Mercado, pages 396 and 397 of which bear the attestation that
the plaintiff Domingo Mercado was born on August 4, 1890, and Josefa
Mercado, on July 14, 1891. Furthermore, this witness corroborated the
averment of the plaintiffs' minority, by the personal registration certificate of
said Domingo Mercado, of the year 1914, Exhibit C, by which it appears that
in 1910 he was only 23 years old, whereby it would also be appear that Josefa
Mercado was 22 years of age in 1910, and therefore, on May 17,1910, when
the instrument of purchase and sale, Exhibit 3, was executed, the plaintiffs
must have been, respectively, 19 and 18 years of age.
The witness Maria Consejo Mercado also testified that after her father's death
her brother and sisters removed to Manila to live there, although her brother
Domingo used to reside with his uncle Luis Espiritu, who took charge of the
administration of the property left by his predecessors in interest; that it was
her uncle Luis who got for her brother Domingo the other cedula, Exhibit B,
pertaining to the year 1910, where in it appears that the latter was then
already 23 years of age; that she did not know why her uncle did so; that she
and her brother and sisters merely signed the deed of May 17, 1910; and that
her father Wenceslao Mercado, prior to his death had pledged the land to her
uncle Luis Espiritu.
The witness Ines Espiritu testified that after the death of the plaintiffs' father,
it was Luis Espiritu who directed the cultivation of the land in litigation. This
testimony was corroborated by her sister Victoria Espiritu, who added that
her nephew, the plaintiff Domingo, had lived for some time, she did not know
just how long, under the control of Luis Espiritu.
Roque Galang, married to a sister of Luis Espiritu, stated that the land that
fell to his wife and to his sister-in-law Victoria, and which had an area of about
8 hectares less than that of the land allotted to the aforementioned Luis and
Margarita produced for his wife and his sister-in-law Victoria a net and
minimum yield of 507 cavanes in 1907, in spite of its being high land and of
inferior quality, as compared with the land in dispute, and that its yield was
still larger in 1914, when the said two sisters' share was 764 cavanes.
Patricio Tanjucto, the notary before whom the deed Exhibit 3 was ratified, was
a witness for the defendant. He testified that this deed was drawn up by him
at the request of the plaintiff Josefa Mercado; that the grantors of the
instrument assured him that they were all of legal age; that said document

was signed by the plaintiffs and the other contracting parties, after it had
been read to them and had been translated into the Pampangan dialect for
those of them who did not understand Spanish. On cross-examination,
witness added that ever since he was 18 years of age and began to court, he
had known the plaintiff Josefa Mercado, who was then a young maiden,
although she had not yet commenced to attend social gatherings, and that all
this took place about the year 1898, for witness said that he was then [at the
time of his testimony, 1914,] 34 years of age.
Antonio Espiritu, 60 years of age, who knew Lucas Espiritu and the properties
owned by the latter, testified that Espiritu's land contained an area of 84
cavanes, and after its owner's death, was under witness' administration
during to harvest two harvest seasons; that the products yielded by a portion
of this land, to wit, an area such as is sown by about 15 cavanes of seed, had
been, since 1894, utilized by Luis Espiritu, by reason of his having acquired
the land; and that, after Margarita Espiritu's death, her husband Wenceslao
Mercado took possession of another portion of the land, containing an area of
six cavanes of seed and which had been left by this deceased, and that he
held same until 1901, when he conveyed it to Luis Espiritu. lawphi1.net
The defendant-administrator, Jose Espiritu, son of the deceased Luis Espiritu,
testified that the plaintiff Domingo Mercado used to live off and on in the
house of his deceased father, about the year 1909 or 1910, and used to go
back and forth between his father's house and those of his other relatives. He
denied that his father had at any time administered the property belonging to
the Mercado brother and sisters.
In rebuttal, Antonio Mercado, a cousin of Wenceslao, father of the plaintiffs,
testified that he mediate in several transactions in connection with a piece of
land belonging to Margarita Espiritu. When shown the deed of purchase and
sale Exhibit 1, he stated that he was not acquainted with its contents. This
same witness also testified that he mediated in a transaction had between
Wenceslao Mercado and Luis Espiritu (he did not remember the year), in
which the former sold to the latter a parcel of land situated in Panducot. He
stated that as he was a witness of the deed of sale he could identify this
instrument were it exhibited to him; but he did not do so, for no instrument
whatever was presented to him for identification. The transaction mentioned
must have concerned either the ratification of the sale of the land of 15
cavanes, in 1901, attested in Exhibit 1, or the mortgage or pledge of the
other parcel of 6 cavanes, given on May 14, 1901, by Wenceslao Mercado to
Luis Espiritu, as may be seen by the private document Exhibit 2. In rebuttal,
the plaintiff Josefa Mercado denied having gone to the house of the notary
Tanjutco for the purpose of requesting him to draw up any document
whatever. She stated that she saw the document Exhibit 3 for the first time in
the house of her uncle Luis Espiritu on the day she signed it, on which
occasion and while said document was being signed said notary was not
present, nor were the witnesses thereto whose names appear therein; and
that she went to her said uncle's house, because he had sent for her, as well
as her brother and sisters, sending a carromata to fetch them. Victoria
Espiritu denied ever having been in the house of her brother. Luis Espiritu in
company with the plaintiffs, for the purpose of giving her consent to the
execution of any deed in behalf of her brother.
The evidence adduced at the trial does not show, even circumstantially, that

the purchaser Luis Espiritu employed fraud, deceit, violence, or intimidation,

in order to effect the sale mentioned in the document Exhibit 3, executed on
May 17, 1910. In this document the vendors, the brother and the sisters
Domingo, Maria del Consejo, Paz and, Josefa surnamed Mercado y Espiritu,
attested the certainty of the previous sale which their mother, during her
lifetime, had made in behalf of said purchaser Luis Espiritu, her brother with
the consent of her husband Wenceslao Mercado, father of the vendors of the
portion of land situated in the barrio of Panducot, pueblo of Calumpit,
Bulacan; and in consideration of the fact that the said vendor Luis Espiritu
paid them, as an increase, the sum of P400, by virtue of the contract made
with him, they declare having sold to him absolutely and in perpetuity said
parcel of the land, waive and thenceforth any and all rights they may have,
inasmuch as said sum constitutes the just price of the property.
So that said document Exhibit 3 is virtually an acknowledgment of the
contract of sale of the parcel or portion of land that would contain 15 cavanes
of seed rice made by the vendors' mother in favor of the purchaser Luis
Espiritu, their uncle, and likewise an acknowledgment of the contract of
pledge or mortgage of the remainder of said land, an area of six cavanes,
made with the same purchaser, at an increase of P400 over the price of
P2,600, making an aggregate sum of P3,000, decomposed as follows: P2,000,
collected during her lifetime, by the vendors' father; and the said increase of
P400, collected by the plaintiffs.
In the aforementioned sale, according to the deed of May 25, 1894, Margarita
Espiritu conveyed to her brother Luis the parcel of 15 cavanes of seed,
Exhibit 1, and after her death the plaintiffs' widowed father mortgaged or
pledged the remaining parcel or portion of 6 cavanes of seed to her brotherin-law, Luis Espiritu, in May, 1901 (Exhibit 2). So it is that the notarial
instrument Exhibit 3, which was assailed by the plaintiffs, recognized the
validity of the previous contracts, and the totality of the land, consisting of an
area containing 21 cavanes of seed rice, was sold absolutely and in
perpetuity, the vendors receiving in exchange P400 more; and there is no
conclusive proof in the record that this last document was false and
simulated on account of the employment of any violence, intimidation, fraud,
or deceit, in the procuring of the consent of the vendors who executed it.
Considering the relation that exists between the document Exhibit 3 and
those of previous dates, Exhibits 1 and 2, and taking into the account the
relationship between the contracting parties, and also the general custom
that prevails in many provinces of these Islands for the vendor or debtor to
obtain an increase in the price of the sale or of the pledge, or an increase in
the amount loaned, without proof to the contrary, it would be improper and
illegal to hold, in view of the facts hereinabove set forth, that the purchaser
Luis Espiritu, now deceased, had any need to forge or simulate the document
Exhibit 3 inasmuch as, since May, 1894, he has held in the capacity of owner
by virtue of a prior acquisition, the parcel of land of 15 cavanes of seed, and
likewise, since May, 1901, according to the contract of mortgage or pledge,
the parcel of 6 cavanes, or the remainder of the total area of 21 cavanes.
So that Luis Espiritu was, during his lifetime, and now, after his death, his
testate or intestate estate is in lawful possession of the parcel of land
situated in Panducot that contains 21 cavanes of seed, by virtue of the title of
conveyance of ownership of the land measuring 15 cavanes, and, in

consequence of the contract of pledge or mortgage in security for the sum of

P600, is likewise in lawful possession of the remainder of the land, or an area
containing 6 cavanes of seed.
The plaintiffs have absolutely no right whatever to recover said first parcel of
land, as its ownership was conveyed to the purchaser by means of a singular
title of purchase and sale; and as to the other portion of 6 cavanes of seed,
they could have redeemed it before May 17, 1910, upon the payment or the
return of the sum which their deceased father Wenceslao Mercado had,
during his lifetime, received as a loan under security of the pledged property;
but, after the execution of the document Exhibit 3, the creditor Luis Espiritu
definitely acquired the ownership of said parcel of 6 cavanes. It is therefore a
rash venture to attempt to recover this latter parcel by means of the contract
of final and absolute sale, set forth in the deed Exhibit 3.
Moreover, the notarial document Exhibit 1, are regards the statements made
therein, is of the nature of a public document and is evidence of the fact
which gave rise to its execution and of the date of the latter, even against a
third person and his predecessors in interest such as are the plaintiffs. (Civ.
Code, art. 1218.)
The plaintiffs' father, Wenceslao Mercado, recognizing it to be perfectly true
that his wife Margarita Espiritu sold said parcel of land which she inherited
from her father, of an area of about "15 cavanes of seed," to her brother Luis
Espiritu, by means of an instrument executed by her on May 25,1894 an
instrument that disappeared or was burned and likewise recognizing that
the protocols and register books belonging to the Province of Bulacan were
destroyed as a result of the past revolution, at the request of his brother-inlaw Luis Espiritu he had no objection to give the testimony recorded in said
notarial instrument, as it was the truth regarding what had occurred, and in
so doing he acted as the plaintiffs' legitimate father in the exercise of his
parental authority, inasmuch as he had personal knowledge of said sale, he
himself being the husband who authorized said conveyance, notwithstanding
that his testimony affected his children's interest and prejudiced his own, as
the owner of any fruits that might be produced by said real property.
The signature and handwriting of the document Exhibit 2 were identified as
authentic by one of the plaintiffs, Consejo Mercado, and as the record shows
no evidence whatever that this document is false, and it does not appear to
have been assailed as such, and as it was signed by the plaintiffs' father,
there is no legal ground or well-founded reason why it should be rejected. It
was therefore properly admitted as evidence of the certainty of the facts
therein set forth.
The principal defect attributed by the plaintiffs to the document Exhibit 3
consists in that, on the date of May 17, 1910, when it was executed that they
signed it, they were minors, that is, they had not yet attained the age of 21
years fixed by Act No. 1891, though no evidence appears in the record that
the plaintiffs Josefa and Domingo Mercado were in fact minors, for no certified
copies were presented of their baptismal certificates, nor did the plaintiffs
adduce any supplemental evidence whatever to prove that Domingo was
actually 19 and Josefa 18 years of age when they signed the document
Exhibit 3, on May 17, 1910, inasmuch as the copybook, Exhibit A,
notwithstanding the testimony of the plaintiff Consejo Mercado, does not

constitute sufficient proof of the dates of births of the said Domingo and
Josefa.
However, even in the doubt whether they certainly were of legal age on the
date referred to, it cannot be gainsaid that in the document Exhibit 3 they
stated that they were of legal age at the time they executed and signed it,
and on that account the sale mentioned in said notarial deed Exhibit 3 is
perfectly valid a sale that is considered as limited solely to the parcel of
land of 6 cavanes of seed, pledged by the deceased father of the plaintiffs in
security for P600 received by him as a loan from his brother-in-law Luis
Espiritu, for the reason that the parcel of 15 cavanes had been lawfully sold
by its original owner, the plaintiffs' mother.
The courts, in their interpretation of the law, have laid down the rule that the
sale of real estate, made by minors who pretend to be of legal age, when in
fact they are not, is valid, and they will not be permitted to excuse
themselves from the fulfillment of the obligations contracted by them, or to
have them annulled in pursuance of the provisions of Law 6, title 19, of the
6th Partida; and the judgment that holds such a sale to be valid and absolves
the purchaser from the complaint filed against him does not violate the laws
relative to the sale of minors' property, nor the juridical rules established in
consonance therewith. (Decisions of the supreme court of Spain, of April 27,
1860, July 11, 1868, and March 1, 1875.) itc@alf
With respect to the true age of the plaintiffs, no proof was adduced of the fact
that it was Luis Espiritu who took out Domingo Mercado's personal
registration certificate on April 13, 1910, causing the age of 23 years to be
entered therein in order to corroborate the date of the notarial instrument of
May 17th of the same year; and the supposition that he did, would also allow
it to be supposed, in order to show the propriety of the claim, that the cedula
Exhibit C was taken out on February 14, 1914, where in it is recorded that
Domingo Mercado was on that date 23 years of age, for both these facts are
not proved; neither was any proof adduced against the statement made by
the plaintiffs Domingo and Josefa in the notarial instrument Exhibit 3, that, on
the date when they executed it, they were already of legal age, and, besides
the annotation contained in the copybook Exhibit A, no supplemental proof of
their true ages was introduced.
Aside from the foregoing, from a careful examination of the record in this
case, it cannot be concluded that the plaintiffs, who claim to have minors
when they executed the notarial instrument Exhibit 3, have suffered positive
and actual losses and damages in their rights and interests as a result of the
execution of said document, inasmuch as the sale effected by the plaintiffs'
mother, Margarita Espiritu, in May, 1894, of the greater part of the land of 21
cavanes of seed, did not occasion any damage or prejudice to the plaintiffs,
inasmuch as their father stated in the document Exhibit 2 that he was obliged
to mortgage or pledge said remaining portion of the land in order to secure
the loan of the P375 furnished by Luis Espiritu and which was subsequently
increased to P600 so as to provide for certain engagements or perhaps to
meet the needs of his children, the plaintiff; and therefore, to judge from the
statements made by their father himself, they received through him, in
exchange for the land of 6 cavanes of seed, which passed into the possession
of the creditor Luis Espiritu, the benefit which must have accrued to them
from the sums of money received as loans; and, finally, on the execution of

the impugned document Exhibit 3, the plaintiffs received and divided

between themselves the sum of P400, which sum, added to that P2,000
received by Margarita Espiritu, and to that of the P600 collected by
Wenceslao Mercado, widower of the latter and father of the plaintiffs, makes
all together the sum of P3,000, the amount paid by the purchaser as the price
of all the land containing 21 cavanes of seed, and is the just price of the
property, was not impugned, and, consequently, should be considered as
equivalent to, and compensatory for, the true value of said land.
For the foregoing reasons, whereby the errors assigned to the judgment
appealed from have been refuted, and deeming said judgment to be in
accordance with law and the evidence of record, we should, and do hereby,
affirm the same, with costs against the appellants. So ordered.
Arellano, C. J., Johnson, Street, and Malcolm, JJ., concur.

Separate Opinions
CARSON, J., concurring:
I concur.
But in order to avoid misunderstanding, I think it well to indicate that the
general statement, in the prevailing opinion to the effect that the making of
false representations as to his age by an infant executing a contract will
preclude him from disaffirming the contract or setting up the defense of
infancy, must be understood as limited to cases wherein, on account of the
minor's representations as to his majority, and because of his near approach
thereto, the other party had good reason to believe, and did in fact believe
the minor capable of contracting.
The doctrine set forth in the Partidas, relied upon by the supreme court of
Spain in the cases cited in the prevailing opinion, is substantially similar to
the doctrine of estoppel as applied in like instances by many of the courts in
the United States.
For the purposes of convenient comparison, I here insert some citations of
authority, Spanish and American, recognizing the limitations upon the
general doctrine to which I am inviting attention at this time; and in this
connection it is worthy of note that the courts of the United States look with
rather less favor than the supreme court of Spain upon the application of the
doctrine, doubtless because the cases wherein it may properly be applied,
are much less likely to occur in a jurisdiction where majority is reached at the
age of 21 than a jurisdiction wherein majority is not ordinarily attained until
the infant reaches the age of 25.

Ley 6, tit. 19, Partida 6. is, in part, as follows:

If he who is minor (1) deceitfully says or sets forth in an instrument that he is
over twenty-five years of age, and this assertion is believed by another
person who takes him to be of about that age, (2) in an action at law he
should be deemed to be of the age he asserted, and should no (3) afterwards
be released from liability on the plea that he was not of said age when he
assumed the obligation. The reason for this is that the law helps the deceived
and not the deceivers.
In the glossary to these provisions of the Partidas by Gregorio Lopez, I find
the following:
(1)
De tal tiempo. Nota bene hoc verbum, nam si appareret ex aspectu
eum esse minorem, tunc adversarius non potest dicere se deceptum; imo
tam ipse, quam minor videntur esse in dolo, quo casu competit minori
restitutio, quia facta doli compensatione, perinde ast ac si nullus fuiset in
dolo, et ideo datur restitutio; et quia scienti dolus non infertur, l. 1. D. de act.
empt. secundum Cyn. Alberic et Salic. in l. 3. C. si minor se major. dixer. adde
Albericum tenentem, quabndo per aspectum a liter constaret, in authent.
sacramenta puberum, col. 3. C. si advers vendit.
(2)
Engoosamente. Adde 1. 2. et 3. C. si minor se major. dixer. Et adverte
nam per istam legem Partitarum, que non distinguit, an adultus, vel pupillus
talem assertionem faciat, videtur comprobari dictum Guillielm. de Cun. de
quo per Paul. de Castr. in 1. qui jurasse. in princ. D. de jurejur. quod si pupillus
proximus pubertari juret, cum contrahit, se esse puberem, et postea etiam
juret, quod non veniet contra contractum quod habebit locum dispositio
authenticae sacramenta puberum, sicut si esset pubes: et cum isto dicto
transit ibi Paul. de Cast. multum commendans, dicens, se alibi non legisse; si
tamen teneamus illam opinionem, quod etiam pupillus doli capax obligatur ex
juramento, non esset ita miranda dicat, decissio; vide per Alexand. in dict. 1.
qui jurasse, in princ. Item lex ista Partitarum expresse sentit de adulto, non
de pupillo, cum superius dixit, que paresciere de tal tiempo: Doctores etiam
intelligunt de adulto 11. dict. tit. C. si minor. se major. dixer. et patet ex 11.
illius tituli. Quid autem dicemus in dubio, cum non constat de dolo minoris?
Azon. in summa illius tit. in fin. Cynus tamen, et alli, tenent oppositum, quia
dolus non praesumitur, nisi probetur, 1. quotiens, s., qui dolo, D. de probat. Et
hoc etiam vult ista lex Partitarum, cum dicit, si lo faze engoosamente: et ita
tenent Alberic. et Salicet. in dict. 1. 3. ubi etiam Bart. in fin. Si autem minor
sui facilitate asserat se mojorem, et ita juret, tunc distingue, ut habetur dict.
1. 3 quia aut juravit verbo tenus, et tunc non restituitur, nisi per
instrumentum seu scripturam probet se minorem; et si juravit corporaliter,
nullo modo restituitur, ut ibi; et per quae instrumenta probentur, cum verbo
tenus juravit, vide per Specul. tit. de restit, in integr. s. quis autem, col. 4.
vers. sed cujusmodi erit scriptura, ubi etiam vide per Speculatorem aliquas
notabiles quaestiones in ista materia, in col. 5. videlicet, an praejudicet sibi
minor ex tali juramento in aliis contractibus, et tenet, quod non; et tenet
glossa finalis in 1. de aetate, D. de minor. in fin. gloss. vide ibi per Speculat.
ubi etiam de aliis in ista materia.
In the decision of the supreme court of Spain dated the 27th of April, 1860, I
find an excellent illustration of the conditions under which that court applied
the doctrine, as appears from the following resolution therein set forth.

Sales of real estate made by minors are valid when the latter pretend to be
twenty-five years of age and, due to the circumstances that they are nearly
of that age, are married, or have administration of their property, or on
account of other special circumstances affecting them, the other parties to
the contract believe them to be of legal age.
With these citations compare the general doctrine in the United States as set
forth in 22 Cyc. (p. 610), supported by numerous citations of authority.
Estoppel to disaffirm (I)
In General. The doctrine of estoppel not
being as a general rule applicable to infants, the court will not readily hold
that his acts during infancy have created an estoppel against him to disaffirm
his contracts. Certainly the infant cannot be estopped by the acts or
admissions of other persons.
(II)
False representations as to age. According to some authorities the
fact that an infant at the time of entering into a contract falsely represented
to the person with whom he dealt that he had attained the age of majority
does not give any validity to the contract or estop the infant from disaffirming
the same or setting up the defense of infancy against the enforcement of any
rights thereunder; but there is also authority for the view that such false
representations will create an estoppel against the infant, and under the
statutes of some states no contract can be disaffirmed where, on account of
the minor's representations as to his majority, the other party had good
reason to believe the minor capable of contracting. Where the infant has
made no representations whatever as to his age, the mere fact that the
person with whom he dealt believed him to be of age, even though his belief
was warranted by the infant's appearance and the surrounding
circumstances, and the infant knew of such belief, will not render the contract
valid or estop the infant to disaffirm.
G.R. No. L-12471
April 13, 1959
ROSARIO L. DE BRAGANZA, ET AL., petitioners,
vs.
FERNANDO F. DE VILLA ABRILLE, respondent.
Oscar M. Herrera for petitioners.
R. P. Sarandi and F. Valdez Anama for respondents.
BENGZON, J.:
Rosario L. de Braganza and her sons Rodolfo and Guillermo petition for review
of the Court of Appeal's decision whereby they were required solidarily to pay
Fernando F. de Villa Abrille the sum of P10,000 plus 2 % interest from October
30, 1944.
The above petitioners, it appears, received from Villa Abrille, as a loan, on
October 30, 1944 P70,000 in Japanese war notes and in consideration
thereof, promised in writing (Exhibit A) to pay him P10,000 "in legal currency
of the P. I. two years after the cessation of the present hostilities or as soon
as International Exchange has been established in the Philippines", plus 2 %
per annum.

Because payment had not been made, Villa Abrille sued them in March 1949.
In their answer before the Manila court of first Instance, defendants claimed
to have received P40,000 only instead of P70,000 as plaintiff asserted.
They also averred that Guillermo and Rodolfo were minors when they signed
the promissory note Exhibit A. After hearing the parties and their evidence,
said court rendered judgment, which the appellate court affirmed, in the
terms above described.
There can be no question about the responsibility of Mrs. Rosario L. Braganza
because the minority of her consigners note release her from liability; since it
is a personal defense of the minors. However, such defense will benefit her to
the extent of the shares for which such minors may be responsible, (Art.
1148, Civil Code). It is not denied that at the time of signing Exhibit A,
Guillermo and Rodolfo Braganza were minors-16 and 18 respectively.
However, the Court of Appeals found them liable pursuant to the following
reasoning:
. . . . These two appellants did not make it appears in the promissory note
that they were not yet of legal age. If they were really to their creditor, they
should have appraised him on their incapacity, and if the former, in spite of
the information relative to their age, parted with his money, then he should
be contended with the consequence of his act. But, that was not the case.
Perhaps defendants in their desire to acquire much needed money, they
readily and willingly signed the promissory note, without disclosing the legal
impediment with respect to Guillermo and Rodolfo. When minor, like in the
instant case, pretended to be of legal age, in fact they were not, they will not
later on be permitted to excuse themselves from the fulfillment of the
obligation contracted by them or to have it annulled. (Mercado, et al. vs.
Espiritu, 37 Phil., 215.) [Emphasis Ours.]
We cannot agree to above conclusion. From the minors' failure to disclose
their minority in the same promissory note they signed, it does not follow as
a legal proposition, that they will not be permitted thereafter to assert it.
They had no juridical duty to disclose their inability. In fact, according to
Corpuz Juris Secundum, 43 p. 206;
. . . . Some authorities consider that a false representation as to age including
a contract as part of the contract and accordingly hold that it cannot be the
basis of an action in tort. Other authorities hold that such misrepresentation
may be the basis of such an action, on the theory that such
misrepresentation is not a part of, and does not grow out of, the contract, or
that the enforcement of liability for such misrepresentation as tort does not
constitute an indirect of enforcing liability on the contract. In order to hold
infant liable, however, the fraud must be actual and not constructure. It has
been held that his mere silence when making a contract as to age does not
constitute a fraud which can be made the basis of an action of decit.
(Emphasis Ours.)
The fraud of which an infant may be held liable to one who contracts with him
in the belief that he is of full age must be actual not constructive, and mere
failure of the infant to disclose his age is not sufficient. (27 American
Jurisprudence, p. 819.)

The Mecado case1 cited in the decision under review is different because the
document signed therein by the minor specifically stated he was of age; here
Exhibit A contained no such statement. In other words, in the Mercado case,
the minor was guilty of active misrepresentation; whereas in this case, if the
minors were guilty at all, which we doubt it is of passive (or constructive)
misrepresentation. Indeed, there is a growing sentiment in favor of limiting
the scope of the application of the Mercado ruling, what with the
consideration that the very minority which incapacitated from contracting
should likewise exempt them from the results of misrepresentation.
We hold, on this point, that being minors, Rodolfo and Guillermo Braganza
could not be legally bound by their signatures in Exhibit A.
It is argued, nevertheless, by respondent that inasmuch as this defense was
interposed only in 1951, and inasmuch as Rodolfo reached the age of
majority in 1947, it was too late to invoke it because more than 4 years had
elapsed after he had become emancipated upon reaching the age of majority.
The provisions of Article 1301 of the Civil Code are quoted to the effect that
"an action to annul a contract by reason of majority must be filed within 4
years" after the minor has reached majority age. The parties do not specify
the exact date of Rodolfo's birth. It is undenied, however, that in October
1944, he was 18 years old. On the basis of such datum, it should be held that
in October 1947, he was 21 years old, and in October 1951, he was 25 years
old. So that when this defense was interposed in June 1951, four years had
not yet completely elapsed from October 1947.
Furthermore, there is reason to doubt the pertinency of the 4-years period
fixed by Article 1301 of the Civil Code where minority is set up only as a
defense to an action, without the minors asking for any positive relief from
the contract. For one thing, they have not filed in this case an action for
annulment.2 They merely interposed an excuse from liability.
Upon the other hand, these minors may not be entirely absolved from
monetary responsibility. In accordance with the provisions of Civil Code, even
if their written contact is unenforceable because of non-age, they shall make
restitution to the extent that they have profited by the money they received.
(Art. 1340) There is testimony that the funds delivered to them by Villa Abrille
were used for their support during the Japanese occupation. Such being the
case, it is but fair to hold that they had profited to the extent of the value of
such money, which value has been authoritatively established in the socalled Ballantine Schedule: in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine money.
Wherefore, as the share of these minors was 2/3 of P70,000 of P46,666.66,
they should now return P1,166.67.3 Their promise to pay P10,000 in
Philippine currency, (Exhibit A) can not be enforced, as already stated, since
they were minors incapable of binding themselves. Their liability, to repeat, is
presently declared without regard of said Exhibit A, but solely in pursuance of
Article 1304 of the Civil Code.
Accordingly, the appealed decision should be modified in the sense that
Rosario Braganza shall pay 1/3 of P10,000 i.e., P3,333.334 plus 2% interest
from October 1944; and Rodolfo and Guillermo Braganza shall pay jointly5 to
the same creditor the total amount of P1,166.67 plus 6% interest beginning

March 7, 1949, when the complaint was filed. No costs in this instance.
Paras, C.J., Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion and Endencia, JJ., concur.