G.R. No.

L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.

REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the
spouses Mr. and Mrs Flaviano Lagasca, executed a deed of mortgage, dated
November 13, 1957, in favor of petitioner Government Service Insurance
System (hereinafter referred to as GSIS) and subsequently, another deed of
mortgage, dated April 14, 1958, in connection with two loans granted by the
latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of
land covered by Transfer Certificate of Title No. 38989 of the Register of
Deed of Quezon City, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds. 2 They also executed a 'promissory
note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY
and SOLIDARILY, promise to pay the GOVERNMENT SERVICE
INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine
Currency, with interest at the rate of six (6%) per centum
compounded monthly payable in . . . (120)equal monthly
installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated
"Assumption of Mortgage" under which they obligated themselves to assume
the aforesaid obligation to the GSIS and to secure the release of the
mortgage covering that portion of the land belonging to herein private
respondents and which was mortgaged to the GSIS. 4 This undertaking was
not fulfilled. 5

Upon failure of the mortgagors to comply with the conditions of the

mortgage, particularly the payment of the amortizations due, GSIS
extrajudicially foreclosed the mortgage and caused the mortgaged property
to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private
respondents filed a complaint against the petitioner and the Lagasca spouses
in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure
"made on, their property and all other documents executed in relation
thereto in favor of the Government Service Insurance System" be declared
null and void. It was further prayed that they be allowed to recover said
property, and/or the GSIS be ordered to pay them the value thereof, and/or
they be allowed to repurchase the land. Additionally, they asked for actual
and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the
mortgage contracts not as sureties or guarantors for the Lagasca spouses
but they merely gave their common property to the said co-owners who were
solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the
complaint for failure to establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals
that:

which held

... although formally they are co-mortgagors, they are so only for
accomodation (sic) in that the GSIS required their consent to the
mortgage of the entire parcel of land which was covered with
only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic)
spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a
valid cause for having foreclosed the mortgage without having
given sufficient notice to them as required either as to their
delinquency in the payment of amortization or as to the

subsequent foreclosure of the mortgage by reason of any default

in such payment. The notice published in the newspaper, 'Daily
Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not
the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed thatIn view of all the foregoing, the judgment appealed from is
hereby reversed, and another one entered (1) declaring the
foreclosure of the mortgage void insofar as it affects the share of
the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if
already sold to third party, in the sum of P 35,000.00, and (3)
ordering the appellees Flaviano Lagasca and Esther Lagasca to
pay the appellants the sum of P 10,00.00 as moral damages, P
5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of
Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments
Law, which provide that an accommodation party is one who has signed an
instrument as maker, drawer, acceptor of indorser without receiving value
therefor, but is held liable on the instrument to a holder for value although
the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance
misplaced. The promissory note hereinbefore quoted, as well as the
mortgage deeds subject of this case, are clearly not negotiable instruments.
These documents do not comply with the fourth requisite to be considered as
such under Section 1 of Act No. 2031 because they are neither payable to
order nor to bearer. The note is payable to a specified party, the GSIS.
Absent the aforesaid requisite, the provisions of Act No. 2031 would not
apply; governance shall be afforded, instead, by the provisions of the Civil
Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private
respondents signed the documents "only to give their consent to the
mortgage as required by GSIS", with the latter having full knowledge that the
loans secured thereby were solely for the benefit of the Lagasca

spouses. 12 This appears to be duly supported by sufficient evidence on

record. Indeed, it would be unusual for the GSIS to arrange for and deduct
the monthly amortizations on the loans from the salary as an army officer of
Flaviano Lagasca without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then there is also the
undisputed fact, as already stated, that the Lagasca spouses executed a socalled "Assumption of Mortgage" promising to exclude private respondents
and their share of the mortgaged property from liability to the mortgagee.
There is no intimation that the former executed such instrument for a
consideration, thus confirming that they did so pursuant to their original
agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this
case for it is clear that there was no objection in the court below regarding
the admissibility of the testimony and documents that were presented to
prove that the private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides, the
introduction of such evidence falls under the exception to said rule, there
being allegations in the complaint of private respondents in the court below
regarding the failure of the mortgage contracts to express the true
agreement of the parties.14
However, contrary to the holding of the respondent court, it cannot be said
that private respondents are without liability under the aforesaid mortgage
contracts. The factual context of this case is precisely what is contemplated
in the last paragraph of Article 2085 of the Civil Code to the effect that third
persons who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the
benefit of the Lagasca spouses would not invalidate the mortgage with
respect to private respondents' share in the property. In consenting thereto,
even assuming that private respondents may not be assuming personal
liability for the debt, their share in the property shall nevertheless secure and
respond for the performance of the principal obligation. The parties to the
mortgage could not have intended that the same would apply only to the
aliquot portion of the Lagasca spouses in the property, otherwise the consent
of the private respondents would not have been required.

The supposed requirement of prior demand on the private respondents

would not be in point here since the mortgage contracts created obligations
with specific terms for the compliance thereof. The facts further show that
the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot
agree with the ruling of respondent court that lack of notice to the private
respondents of the extrajudicial foreclosure sale impairs the validity thereof.
In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No.
3135, as amended, does not require personal notice on the mortgagor,
quoting the requirement on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not
less than twenty days in at least three public places of the
municipality where the property is situated, and if such property
is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not
complied with in the foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it
affected the share of private respondents or in directing reconveyance of
their property or the payment of the value thereof Indubitably, whether or
not private respondents herein benefited from the loan, the mortgage and
the extrajudicial foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the
respondent Court of Appeals and REINSTATING the decision of the court a
quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
G.R. No. 75908 October 22, 1999
FEDERICO O. BORROMEO, LOURDES O. BORROMEO and FEDERICO O.
BORROMEO, INC., petitioners,
vs.
AMANCIO SUN and the COURT OF APPEALS, respondents.

PURISIMA, J.:
At bar is a Petition for review on Certiorari under Rule 45 of the Revised Rules
of Court seeking to set aside the Resolution of the then Intermediate
Appellate Court 1, dated March 13, 1986, in AC-G.R. CV NO. 67988, which
reversed its earlier Decision dated February 12, 1985, setting aside the
Decision of the former Court of the First Instance of Rizal, Branch X, in Civil
Case No. 19466.
The antecedent facts are as follows:
Private respondent Amancio Sun brought before the then Court of the First
Instance of Rizal, Branch X, an action against Lourdes O. Borromeo (in her
capacity as corporate secretary), Federico O. Borromeo and Federico O.
Borromeo (F.O.B.), Inc., to compel the transfer to his name in the books of
F.O.B., Inc., 23,223 shares of stock registered in the name of Federico O.
Borromeo, as evidenced by a Deed of Assignment dated January 16, 1974.
Private respondent averred 2 that all the shares of stock of F.O.B. Inc.
registered in the name of Federico O. Borromeo belong to him, as the said
shares were placed in the name of Federico O. Borromeo "only to give the
latter personality and importance in the business world." 3 According to the
private respondent, on January 16, 1974 Federico O. Borromeo executed in
his favor a Deed of Assignment with respect to the said 23,223 shares of
stock.
On the other hand, petitioner Federico O. Borromeo disclaimed any
participation in the execution of the Deed of Assignment, theorizing that his
supposed signature thereon was forged.1wphi1.nt
After trial, the lower court of origin came out with a decision declaring the
questioned signature on subject Deed of Assignment, dated January 16,
1974, as the genuine signature of Federico O. Borromeo; ratiocinating thus:
After considering the testimonies of the two expert witnesses for
the parties and after a careful and judicious study and analysis of
the questioned signature as compared to the standard
signatures, the Court is not in a position to declare that the
questioned signature in Exh. A is a forgery. On the other hand,
the Court is of the opinion that the questioned signature is the
real signature of Federico O. Borromeo between the years 1954

to 1957 but definitely is not his signature in 1974 for by then he

has changed his signature. Consequently, to the mind of the
Court Exhibit A was signed by defendant Federico O. Borromeo
between the years 1954 to 1957 although the words in the blank
were filled at a much later date. 4
On appeal by petitioners, the Court of Appeals adjudged as forgery the
controverted signature of Federico O. Borromeo; disposing as follows:
WHEREFORE, the judgment of the Court a quo as to the second
cause of action dated March 12, 1980 is hereby reversed and set
aside and a new judgment is hereby rendered:
1. Ordering the dismissal of the complaint as to defendantappellants;
2. Ordering plaintiff-appellee on appellants' counterclaim to pay
the latter:
a) P20,000.00 as moral damages;
b) P10,000.00 as exemplary damages;
c) P 10,000.00 as attorney's fees.
3. Ordering plaintiff-appellee to pay the costs.

On March 29, 1985, Amancio Sun interposed a motion for reconsideration of

the said decision, contending that Segundo Tabayoyong, petitioners' expert
witness, is not a credible witness as found and concluded in the following
disposition by this Court in Cesar vs. Sandigan Bayan 6:
The testimony of Mr. Segundo Tabayoyong on March 5, 1980,
part of which is cited on pages 19-23 of the petition, shows
admissions which are summarized by the petitioner as follows:
He never finished any degree in Criminology. Neither
did he obtain any degree in physics or chemistry. He
was a mere trainee in the NBI laboratory. He said he
had gone abroad only once-to Argentina which,
according to him is the only one country in the world

that gives this degree (?) . . . "People go there where

they obtain this sort of degree (?) where they are
authorized to practice (sic) examination of
questioned documents."
His civil service eligibility was second grade (general
clerical). His present position had to be "re-classified"
"confidential" in order to qualify him to it. He never
passed any Board Examination.
He has never authored any book on the subject on
which he claimed to be an "expert." Well, he did
"write" a so-called pamphlet pretentiously called
"Fundamentals of Questioned Documents
Examination and Forgery Detection." In that
pamphlet, he mentioned some references' (some)
are Americans and one I think is a British, sir, like in
the case of Dr. Wilson Harrison, a British' (he
repeated with emphasis). Many of the "theories"
contained in his pamphlet were lifted body and soul
from those references, one of them being Albert
Osborn. His pamphlet has neither quotations nor
footnotes, although he was too aware of the crime
committed by many an author called "plagiarism."
But that did not deter him, nor bother him in the
least.
He has never been a member of any professional
organization of experts in his supposed field of
expertise, because he said there is none locally.
Neither is he on an international level. 7
Acting an the aforesaid motion for reconsideration, the Court of Appeals
reconsidered its decision of February 12, 1985 aforementioned. Thereafter,
the parties agreed to have subject Deed of Assignment examined by the
Philippine Constabulary (PC) Crime Laboratory, which submitted a Report on
January 9, 1986, the pertinent portion of which, stated:
1. Comparative examination and analysis of the
questioned and the standard signature reveal
significant similarities in the freedom of movement,

good quality of lines, skills and individual handwriting

characteristics.
2. By process of interpolation the questioned
signature fits in and can be bracketed in time with
the standard signatures written in the years between
1956 to 1959. Microscopic examination of the ink
used in the questioned signature and the standard
signature in document dated 30 July 1959 marked
Exh. "E" indicate gallotanic ink.
xxx xxx xxx
1. The questioned signature FEDERICO O.
BORROMEO marked "Q" appearing in the original
Deed of Assignment dated 16 January 1974 and the
submitted standard signatures of Federico O.
Borromeo marked "S-1" to "S-49" inclusive were
written BY ONE AND THE SAME PERSON.
2. The questioned signature FEDERICO O.
BORROMEO marked "Q" COULD HAVE BEEN SIGNED
IN THE YEARS BETWEEN 1950-1957. 8
After hearing the arguments the lawyers of record advanced on the said
"Report" of the PC Crime Laboratory, the Court of Appeals resolved:
xxx xxx xxx
1) to ADMIT the Report dated Jan. 9, 1986 of the PC Crime
Laboratory on the Deed of Assignment in evidence, without
prejudice to the parties' assailing the credibility of said Report;
2) to GIVE both parties a non-extendible period of FIVE (5) DAYS
from February 27, 1986, within which to file simultaneous
memoranda. 9
On March 13, 1986, the Court of Appeals reversed its decision of February
12, 1985, which affirmed in toto the decision of the trial court of origin;
resolving thus:

WHEREFORE, finding the Motion for Reconsideration meritorious.

We hereby set aside our Decision, dated February 12, 1985 and
in its stead a new judgment is hereby rendered affirming in
toto the decision of the trial Court, dated March 12, 1980,
without pronouncement as to costs.
SO ORDERED.

10

Therefrom, petitioners found their way to this court via the present Petition;
theorizing that:
I
THE RESPONDENT COURT ERRED IN HOLDING THAT WHEN
PETITIONER AGREED TO THE SUGGESTION OF RESPONDENT
COURT TO HAVE THE QUESTIONED DOCUMENT EXAMINED BY
THE PC CRIME LABORATORY THEY COULD NO LONGER QUESTION
THE COMPETENCY OF THE DOCUMENT.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
QUESTIONED DOCUMENT WAS SIGNED IN 1954 BUT WAS DATED
IN 1974.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
SIGNATURE OF FEDERICO O. BORROMEO IN THE DEED OF
ASSIGNMENT (EXHIBIT "A") IS A GENUINE SIGNATURE CIRCA
1954-1957.
The Petition is barren of merit.
Well-settled is the rule that "factual findings of the Court of Appeals are
conclusive on the parties and not reviewable by the Supreme Court and
they carry even more weight when the Court of Appeals affirms the factual
findings of the trial court." 11
In the present case, the trial court found that the signature in question is the
genuine signature of Federico O. Borromeo between the years 1954 to 1957

although the words in the blank space of the document in question were
written on a much later date. The same conclusion was arrived at by the
Court of Appeals on the basis of the Report of the PC crime Laboratory
corroborating the findings of Col. Jose Fernandez that the signature under
controversy is genuine.
It is significant to note that Mr. Tabayoyong, petitioners' expert witness,
limited his comparison of the questioned signature with the 1974 standard
signature of Federico O. Borromeo. No comparison of the subject signature
with the 1950 1957 standard signature was ever made by Mr. Tabayoyong
despite his awareness that the expert witness of private respondent, Col.
Jose Fernandez, made a comparison of said signatures and notwithstanding
his (Tabayoyong's) access to such signatures as they were all submitted to
the lower Court. As correctly ratiocinated 12 by the Court of origin, the only
conceivable reason why Mr. Tabayoyong avoided making such a comparison
must have been, that even to the naked eye the questioned signature affixed
to the Deed of Assignment, dated January 16, 1974, is strikingly similar to
the 1950 to 1954 standard signature of Federico O. Borromeo, such that if a
comparison thereof was made by Mr. Tabayoyong, he would have found the
questioned signature genuine.
That the Deed of Assignment is dated January 16, 1974 while the questioned
signature was found to be circa 1954-1957, and not that of 1974, is of no
moment. It does not necessarily mean, that the deed is a forgery. Pertinent
records reveal that the subject Deed of Assignment is embodied in a blank
form for the assignment of shares with authority to transfer such shares in
the books of the corporation. It was clearly intended to be signed in blank to
facilitate the assignment of shares from one person to another at any future
time. This is similar to Section 14 of the Negotiable Instruments Law where
the blanks may be filled up by the holder, the signing in blank being with the
assumed authority to do so. Indeed, as the shares were registered in the
name of Federico O. Borromeo just to give him personality and standing in
the business community, private respondent had to have a counter evidence
of ownership of the shares involved. Thus, the execution of the deed of
assignment in blank, to be filled up whenever needed. The same explains the
discrepancy between the date of the deed of assignment and the date when
the signature was affixed thereto.
While it is true that the 1974 standard signature of Federico O. Borromeo is
to the naked eye dissimilar to his questioned signature circa 1954-1957,

which could have been caused by sheer lapse of time, Col. Jose Fernander,
respondent's expert witness, found the said signatures similar to each other
after subjecting the same to stereomicroscopic examination and analysis
because the intrinsic and natural characteristics of Federico O. Borromeo's
handwriting were present in all the exemplar signatures used by both
Segundo Tabayoyong and Col. Jose Fernandez.
It is therefore beyond cavil that the findings of the Court of origin affirmed by
the Court of Appeals on the basis of the corroborative findings of the
Philippine Constabulary Crime Laboratory confirmed the genuineness of the
signature of Federico O. Borromeo in the Deed of Assignment dated January
16, 1974.
Petitioners, however, question the "Report" of the document examiner on the
ground that they were not given an opportunity to cross-examine the
Philippine Constabulary document examiner; arguing that they never waived
their right to question the compentecy of the examiner concerned. While the
Court finds merit in the contention of petitioners, that they did not actually
waive their right to cross-examine on any aspect of subject Report of the
Philippine Constabulary Crime Laboratory, the Court discerns no proper basis
for deviating from the findings of the Court of Appeals on the matter. It is
worthy to stress that courts may place whatever weight due on the
testimony of an expert witness. 13 Conformably, in giving credence and
probative value to the said "Report" of the Philippine Constabulary Crime
Laboratory, corroborating the findings of the trial Court, the Court of Appeals
merely exercised its discretion. There being no grave abuse in the exercise of
such judicial discretion, the findings by the Court of Appeals should not be
disturbed on appeal.1wphi1.nt
Premises studiedly considered, the Court is of the irresistible conclusion, and
so holds, that the respondent Court erred not in affirming the decision of the
Regional Trial Court a quo in Civil Case No. 19466.
WHEREFORE, the Petition is DISMISSED for lack of merit and the assailed
Resolution, dated March 13, 1986, AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 16454

September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff,
George A. Kauffman, was the president of a domestic corporation engaged
chiefly in the exportation of hemp from the Philippine Islands and known as
the Philippine Fiber and Produce Company, of which company the plaintiff
apparently held in his own right nearly the entire issue of capital stock. On
February 5, 1918, the board of directors of said company, declared a
dividend of P100,000 from its surplus earnings for the year 1917, of which
the plaintiff was entitled to the sum of P98,000. This amount was accordingly
placed to his credit on the books of the company, and so remained until in
October of the same year when an unsuccessful effort was made to transmit
the whole, or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks,
treasurer of the Philippine Fiber and Produce Company, presented himself in
the exchange department of the Philippine National Bank in Manila and
requested that a telegraphic transfer of $45,000 should be made to the
plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. He was informed that the total cost of said transfer, including
exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as
treasurer of the Philippine Fiber and Produce Company, thereupon drew and
delivered a check for that amount on the Philippine National Bank; and the
same was accepted by the officer selling the exchange in payment of the
transfer in question. As evidence of this transaction a document was made
out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt. This memorandum receipt is in the following
language:
October 9th, 1918.
CABLE TRANSFER BOUGHT FROM
PHILIPPINE NATIONAL BANK,
Manila, P.I.
Stamp P18
Foreign
$45,000.

Amount
3/8 %

Rate
P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman,

New York. Total P90,355.50. Account of Philippine Fiber and Produce
Company. Sold to Messrs. Philippine Fiber and Produce Company,
Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York
agency a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce
Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New
York sent a cable message in reply suggesting the advisability of withholding
this money from Kauffman, in view of his reluctance to accept certain bills of
the Philippine Fiber and Produce Company. The Philippine National Bank
acquiesced in this and on October 11 dispatched to its New York agency
another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company,
cabled to Kauffman in New York, advising him that $45,000 had been placed
to his credit in the New York agency of the Philippine National Bank; and in
response to this advice Kauffman presented himself at the office of the
Philippine National Bank in New York City on October 15, 1918, and
demanded the money. By this time, however, the message from the
Philippine National Bank of October 11, directing the withholding of payment
had been received in New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in
the Court of First Instance of the city of Manila to recover said sum, with
interest and costs; and judgment having been there entered favorably to the
plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that
at the time of the transaction above-mentioned, the Philippines Fiber and
Produce Company did not have on deposit in the Philippine National Bank
money adequate to pay the check for P90,355.50, which was delivered in
payment of the telegraphic order; but the company did have credit to that
extent, or more, for overdraft in current account, and the check in question
was charged as an overdraft against the Philippine Fiber and Produce
Company and has remained on the books of the bank as an interest-bearing
item in the account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to

show failure of consideration with respect to the amount paid for said
telegraphic order. It is true that in the defendant's answer it is suggested
that the failure of the bank to pay over the amount of this remittance to the
plaintiff in New York City, pursuant to its agreement, was due to a desire to
protect the bank in its relations with the Philippine Fiber and Produce
Company, whose credit was secured at the bank by warehouse receipts on
Philippine products; and it is alleged that after the exchange in question was
sold the bank found that it did not have sufficient to warrant payment of the
remittance. In view, however, of the failure of the bank to substantiate these
allegations, or to offer any other proof showing failure of consideration, it
must be assumed that the obligation of the bank was supported by adequate
consideration.
In this court the defense is mainly, if not exclusively, based upon the
proposition that, inasmuch as the plaintiff Kauffman was not a party to the
contract with the bank for the transmission of this credit, no right of action
can be vested in him for the breach thereof. "In this situation," we here
quote the words of the appellant's brief, "if there exists a cause of action
against the defendant, it would not be in favor of the plaintiff who had taken
no part at all in the transaction nor had entered into any contract with the
plaintiff, but in favor of the Philippine Fiber and Produce Company, the party
which contracted in its own name with the defendant."
The question thus placed before us is one purely of law; and at the very
threshold of the discussion it can be stated that the provisions of the
Negotiable Instruments Law can come into operation there must be a
document in existence of the character described in section 1 of the Law;
and no rights properly speaking arise in respect to said instrument until it is
delivered. In the case before us there was an order, it is true, transmitted by
the defendant bank to its New York branch, for the payment of a specified
sum of money to George A. Kauffman. But this order was not made payable
"to order or "to bearer," as required in subsection (d) of that Act; and
inasmuch as it never left the possession of the bank, or its representative in
New York City, there was no delivery in the sense intended in section 16 of
the same Law. In this connection it is unnecessary to point out that the
official receipt delivered by the bank to the purchaser of the telegraphic
order, and already set out above, cannot itself be viewed in the light of a
negotiable instrument, although it affords complete proof of the obligation
actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for
a valuable consideration paid by the Philippine Fiber and Produce Company
agreed on October 9, 1918, to cause a sum of money to be paid to the
plaintiff in New York City; and the question is whether the plaintiff can
maintain an action against the bank for the nonperformance of said

undertaking. In other words, is the lack of privity with the contract on the
part of the plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on
this question is the second paragraph of article 1257 of the Civil Code; and
unless the present action can be maintained under the provision, the plaintiff
admittedly has no case. This provision states an exception to the more
general rule expressed in the first paragraph of the same article to the effect
that contracts are productive of effects only between the parties who
execute them; and in harmony with this general rule are numerous decisions
of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibaez de
Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584;
Manila Railroad Co. vs. Compaia Trasatlantica and Atlantic, Gulf and Pacific
Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in
these words:
Should the contract contain any stipulation in favor of a third person,
he may demand its fulfillment, provided he has given notice of his
acceptance to the person bound before the stipulation has been
revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an
elaborate dissertation upon the history and interpretation of the paragraph
above quoted and so complete is the discussion contained in that opinion
that it would be idle for us here to go over the same matter. Suffice it to say
that Justice Trent, speaking for the court in that case, sums up its conclusions
upon the conditions governing the right of the person for whose benefit a
contract is made to maintain an action for the breach thereof in the following
words:
So, we believe the fairest test, in this jurisdiction at least, whereby to
determine whether the interest of a third person in a contract is a
stipulation pour autrui, or merely an incidental interest, is to rely upon
the intention of the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, the
question must be settled by determining whether the contracting
parties desired to tender him such an interest. Did they deliberately
insert terms in their agreement with the avowed purpose of conferring
a favor upon such third person? In resolving this question, of course,
the ordinary rules of construction and interpretation of writings must
be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a

stipulation pour autrui, it matters not whether the stipulation is in the nature
of a gift or whether there is an obligation owing from the promise to the third
person. That no such obligation exists may in some degree assist in
determining whether the parties intended to benefit a third person, whether
they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain
the present action is clear enough; for it is undeniable that the bank's
promise to cause a definite sum of money to be paid to the plaintiff in New
York City is a stipulation in his favor within the meaning of the paragraph
above quoted; and the circumstances under which that promise was given
disclose an evident intention on the part of the contracting parties that the
plaintiff should have the money upon demand in New York City. The
recognition of this unqualified right in the plaintiff to receive the money
implies in our opinion the right in him to maintain an action to recover it; and
indeed if the provision in question were not applicable to the facts now
before us, it would be difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to
enforce compliance with a stipulation in his favor must signify his acceptance
before it has been revoked. In this case the plaintiff clearly signified his
acceptance to the bank by demanding payment; and although the Philippine
National Bank had already directed its New York agency to withhold payment
when this demand was made, the rights of the plaintiff cannot be considered
to as there used, must be understood to imply revocation by the mutual
consent of the contracting parties, or at least by direction of the party
purchasing he exchange.
In the course of the argument attention was directed to the case of
Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of
Appeals of the State of New York on March 1, 1921, wherein it is held that, by
selling a cable transfer of funds on a foreign country in ordinary course, a
bank incurs a simple contractual obligation, and cannot be considered as
holding the money which was paid for the transfer in the character of a
specific trust. Thus, it was said, "Cable transfers, therefore, mean a method
of transmitting money by cable wherein the seller engages that he has the
balance at the point on which the payment is ordered and that on receipt of
the cable directing the transfer his correspondent at such point will make
payment to the beneficiary described in the cable. All these transaction are
matters of purchase and sale create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the
question now before us, wish is merely that of the right of the beneficiary to
maintain an action against the bank selling the transfer.

Upon the considerations already stated, we are of the opinion that the right
of action exists, and the judgment must be affirmed. It is so ordered, with
costs against the appellant. Interest will be computed as prescribed in
section 510 of the Code of Civil Procedure.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615 1 affirming with modifications, the earlier decision of the Regional
Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution,
through its Sucat Branch issued 280 certificates of time deposit
(CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original
Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146

5 Mar. 82 74797 to 94800
5 Mar. 82 89965 to 89986
5 Mar. 82 70147 to 90150
8 Mar. 82 90001 to 90020
9 Mar. 82 90023 to 90050
9 Mar. 82 89991 to 90000
9 Mar. 82 90251 to 90272

Total 280 P1,120,000
===== ========

20 80,000
4 16,000
22 88,000
4 16,000
20 80,000
28 112,000
10 40,000
22 88,000

2. Angel dela Cruz delivered the said certificates of time (CTDs)

to herein plaintiff in connection with his purchased of fuel
products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr.
Timoteo Tiangco, the Sucat Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as
required by defendant bank's procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 4850).
4. On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant's
Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a
loan from defendant bank in the amount of Eight Hundred
Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time
Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated
time deposits from and after date" of the assignment and further
authorizes said bank to pre-terminate, set-off and "apply the said
time deposits to the payment of whatever amount or amounts

may be due" on the loan upon its maturity (TSN, February 9,

1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of
plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat
branch and presented for verification the CTDs declared lost by
Angel dela Cruz alleging that the same were delivered to herein
plaintiff "as security for purchases made with Caltex Philippines,
Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter
(Defendant's Exhibit 563) from herein plaintiff formally informing
it of its possession of the CTDs in question and of its decision to
pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document
evidencing the guarantee agreement with Mr. Angel dela Cruz"
as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's
Exhibit 564).
9. No copy of the requested documents was furnished herein
defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand
and claim for payment of the value of the CTDs in a letter dated
February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due and on August 5, 1983, the latter setoff and applied the time deposits in question to the payment of
the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's
fees.

After trial, the court a quo rendered its decision dismissing the
instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner
did not become a holder in due course of the said certificates of deposit; and
(3) in disregarding the pertinent provisions of the Code of Commerce relating
to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in
this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation
and surrender of this certificate, with interest at the
rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES

Respondent court ruled that the CTDs in question are non-negotiable

instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after the
word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain
amount follows. The document further provides that the amount
deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves
manifest with clarity that they are payable, not to whoever
purports to be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who
made the deposit and further engages itself to pay said depositor
the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:
q In other words Mr. Witness, you are saying that per
books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show
that Angel dela Cruz was the one who cause (sic) the
amount.
Atty. Calida:
q And no other person or entity or company, Mr.
Witness?
witness:
a None, your Honor.

xxx xxx xxx

Atty. Calida:
q Mr. Witness, who is the depositor identified in all of
these certificates of time deposit insofar as the bank
is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability
of an instrument is determined from the writing, that is, from the face of the
instrument itself. 9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly

understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but
what is the meaning of the words they have used. What the parties meant
must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as the
bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to
be avoided by the Negotiable Instruments Law and calls for the application of
the elementary rule that the interpretation of obscure words or stipulations
in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for the

true purpose and agreement between it and De la Cruz, as ultimately

ascertained, requires both delivery and indorsement. For, although petitioner
seeks to deflect this fact, the CTDs were in reality delivered to it as a security
for De la Cruz' purchases of its fuel products. Any doubt as to whether the
CTDs were delivered as payment for the fuel products or as a security has
been dissipated and resolved in favor of the latter by petitioner's own
authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to
falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent
bank, as defendant in the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be required to
aver with sufficient definiteness or particularity (a) the due date or dates
ofpayment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it
by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff
corporation opposed the motion. 18 Had it produced the receipt prayed for, it
could have proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be
adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez,

supra, we quote therefrom:
The character of the transaction between the parties
is to be determined by their intention, regardless of
what language was used or what the form of the
transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object
and character might still be qualified and explained
by contemporaneous writing declaring it to have
been a deposit of the property as collateral security.
It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence and is
not discharged by the transfer, and that accordingly
the use of the terms ordinarily importing conveyance
of absolute ownership will not be given that effect in
such a transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent
to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it
is transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer
thereof. 22 In the present case, however, there was no negotiation in the
sense of a transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact that the amount involved
was not disclosed) could at the most constitute petitioner only as a holder for
value by reason of his lien. Accordingly, a negotiation for such purpose

cannot be effected by mere delivery of the instrument since, necessarily, the

terms thereof and the subsequent disposition of such security, in the event
of non-payment of the principal obligation, must be contractually provided
for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do
not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With
regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public

instrument, or the instrument is recorded in the Registry of

Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of
any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter
has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements of
the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the depositor's
outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some

doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time
on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount to
saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny
of the provisions of the Code of Commerce laying down the rules to be
followed in case of lost instruments payable to bearer, which it invokes, will
reveal that said provisions, even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not mandatory. The very first
article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends due or
about to become due, be not paid a third person, as well as in
order to prevent the ownership of the instrument that a duplicate
be issued him. (Emphasis ours.)
xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558
of the Code of Commerce, on which petitioner seeks to anchor respondent
bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument so
that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance
a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 76788 January 22, 1990
JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION, respondents.
Arsenio C. Villalon, Jr. for petitioner.
Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court
of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between
the same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred
to as petitioner) bought a motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory
note. This note was subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private respondent) which financed
the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly
due to a discrepancy in the engine and chassis numbers of the vehicle
delivered to her and those indicated in the sales invoice, certificate of
registration and deed of chattel mortgage, which fact she discovered when
the vehicle figured in an accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No.
5915 for a sum of money against petitioner before the Regional Trial Court of
San Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October
2, 1980 until the said sum is fully paid; and the further amount of
P1,000.00 as attorney's fees.
The counterclaim of defendant is dismissed.
With costs against defendant.

Both petitioner and private respondent appealed the aforesaid decision to

the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having
delivered a different vehicle to petitioner, the latter prayed for a reversal of

the trial court's decision so that she may be absolved from the obligation
under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the
pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a
pleading are conclusive as against the pleader. A party cannot
subsequently take a position contradictory of, or inconsistent
with his pleadings (Cunanan vs. Amparo, 80 Phil. 227).
Admissions made by the parties in the pleadings, or in the course
of the trial or other proceedings, do not require proof and cannot
be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of
Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA
1018).
When an action or defense is founded upon a written instrument,
copied in or attached to the corresponding pleading as provided
in the preceding section, the genuineness and due execution of
the instrument shall be deemed admitted unless the adverse
party, under oath, specifically denied them, and sets forth what
he claims to be the facts (Sec. 8, Rule 8, Revised Rules of Court;
Hibbered vs. Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20
stated in the promissory note is the amount assumed by the
plaintiff in financing the purchase of defendant's motor vehicle
from the Violago Motor Sales Corp., the monthly amortization of
winch is Pl,614.95 for 36 months. Considering that the defendant
was able to pay twice (as admitted by the plaintiff, defendant's
account became delinquent only beginning May, 1980) or in the
total sum of P3,229.90, she is therefore liable to pay the
remaining balance of P54,908.30 at l4% per annum from October
2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is
hereby modified ordering the defendant to pay the plaintiff the
sum of P54,908.30 at 14% per annum from October 2, 1980 until
full payment. The decision is AFFIRMED in all other respects. With
costs to defendant. 2

Petitioner's motion for reconsideration was denied; hence, the present

recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on
the alleged fraud, bad faith and misrepresentation of Violago Motor Sales
Corporation in the conduct of its business and which fraud, bad faith and
misrepresentation supposedly released petitioner from any liability to private
respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of
private respondent.
She contends that it is not necessary, as opined by the appellate court, to
implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for "breach of contract with
damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein
where the court originally ordered petitioner to pay the remaining balance of
the motor vehicle installments in the amount of P31,644.30 representing the
difference between the agreed consideration of P49,000.00 as shown in the
sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with
the same court ordering defendant VMS instead to return to petitioner the
sum of P17,855.70. Parenthetically, said decision is still pending
consideration by the First Civil Case Division of the Court of Appeals, upon an
appeal by VMS, docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and
counters that the issues raised and the allegations adduced therein are a
mere rehash of those presented and already passed upon in the court below,
and that the judgment in the "breach of contract" suit cannot be invoked as
an authority as the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of
the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and

genuineness of which she never denied under oath is, under the foregoing
factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of
credit as petitioner would have it appear, where the assignee merely steps
into the shoes of, is open to all defenses available against and can enforce
payment only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing
and Acceptance Corp., 6 this Court had the occasion to clearly distinguish
between a negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must
contain the so-called "words of negotiability i.e., must be payable to
"order" or "bearer"". Under Section 8 of the Negotiable Instruments Law,
there are only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument and
the bill or note is to be paid to the person designated in the instrument or to
any person to whom he has indorsed and delivered the same. Without the
words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument, but will merely "step into the shoes" of the person
designated in the instrument and will thus be open to all defenses available
against the latter. Such being the situation in the above-cited case, it was
held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be
raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis
of private respondent's claim against petitioner is a promissory note which
bears all the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to
pay Violago Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said principal sum,
to be payable, without need of notice or demand, in installments
of the amounts following and at the dates hereinafter set forth,
to wit: P1,614.95 monthly for "36" months due and payable on
the 21st day of each month starting March 21, 1980 thru and
inclusive of February 21, 1983. P_________ monthly for ______
months due and payable on the ______ day of each month
starting _____198__ thru and inclusive of _____, 198________
provided that interest at 14% per annum shall be added on each
unpaid installment from maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a

negotiable instrument, having complied with the requisites under the law as
follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it
contains an unconditional promise to pay the amount of P58,138.20; [c] it is
payable at a fixed or determinable future time which is "P1,614.95 monthly
for 36 months due and payable on the 21 st day of each month starting
March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to
Violago Motor Sales Corporation, or order and as such, [e] the drawee is
named or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable
to the Order of Filinvest Finance and Leasing Corporation 10 and it is an
indorsement of the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest is a
holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the
holder thereof before it was overdue, and without notice that it had
previously been dishonored; [c] it took the same in good faith and for value;
and [d] when it was negotiated to Filinvest, the latter had no notice of any
infirmity in the instrument or defect in the title of VMS Corporation. 12
Accordingly, respondent corporation holds the instrument free from any
defect of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the instrument for
the full amount thereof. 13 This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and
VMS.
Even assuming for the sake of argument that there is an iota of truth in
petitioner's allegation that there was in fact deception made upon her in that
the vehicle she purchased was different from that actually delivered to her,
this matter cannot be passed upon in the case before us, where the VMS was
never impleaded as a party.
Whatever issue is raised or claim presented against VMS must be resolved in
the "breach of contract" case.
Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein

petitioner) in this unfortunate incident. Indeed, there is nothing
We can do as far as the Violago Motor Sales Corporation is
concerned since it is not a party in this case. To even discuss the
issue as to whether or not the Violago Motor Sales Corporation is
liable in the transaction in question would amount, to denial of
due process, hence, improper and unconstitutional. She should
have impleaded Violago Motor Sales. 14
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With
costs against petitioner.
SO ORDERED.
[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the
express assent of the parties or by the complete incompatibility between the
old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him liable
as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision[2] and the June 26,
2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 60521. The
appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it
hereby is,AFFIRMED, subject to the modification that the award for
attorneys fees and cost of suit is DELETED. The portion of the judgment that
pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly,
the case against x x x Eduardo de Jesus is REMANDED to the court of origin

for purposes of receiving exparte [Respondent] Dionisio Llamas evidence

against x x x Eduardo de Jesus.[4]
The challenged Resolution, on the other hand, denied petitioners Motion
for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo
Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the
complaint alleged that on 23 December 1996[,] [petitioner and de Jesus]
borrowed P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves jointly and
severally to pay the loan on or before 23 January 1997 with a 5% interest per
month; that the loan has long been overdue and, despite repeated demands,
[petitioner and de Jesus] have failed and refused to pay it; and that, by
reason of the[ir] unjustified refusal, [respondent] was compelled to engage
the services of counsel to whom he agreed to pay 25% of the sum to be
recovered from [petitioner and de Jesus], plus P2,000.00 for every
appearance in court. Annexed to the complaint were the promissory note
above-mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he
assumed no liability under the promissory note because he signed it merely
as an accommodation party for x x x de Jesus; and, alternatively, that he is
relieved from any liability arising from the note inasmuch as the loan had
been paid by x x x de Jesus by means of a check dated 17 April 1997; and
that, in any event, the issuance of the check and [respondents] acceptance
thereof novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder
asserting that the loan remained unpaid for the reason that the check issued
by x x x de Jesus bounced, and that [Petitioner] Garcias answer was not even
accompanied by a certificate of non-forum shopping. Annexed to the reply
were the face of the check and the reverse side thereof.

For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that
out of the supposed P400,000.00 loan, he received only P360,000.00,
the P40,000.00 having been advance interest thereon for two months, that
is, for January and February 1997; that[,] in fact[,] he paid the sum
of P120,000.00 by way of interests; that this was made when [respondents]
daughter, one Nits Llamas-Quijencio, received from the Central Police District
Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked),
the sum of P40,000.00, representing the peso equivalent of his accumulated
leave credits, another P40,000.00 as advance interest, and still
another P40,000.00 as interest for the months of March and April 1997; that
he had difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in instituting the case,
[respondent] having agreed to accept the benefits he (de Jesus) would
receive for his retirement, but [respondent] nonetheless filed the instant
case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees,
plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not appear,
nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file a pretrial brief, and his counsel even manifested that he would no [longer] present
evidence. Given this development, the trial court gave [respondent]
permission to present his evidence ex parte against x x x de Jesus; and, as
regards [Petitioner] Garcia, the trial court directed [respondent] to file a
motion for judgment on the pleadings, and for [Petitioner] Garcia to file his
comment or opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default
and to allow him to present his evidence ex parte. Meanwhile, [Petitioner]
Garcia filed a [M]anifestation submitting his defense to a judgment on the
pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to
submit the case for judgement on the pleadings, withdrawing in the process
his previous motion. Thereunder, he asserted that [petitioners and de
Jesus] solidary liability under the promissory note cannot be any clearer, and
that the check issued by de Jesus did not discharge the loan since the check
bounced.[5]
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch
222) disposed of the case as follows:

WHEREFORE, premises considered, judgment on the pleadings is hereby

rendered in favor of [respondent] and against [petitioner and De Jesus], who
are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon
per month from January 23, 1997 until the same shall have been fully paid,
less the amount of P120,000.00 representing interests already paid by
x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each
day of [c]ourt appearance, and;
3) Cost of this suit.[6]
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment
on the pleadings against De Jesus. According to the appellate court, his
Answer raised genuinely contentious issues. Moreover, he was still required
to present his evidence ex parte. Thus, respondent was not ipso factoentitled
to the RTC judgment, even though De Jesus had been declared in
default. The case against the latter was therefore remanded by the CA to the
trial court for the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue regarding
any material fact.
The appellate court ruled that no novation -- express or implied -- had
taken place when respondent accepted the check from De Jesus. According
to the CA, the check was issued precisely to pay for the loan that was
covered by the promissory note jointly and severally undertaken by
petitioner and De Jesus. Respondents acceptance of the check did not serve
to make De Jesus the sole debtor because, first, the obligation incurred by
him and petitioner was joint and several; and, second, the check -- which had
been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.[7]
Issues

Petitioner submits the following issues for our consideration:

I
Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had
expressly assumed sole and exclusive liability for the loan obligation he
obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of P400,000.00 in favor of Respondent
Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the
superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total
amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal
of x x x de Jesus that due to financial difficulties, he be
given an extension of time to pay his loan obligation and
that his retirement benefits from the Philippine National
Police will answer for said obligation.
II
Whether or not the Honorable Court of Appeals seriously erred in not holding
that the defense of petitioner that he was merely an accommodation party,
despite the fact that the promissory note provided for a joint
and solidary liability, should have been given weight and credence
considering that subsequent events showed that the principal obligor was in
truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances
showing his assumption of sole liability over the loan obligation.
III
Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there are
genuine issues of fact, which the Honorable Court of Appeals itself admitted

in its Decision, which call for the presentation of evidence in a full-blown trial.
[8]

Simply put, the issues are the following: 1) whether there was novation of
the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him -- be it a judgment on the pleadings or a summary judgment -- was
proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint
and solidary debtor by insisting that novation took place, either through the
substitution of De Jesus as sole debtor or the replacement of the promissory
note by the check. Alternatively, the former argues that the original
obligation was extinguished when the latter, who was his co-obligor, paid the
loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,[9] the delivery of a check produces the effect of
payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old one,
or by subrogating a third person to the rights of the creditor.[10] Article 1293
of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third persons assumption of
the obligation. As such, it logically requires the consent of the third person
and the creditor. In delegacion, the debtor offers, and the creditor accepts, a
third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary.[11] Both modes of
substitution by the debtor require the consent of the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the place
of the former. It is merely modificatory when the old obligation subsists to
the extent that it remains compatible with the amendatory agreement.
[13]
Whether extinctive or modificatory, novation is made either by changing
the object or the principal conditions, referred to as objective or realnovation;
or by substituting the person of the debtor or subrogating a third person to
the rights of the creditor, an act known as subjective or personalnovation.
[14]
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.[15]
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point.[16] The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.
[17]

Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility between

the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the
note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also
constitutes novation[18] -- change the terms and conditions of the
obligation. Such payment was already provided for in the promissory note
and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation
was novated by the substitution of debtors. In order to change the person of
the debtor, the old one must be expressly released from the obligation, and
the third person or new debtor must assume the formers place in the
relation.[19] Well-settled is the rule that novation is never presumed.
[20]
Consequently, that which arises from a purported change in the person of
the debtor must be clear and express.[21] It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his place,
or that the joint and solidary obligation was cancelled and substituted by the
solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by
de Jesus either, the nature of the obligation being solidary due to the fact
that the promissory note expressly declared that the liability of appellants
thereunder is joint and [solidary.] Reason: under the law, a creditor may
demand payment or performance from one of the solidary debtors or some
or all of them simultaneously, and payment made by one of them
extinguishes the obligation. It therefore follows that in case the creditor fails
to collect from one of the solidary debtors, he may still proceed against the
other or others. x x x [22]
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.[23] Since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express.[24] It cannot be supposed, without
clear proof, that the present respondent has done away with his right to
exact fulfillment from either of the solidary debtors.[25]

More important, De Jesus was not a third person to the obligation. From
the beginning, he was a joint and solidary obligor of the P400,000 loan; thus,
he can be released from it only upon its extinguishment. Respondents
acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.[26] It is up to the former to determine against whom to enforce
collection.[27] Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable[28] for the entire obligation.[29]
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23,
1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5%
per month or fraction thereof.
It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December, 1996.[30]
By its terms, the note was made payable to a specific person rather than
to bearer or to order[31] -- a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of
the NILs provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing

and is evidence of such intangible rights as may have been created by the
assent of the parties.[32] The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even
if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and
the party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety.[33] It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an
originalpromissor and debtor from the beginning. The liability is immediate
and direct.[34]
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules
of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show
that (1) except as to the amount of damages, there is no genuine issue
regarding any material fact; and (2) the moving party is entitled to a
judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a genuine,
issue regarding any material fact.[35] Consequently, facts are asserted in the
complaint regarding which there is yet no admission, disavowal or
qualification; or specific denials or affirmative defenses are set forth in the
answer, but the issues are fictitious as shown by the pleadings, depositions
or admissions.[36] A summary judgment may be applied for by either a
claimant or a defending party.[37]
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails to render an issue
or otherwise admits the material allegations of the adverse partys

pleading. The essential question is whether there are issues generated by

the pleadings.[38] A judgment on the pleadings may be sought only by a
claimant, who is the party seeking to recover upon a claim, counterclaim or
cross-claim; or to obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts judgment
against petitioner was correctly treated by the appellate court as a summary
judgment,
rather
than
as
a
judgment
on
the
pleadings. His
[40]
Answer
apparently raised several issues -- that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are not factual
issues requiring trial. We quote with approval the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of affirmative
defenses, the documents submitted by [respondent] nevertheless clearly
showed that the issues so tendered were not valid issues. Firstly, Garcias
claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was
only an accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: It is understood that our liability under
this loan is jointly and severally [sic]. Secondly, his claim that his codefendant de Jesus already paid the loan by means of a check collapses in
view of the dishonor thereof as shown at the dorsal side of said check.[41]
From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and documents. In a
written Manifestation,[42] he stated that judgment on the pleadings may now
be rendered without further evidence, considering the allegations and
admissions of the parties.[43]
In view of the foregoing, the CA correctly considered as a summary
judgment that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-10221

February 28, 1958

the

assailed

Intestate of Luther Young and Pacita Young, spouses. PACIFICA

JIMENEZ, petitioner-appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.
Frank W. Brady and Pablo C. de Guia, Jr. for appellee.
E. A. Beltran for appellant.
BENGZON, J.:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952
respectively, Pacifica Jimenez presented for payment four promissory notes
signed by Pacita for different amounts totalling twenty-one thousand pesos
(P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the
currency then prevailing, the administrator manifested willingness to pay
provided adjustment of the sums be made in line with the Ballantyne
schedule.
The claimant objected to the adjustment insisting on full payment in
accordance with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L.
Gonzales, Judge, held that the notes should be paid in the currency
prevailing after the war, and that consequently plaintiff was entitled to
recover P21,000 plus attorneys fees for the sum of P2,000.
Hence this appeal.
Executed in the month of August 1944, the first promissory note read as
follows:
Received from Miss Pacifica Jimenez the total amount of P10,000) ten
thousand pesos payable six months after the war, without interest.
The other three notes were couched in the same terms, except as to
amounts and dates.
There can be no serious question that the notes were promises to pay "six
months after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to

appeal, is whether the amounts should be paid, peso for peso, or whether a
reduction should be made in accordance with the well-known Ballantyne
schedule.
This matter of payment of loans contracted during the Japanese occupation
has received our attention in many litigations after the liberation. The gist of
our adjudications, in so far as material here, is that if the loan should be paid
during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became
payable after those dates, no reduction could be effected, and peso-for-peso
payment shall be ordered in Philippine currency.2
The Ballantyne Conversion Table does not apply where the monetary
obligation, under the contract, was not payable during the Japanese
occupation but until after one year counted for the date of ratification
of the Treaty of Peace concluding the Greater East Asia War.
(Arellano vs. De Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the Japanese
occupation, to be discharged after the war, the payment should be
made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil.,
173.)
Now then, as in the case before us, the debtor undertook to pay "six months
after the war," peso for peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the loan
therein given could have been repaid during the Japanese occupation. Dated
December 26, 1944, it was payable within one year. Payment could therefore
have been made during January 1945. The notes here in question were
payable only after the war.
The appellant administrator calls attention to the fact that the notes
contained no express promise to pay a specified amount. We declare the
point to be without merit. In accordance with doctrines on the matter, the
note herein-above quoted amounted in effect to "a promise to pay ten
thousand pesos six months after the war, without interest." And so of the
other notes.

"An acknowledgment may become a promise by the addition of words by

which a promise of payment is naturally implied, such as, "payable,"
"payable" on a given day, "payable on demand," "paid . . . when called for," .
. . (10 Corpus Juris Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract are
necessary, provided they amount, in legal effect, to a promise to pay. In
other words, if over and above the mere acknowledgment of the debt there
may be collected from the words used a promise to pay it, the instrument
may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.;
Byles, Bills, 10, 11, and cases cited . . . "Due A. B. $325, payable on
demand," or, "I acknowledge myself to be indebted to A in $109, to be paid
on demand, for value received," or, "I O. U. $85 to be paid on May 5th," are
held to be promissory notes, significance being given to words of payment as
indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited.
(Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not
sign these notes, his estate is not liable for the same. This defense, however,
was not interposed in the lower court. There the only issue related to the
amount to be amount, considering that the money had been received in
Japanese money. It is now unfair to put up this new defense, because had it
been raised in the court below, appellees could have proved, what they now
alleged that Pacita contracted the obligation to support and maintain herself,
her son and her husband (then concentrated at Santo Tomas University)
during the hard days of the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
In order that a question may be raised on appeal, it is essential that it
be within the issues made by the parties in their pleadings.
Consequently, when a party deliberately adopts a certain theory, and
the case is tried and decided upon that theory in the court below, he
will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38
Phil., 424; American Express Company vs. Natividad, 46 Phil., 207; San
Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55 Phil.,
461.)

Appellant's last assignment of error concerns attorneys fees. He says there

was no reason for making this and exception to the general rule that
attorney's fees are not recoverable in the absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be
awarded in this case if defendant acted in gross and evident bad faith in
refusing to satisfy plaintiff's plainly valid, just and demandable claim" or
"where the court deems it just and equitable that attorney's fees be
recovered" (Article 2208 Civil Code). These are if applicable some of the
exceptions to the general rule that in the absence of stipulation no attorney's
fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees.
Needless to say, it is desirable that the decision should state the reason why
such award is made bearing in mind that it must necessarily rest on an
exceptional situation. Unless of course the text of the decision plainly shows
the case to fall into one of the exceptions, for instance "in actions for legal
support," when exemplary damages are awarded," etc. In the case at bar,
defendant could not obviously be held to have acted in gross and evident
bad faith." He did not deny the debt, and merely pleaded for adjustment,
invoking decisions he thought to be controlling. If the trial judge considered it
"just and equitable" to require payment of attorney's fees because the
defense adjustment under Ballantyne schedule proved to be untenable
in view of this Court's applicable rulings, it would be error to uphold his view.
Otherwise, every time a defendant loses, attorney's fees would follow as a
matter of course. Under the article above cited, even a clearly untenable
defense would be no ground for awarding attorney's fees unless it amounted
to "gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of
defendant's refusal to accept her offer, before the suit, to take P5,000 in full
settlement of her claim. We do not think this is tenable, defendant's attitude
being merely a consequence of his line of defense, which though erroneous
does not amount to "gross and evident bad faith." For one thing, there is a
point raised by defendant, which so far as we are informed, has not been
directly passed upon in this jurisdiction: the notes contained no express
promise to pay a definite amount.

There being no circumstance making it reasonable and just to require

defendant to pay attorney's fees, the last assignment of error must be
upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is
affirmed, except as to the attorney's fees which are hereby disapproved. So
ordered.
[G.R. No. 113236. March 5, 2001]
FIRESTONE
TIRE
&
RUBBER
COMPANY
OF
THE
PHILIPPINES, petitioner, vs., COURT OF APPEALS and LUZON
DEVELOPMENT BANK, respondents.
DECISION
QUISUMBING, J.:
This petition assails the decision[1] dated December 29, 1993 of the Court
of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment [2] of the
Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P,
dismissing Firestones complaint for damages.
The facts of this case, adopted by the CA and based on findings by the
trial court, are as follows:
[D]efendant is a banking corporation. It operates under a certificate of
authority issued by the Central Bank of the Philippines, and among its
activities, accepts savings and time deposits. Said defendant had as one of
its client-depositors the Fojas-Arca Enterprises Company (Fojas-Arca for
brevity). Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds therefrom
through the medium of special withdrawal slips. These are supplied by the
defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a Franchised Dealership
Agreement (Exh. B) whereby Fojas-Arca has the privilege to purchase on
credit and sell plaintiffs products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid
Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff

with a total amount of P4,896,000.00. In payment of these purchases, FojasArca delivered to plaintiff six (6) special withdrawal slips drawn upon the
defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the
defendant. This singular circumstance made plaintiff believe [sic] and relied
[sic] on the fact that the succeeding special withdrawal slips drawn upon the
defendant would be equally sufficiently funded. Relying on such confidence
and belief and as a direct consequence thereof, plaintiff extended to FojasArca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit
(Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal
slips in payment thereof drawn upon the defendant, to wit:
DATE WITHDRAWAL AMOUNT
SLIP NO.
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00
These were likewise deposited by plaintiff in its current account with Citibank
and in turn the Citibank forwarded it [sic] to the defendant for payment and
collection, as it had done in respect of the previous special withdrawal
slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in
the amount of P981,500.00 was honored and paid by the defendant in
October 1978. Because of the absence for a long period coupled with the fact
that defendant honored and paid withdrawal slips No. 42128 dated July 15,
1978, in the amount of P981,500.00 plaintiffs belief was all the more
strengthened that the other withdrawal slips were likewise sufficiently
funded, and that it had received full value and payment of Fojas-Arcas credit
purchased then outstanding at the time. On this basis, plaintiff was induced
to continue extending to Fojas-Arca further purchase on credit of its products
as per agreement (Exh. B).

However, on December 14, 1978, plaintiff was informed by Citibank that

special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80
and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and
not paid for the reason NO ARRANGEMENT. As a consequence, the Citibank
debited plaintiffs account for the total sum of P2,078,092.80 representing the
aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by
and directly attributable to defendants gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon
the defendant for the satisfaction of the damages suffered by it. And due to
defendants refusal to pay plaintiffs claim, plaintiff has been constrained to
file this complaint, thereby compelling plaintiff to incur litigation expenses
and attorneys fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant
asserted, inter alia that the transactions mentioned by plaintiff are that of
plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips
were honored and treated as if it were checks, the truth being that when the
special withdrawal slips were received by defendant, it only verified whether
or not the signatures therein were authentic, and whether or not the deposit
level in the passbook concurred with the savings ledger, and whether or not
the deposit is sufficient to cover the withdrawal; if plaintiff treated the special
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame
itself for being grossly negligent in treating the withdrawal slips as check
when it is clearly stated therein that the withdrawal slips are non-negotiable;
that defendant is not a privy to any of the transactions between Fojas-Arca
and plaintiff for which reason defendant is not duty bound to notify nor give
notice of anything to plaintiff. If at first defendant had given notice to plaintiff
it is merely an extension of usual bank courtesy to a prospective client; that
defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In
summation, defendant categorically stated that plaintiff has no cause of
action against it (pp. 1-3, Dec.; pp. 368-370, id).[3]
Petitioners complaint[4] for a sum of money and damages with the
Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No.
29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that

respondent Luzon Development Bank was liable for damages under Article
2176[5] in relation to Articles 19[6] and 20[7] of the Civil Code. As noted by the
CA, petitioner alleged the following tortious acts on the part of private
respondent: 1) the acceptance and payment of the special withdrawal slips
without the presentation of the depositors passbook thereby giving the
impression that the withdrawal slips are instruments payable upon
presentment; 2) giving the special withdrawal slips the general appearance
of checks; and 3) the failure of respondent bank to seasonably warn
petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed
decision. It denied the appeal and affirmed the judgment of the trial
court. According to the appellate court, respondent bank notified the
depositor to present the passbook whenever it received a collection note
from another bank, belying petitioners claim that respondent bank was
negligent in not requiring a passbook under the subject transaction. The
appellate court also found that the special withdrawal slips in question were
not purposely given the appearance of checks, contrary to petitioners
assertions, and thus should not have been mistaken for checks. Lastly, the
appellate court ruled that the respondent bank was under no obligation to
inform petitioner of the dishonor of the special withdrawal slips, for to do so
would have been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon
Development] Bank was free from any fault or negligence
regarding the dishonor, or in failing to give fair and timely
advice of the dishonor, of the two intermediate LDB Slips
and in failing to award damages to Firestone pursuant to
Article 2176 of the New Civil Code.[8]
The issue for our consideration is whether or not respondent bank should
be held liable for damages suffered by petitioner, due to its allegedly belated
notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca,
whereby the latter purchased tires from the former with special withdrawal
slips drawn upon Fojas-Arcas special savings account with respondent bank.
Petitioner in turn deposited these withdrawal slips with Citibank. The latter

credited the same to petitioners current account, then presented the slips for
payment to respondent bank. It was at this point that the bone of contention
arose.
On December 14, 1978, Citibank informed petitioner that special
withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15,
1978, respectively, were refused payment by respondent bank due to
insufficiency of Fojas-Arcas funds on deposit. That information came about
six months from the time Fojas-Arca purchased tires from petitioner using the
subject withdrawal slips. Citibank then debited the amount of these
withdrawal slips from petitioners account, causing the alleged pecuniary
damage subject of petitioners cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in
question were non-negotiable.[9] Hence, the rules governing the giving of
immediate notice of dishonor of negotiable instruments do not apply in this
case.[10] Petitioner itself concedes this point.[11] Thus, respondent bank was
under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known that
withdrawal slips were not negotiable instruments. It could not expect these
slips to be treated as checks by other entities. Payment or notice of dishonor
from respondent bank could not be expected immediately, in contrast to the
situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that
respondent Luzon Development Bank, had honored and paid the previous
withdrawal slips, automatically credited petitioners current account with the
amount of the subject withdrawal slips, then merely waited for the same to
be honored and paid by respondent bank. It presumed that the withdrawal
slips were good.
It bears stressing that Citibank could not have missed the non-negotiable
nature of the withdrawal slips. The essence of negotiability which
characterizes a negotiable paper as a credit instrument lies in its freedom to
circulate freely as a substitute for money. [12] The withdrawal slips in question
lacked this character.
A bank is under obligation to treat the accounts of its depositors with
meticulous care, whether such account consists only of a few hundred pesos
or of millions of pesos.[13] The fact that the other withdrawal slips were
honored and paid by respondent bank was no license for Citibank to presume

that subsequent slips would be honored and paid immediately. By doing so, it
failed in its fiduciary duty to treat the accounts of its clients with the highest
degree of care.[14]
In the ordinary and usual course of banking operations, current account
deposits are accepted by the bank on the basis of deposit slips prepared and
signed by the depositor, or the latters agent or representative, who indicates
therein the current account number to which the deposit is to be credited,
the name of the depositor or current account holder, the date of the deposit,
and the amount of the deposit either in cash or in check.[15]
The withdrawal slips deposited with petitioners current account with
Citibank were not checks, as petitioner admits. Citibank was not bound to
accept the withdrawal slips as a valid mode of deposit. But having
erroneously accepted them as such, Citibank and petitioner as accountholder must bear the risks attendant to the acceptance of these
instruments. Petitioner and Citibank could not now shift the risk and hold
private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of
Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. NO. 117913. February 1, 2002]

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,

RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT OF
APPEALS
and
PHILIPPINE
BANK
OF
COMMUNICATIONS, respondents.
[G.R. NO. 117914. February 1, 2002]

MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and

PHILIPPINE BANK OF COMMUNICATIONS,respondents.
DECISION
DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the

Decision[1] dated June 15, 1994 of the Court of Appeals in CA-G.R. CV No.
27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, which reversed the decision of the Regional Trial
Court (RTC) of Manila, Branch 55 dismissing the complaint for a sum of
money filed by private respondent Philippine Bank of Communications
against herein petitioners, Mico Metals Corporation (MICO, for brevity),
Charles Lee, ChuaSiok Suy,[2] Mariano Sio, Alfonso Yap, Richard Velasco and
Alfonso Co.[3] The dispositive portion of the said Decision of the Court of
Appeals, reads:
WHEREFORE, the decision of the Regional Trial Court is hereby reversed and
in lieu thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally to pay
plaintiff PBCom the sum of Five million four hundred fifty-one
thousand six hundred sixty-three pesos and ninety centavos
(P5,451,663.90)
representing
defendants-appellees unpaid
obligations arising from ordinary loans granted by the plaintiff plus
legal interest until fully paid.
b) Ordering
defendants-appellees jointly
and
severally
to
pay PBCom the sum of Four hundred sixty-one thousand six
hundred pesos and sixty-six centavos (P46 1,600.66) representing
defendants-appellees unpaid obligations arising from their letters of
credit and trust receipt transactions with plaintiff PBCom plus legal
interest until fully paid.
c) Ordering
defendants-appellees jointly
and
severally
pay PBCom the sum of P50,000.00 as attorneys fees.

to

No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private
respondent Philippine Bank of Communications (PBCom) requesting for a
grant of a discounting loan/credit line in the sum of Three Million Pesos
(P3,000,000.00) for the purpose of carrying out MICOs line of business as
well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting
loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom for the
purpose of opening letters of credit and trust receipts.
In connection with the requests for discounting loan/credit
lines, PBCom was furnished by MICO the following resolution which was
adopted unanimously by MICOs Board of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and
General Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly
authorized and empowered for and in behalf of this Corporation to apply for,
negotiate and secure the approval of commercial loans and other banking
facilities and accommodations, such as, but not limited to discount loans,
letters of credit, trust receipts, lines for marginal deposits on foreign and
domestic letters of credit, negotiate out-of-town checks, etc. from the
Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as
they shall deem advantageous, the principal of all of which shall not exceed
the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine
Currency, plus any interests that may be agreed upon with said Bank in such
loans and other credit lines of the same kind and such further terms and
conditions as may, upon granting of said loans and other banking facilities,
be imposed by the Bank; and to make, execute, sign and deliver any
contracts of mortgage, pledge or sale of one, some or all of the properties of
the Company, or any other agreements or documents of whatever nature or
kind, including the signing, indorsing, cashing, negotiation and execution of
promissory notes, checks, money orders or other negotiable instruments,
which may be necessary and proper in connection with said loans and other
banking facilities, or with their amendments, renewals and extensions of
payment of the whole or any part thereof.[4]
On March 26, 1979, MICO availed of the first loan of One Million Pesos
(P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the
same to be renewed, the last renewal of which was made on May 21,
1982 under Promissory Note BNA No. 26218.[5]
Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO
from PBCom which was likewise later on renewed, the last renewal of which
was made on May 21, 1982 under Promissory Note BNA No. 26219. [6] To
complete MICOs availment of
Three
Million
Pesos
(P3,000,000.00)
discounting loan/credit line with PBCom, MICO availed of another loan
from PBCom in the sum of One Million Pesos (P1,000,000.00) on May 24,
1979. As in previous loans, this was rolled over or renewed, the last renewal
of which was made on May 25, 1982 under Promissory Note BNA No. 26253.
[7]

As security for the loans, MICO through its Vice-President and General
Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real Estate
Mortgage over its properties situated in Pasig, Metro Manila covered by
Transfer Certificates of Title (TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap
and Richard Velasco, in their personal capacities executed a Surety
Agreement[8] in favor of PBCom whereby the petitioners jointly and severally,
guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust

receipts, and other obligations of every kind and nature, for which MICO may
be held accountable by PBCom. It was provided, however, that the liability of
the sureties shall not at any one time exceed the principal amount of Three
Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and
expenses including attorneys fees incurred byPBCom in connection
therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president of
MICO, wrote PBCom and applied for an additional loan in the sum of Four
Million Pesos (P4,000,000.00). The loan was intended for the expansion and
modernization of the companys machineries. Upon approval of the said
application for loan, MICO availed of the additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory Note TA No. 094.[9]
As per agreement, the proceeds of all the loan availments were credited
to MICOs current checking account with PBCom. To induce the PBComto
increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as
petitioners-sureties), executed another surety agreement [10] in favor
of PBCom on July 28, 1980, whereby they jointly and severally guaranteed
the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be held
accountable by PBCom. It was provided, however, that their liability shall not
at any one time exceed the sum of Seven Million Five Hundred Thousand
Pesos (P7,500,000.00) including interest, costs, charges, expenses and
attorneys fees incurred by MICO in connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized certification
issued by its corporate secretary, Atty. P.B. Barrera, that Chua Siok Suywas
duly authorized by the Board of Directors to negotiate on behalf of MICO for
loans and other credit availments from PBCom. Indicated in the certification
was the following resolution unanimously approved by the Board
of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is
hereby authorized and empowered, on behalf of MICO METALS
CORPORATION from time to time, to borrow money and obtain other credit
facilities, with or without security, from the PHILIPPINE BANK OF
COMMUNICATIONS in such amount(s) and under such terms and conditions
as he may determine, with full power and authority to execute, sign and
deliver such contracts, instruments and papers in connection therewith,
including real estate and chattel mortgages, pledges and assignments over
the properties of the Corporation; and to renew and/or extend and/or rollover and/or reavail of the credit facilities granted thereunder, either for
lesser or for greater amount(s), the intention being that such credit facilities
and all securities of whatever kind given as collaterals therefor shall be a
continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and

directed to rely on the authority given hereunder, the same to continue in
full force and effect until written notice of its revocation shall be received by
said Bank.[11]
On July 2, 1981, MICO filed with PBCom an application for a domestic
letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00).[12] The corresponding irrevocable letter of credit was approved
and opened under LC No. L-16060.[13] Thereafter, the domestic letter of credit
was negotiated and accepted by MICO as evidenced by the corresponding
bank draft issued for the purpose.[14] After the supplier of the merchandise
was paid, a trust receipt upon MICOs own initiative, was executed in favor
of PBCom.[15]
On September 14, 1981, MICO applied for another domestic letter of
credit with PBCom in the sum of Two Hundred Ninety Thousand Pesos
(P290,000.00).[16] The corresponding irrevocable letter of credit was issued
on September 22, 1981 under LC No. L-16334.[17] After the beneficiary of the
said letter of credit was paid by PBCom for the price of the merchandise, the
goods were delivered to MICO which executed a corresponding trust
receipt[18] in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign
letter of credit in favor of Ta Jih Enterprises Co., Ltd.,[19] and thus, the
corresponding letter of credit[20] was then issued by PBCom with a cable sent
to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary
may draw funds from the account of PBCom in its correspondent banks New
York Office.[21] PBCom also informed its corresponding bank in Taiwan, the
Irving Trust Company, of the approved letter of credit. The correspondent
bank acknowledged PBComs advice through a confirmation letter[22] and by
debiting from PBComs account with the said correspondent bank the sum of
Eleven Thousand Nine Hundred Sixty US Dollars ($11 ,960.00). [23] As in past
transactions, MICO executed in favor of PBCom a corresponding trust receipt.
[24]

On January 4, 1982, MICO applied, for authority to open a foreign letter of

credit in the sum of One Thousand Nine Hundred US Dollars ($1,900.00),
with PBCom.[25] Upon approval, the corresponding letter of credit
denominated as LC No. 62293[26] was issued whereupon PBComadvised its
correspondent bank and MICO[27] of the same. Negotiation and proper
acceptance of the letter of credit were then made by MICO. Again, a
corresponding trust receipt[28] was executed by MICO in favor of PBCom.
In all the transactions involving foreign letters of credit, PBCom turned
over to MICO the necessary documents such as the bills of lading and
commercial invoices to enable the latter to withdraw the goods from
the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan in the sum of
Three Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by
Promissory Note BA No. 7458.[29]
Upon maturity of all credit availments obtained by MICO from PBCom, the
latter made a demand for payment.[30] For failure of petitioner MICO to pay
the
obligations
incurred
despite
repeated
demands,
private
respondent PBCom extrajudicially foreclosed MICOs real estate mortgage and
sold the said mortgaged properties in a public auction sale held
on November 23, 1982. Private respondent PBCom which emerged as the
highest bidder in the auction sale, applied the proceeds of the purchase price
at public auction of Three Million Pesos (P3,000,000.00) to the expenses of
the foreclosure, interest and charges and part of the principal of the loans,
leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand
Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)
exclusive of penalty and interest charges. Aside from the unpaid balance of
Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos
and Ninety Centavos (P5,441,663.90), MICO likewise had another standing
obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred
Pesos and Six Centavos (P461,600.06) representing its trust receipts
liabilities to private respondent. PBCom then demanded the settlement of
the aforesaid obligations from herein petitioners-sureties who, however,
refused to acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment before the Regional Trial Court of Manila, which was
raffled to Branch 55, alleging that MICO was no longer in operation and had
no properties to answer for its obligations. PBCom further alleged that
petitioner Charles Lee has disposed or concealed his properties with intent to
defraud his creditors. Except for MICO and Charles Lee, the sheriff of the RTC
failed to serve the summons on herein petitioners-sureties since they were
all reportedly abroad at the time. An alias summons was later issued but the
sheriff was not able to serve the same to petitioners Alfonso Co and
Chua Siok Suy who was already sickly at the time and reportedly
in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the
allegations of the complaint filed by respondent PBCom, and alleged that: a)
MICO was not granted the alleged loans and neither did it receive the
proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any
valid Board Resolution to sign for and in behalf of MICO; c) PBCom acted in
bad faith in granting the alleged loans and in releasing the proceeds thereof;
d) petitioners were never advised of the alleged grant of loans and the
subsequent releases therefor, if any; e) since no loan was ever released to or
received by MICO, the corresponding real estate mortgage and the surety
agreements signed concededly by the petitioners-sureties are null and void.

The trial court gave credence to the testimonies of herein petitioners and
dismissed the complaint filed by PBCom. The trial court likewise declared the
real estate mortgage and its foreclosure null and void. In ruling for herein
petitioners, the trial court said that PBCom failed to adequately prove that
the proceeds of the loans were ever delivered to MICO. The trial court
pointed out, among others, that while PBCom claimed that the proceeds of
the Four Million Pesos (P4,000,000.00) loan covered by promissory note TA
094 were deposited to the current account of petitioner MICO, PBCom failed
to produce the ledger account showing such deposit. The trial court added
that while PBCom may have loaned to MICO the other sums of Three
Hundred Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety
Thousand Pesos (P290,000.00), no proof has been adduced as to the
existence of the goods covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed fromPBCom to MICO, all the
documents involved therein, such as the promissory notes, real estate
mortgage including the surety agreements were all void or nonexistent for
lack of cause or consideration. The trial court said that the lack of proof as
regards the existence of the merchandise covered by the letters of credit
bolstered the claim of herein petitioners that no purchases of the goods were
really made and that the letters of credit transactions were simply resorted
to by the PBCom and Chua Siok Suy to accommodate the latter in his
financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that the
latter committed an erroneous application and appreciation of the rules
governing the burden of proof. Citing Section 24 of the Negotiable
Instruments Law which provides that Every negotiable instrument is
deemedprima facie to have been issued for valuable consideration
and every person whose signature appears thereon to have become
a party thereto for value, the Court of Appeals said that while the subject
promissory notes and letters of credit issued by the PBCom made no mention
of delivery of cash, it is presumed that said negotiable instruments were
issued for valuable consideration. The Court of Appeals also cited the case
ofGatmaitan vs. Court of Appeals[31] which holds that "there is a
presumption that an instrument sets out the true agreement of the
parties thereto and that it was executed for valuable consideration.
The appellate court noted and found that a notarized Certification was issued
by MICOscorporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain
credit facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision of
the Court of Appeals but this was denied in a Resolution datedNovember 7,
1994 issued by its Former Second Division. Petitioners-sureties then filed a
petition for review on certiorari with this Court, docketed as G.R. No. 117913,
assailing the decision of the Court of Appeals. MICO likewise filed a separate
petition for review on certiorari, docketed as G.R. No. 117914, with this Court

assailing the same decision rendered by the Court of Appeals. Upon motion
filed by petitioners, the two (2) petitions were consolidated on January 11,
1995.[32]
Petitioners contend that there was no proof that the proceeds of the loans
or the goods under the trust receipts were ever delivered to and received by
MICO. But the record shows otherwise. Petitioners-sureties further contend
that assuming that there was delivery by PBCom of the proceeds of the loans
and the goods, the contracts were executed by an unauthorized person,
more specifically Chua Siok Suy who acted fraudulently and in collusion
with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a)
whether or not the proceeds of the loans and letters of credit transactions
were ever delivered to MICO, and b) whether or not the individual petitioners,
as sureties, may be held liable under the two (2) Surety Agreements
executed on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his
case by preponderance of evidence. [33] Preponderance of evidence means
evidence which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto. Petitioners contend that the alleged
promissory notes, trust receipts and surety agreements attached to the
complaint filed by PBCom did not ripen into valid and binding contracts
inasmuch as there is no evidence of the delivery of money or loan proceeds
to MICO or to any of the petitioners-sureties. Petitioners claim that under
normal banking practice, borrowers are required to accomplish promissory
notes in blank even before the grant of the loans applied for and such
documents become valid written contracts only when the loans are actually
released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof upon
an issue may be aided in establishing his claim or defense by the operation
of a presumption, or, expressed differently, by the probative value which the
law attaches to a specific state of facts. A presumption may operate against
his adversary who has not introduced proof to rebut the presumption. The
effect of a legal presumption upon a burden of proof is to create the
necessity of presenting evidence to meet the legal presumption or the prima
facie case created thereby, and which if no proof to the contrary is presented
and offered, will prevail. The burden of proof remains where it is, but by the
presumption the one who has that burden is relieved for the time being from
introducing evidence in support of his averment, because the presumption
stands in the place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following
presumptions, among others, are satisfactory if uncontradicted: a) That there
was a sufficient consideration for a contract and b) That a negotiable

instrument was given or indorsed for sufficient consideration. As observed by

the Court of Appeals, a similar presumption is found in Section 24 of the
Negotiable Instruments Law which provides that every negotiable instrument
is deemedprima facie to have been issued for valuable consideration and
every person whose signature appears thereon to have become a party for
value. Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it must
be in writing; b) it must be signed by the maker or drawer; c) it must contain
an unconditional promise or order to pay a sum certain in money; d) it must
be payable on demand or at a fixed or determinable future time; e) it must
be payable to order or bearer; and f) where it is a bill of exchange,
thedrawee must be named or otherwise indicated with reasonable certainty.
Negotiable instruments include promissory notes, bills of exchange and
checks. Letters of credit and trust receipts are, however, not negotiable
instruments. But drafts issued in connection with letters of credit are
negotiable instruments.
Private respondent PBCom presented the following
evidence to prove petitioners credit availments and liabilities:

documentary

1) Promissory Note No. BNA 26218 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
2) Promissory Note No. BNA 26219 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
3) Promissory Note No. BNA 26253 dated May 25, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
4) Promissory Note No. BNA 7458 dated May 21, 1982 in the sum
of P377,000.00 executed by MICO in favor of PBCom.
5) Promissory Note No. TA 094 dated July 29, 1980 in the sum
of P4,000.000.00 executed by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in
favor of Perez Battery Center for account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez
Battery Center, beneficiary of irrevocable Letter of Credit No. No. L16060 and accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to
private respondent PBCom showing that proceeds of the
irrevocable letter of creditNo. L- 16060 was received by
Mr. Moises Rosete, representative of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor
of PBCom covering the merchandise purchased under Letter of
Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981
issued in favor of Perez Battery Center for account of MICO Metals
Corp.
11) Draft
dated September
22,
1981 in
the
sum
of P290,000.00 issued by Perez Battery Center and accepted by
MICO.
12) Letter dated September 17, 1981 from Perez Battery addressed
to PBCom showing that the proceeds of credit no. L-16344 was
received
by
Mr.Moises Rosete,
a
representative
of Perez Battery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in
favor of PBCom covering the merchandise under Letter of Credit
No. L-16334.
14) Irrevocable Letter of Credit no. 61873 dated November 10,
1981 for US$11,960.00 issued by PBCom in favor of TA JIH
Enterprises Co. Ltd., through its correspondent bank, Irving Trust
Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in
favor of PBCom showing that possession of the merchandise
covered by Irrevocable Letter of Credit no. 61873 was released
by PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed by its president,
Charles Lee, showing that MICO sought credit line from PBCom in
the form of loans, letters of credit and trust receipt in the sum
of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president,
Charles Lee, showing that MICO requested for additional financial
assistance in the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing Charles
Lee and Mariano Sio singly or jointly to act and sign for and in
behalf of MICO relative to the obtention of credit facilities
from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed
by MICO in favor of PBCom over MICO s real properties covered by
TCT Nos. 11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979 executed
by herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard
Velasco and Chua Siok Suy in favor of PBCom.

21) Duly notarized Surety Agreement dated July 28, 1980 executed
by herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard
Velasco and Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICO s
corporate secretary, Mr. P.B. Barrera, attesting to the adoption of a
board resolution authorizing Chua Siok Suy to sign, for and in
behalf of MICO, all the necessary documents including contracts,
loan instruments and mortgages relative to the obtention of
various credit facilities from PBCom.
The above-cited documents presented have not merely created a prima
facie case but have actually proved the solidary obligation of MICO and the
petitioners, as sureties of MICO, in favor of respondent PBCom. While the
presumption found under the Negotiable Instruments Law may not
necessarily be applicable to trust receipts and letters of credit, the
presumption that the drafts drawn in connection with the letters of credit
have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of
Court there is also a presumption that sufficient consideration was given in a
contract. Hence, petitioners should have presented credible evidence to
rebut that presumption as well as the evidence presented by private
respondent PBCom. The letters of credit show that the pertinent
materials/merchandise have been received by MICO. The drafts signed by
the beneficiary/suppliers in connection with the corresponding letters of
credit proved that said suppliers were paid by PBCom for the account of
MICO. On the other hand, aside from their bare denials petitioners did not
present sufficient and competent evidence to rebut the evidence of private
respondent PBCom. Petitioner MICO did not proffer a single piece of
evidence, apart from its bare denials, to support its allegation that the loan
transactions, real estate mortgage, letters of credit and trust receipts were
issued allegedly without any consideration.
Petitioners-sureties,
for
their
part,
presented
the
By[34]
Laws
of Mico Metals Corporation (MICO) to prove that only the president of
MICO is authorized to borrow money, arrange letters of credit, execute trust
receipts, and promissory notes and consequently, that the loan transactions,
letters of credit, promissory notes and trust receipts, most of which were
executed by Chua Siok Suy in representation of MICO were not allegedly
authorized and hence, are not binding upon MICO. A perusal of the By-Laws
of MICO, however, shows that the power to borrow money for the company
and issue mortgages, bonds, deeds of trust and negotiable instruments or
securities, secured by mortgages or pledges of property belonging to the
company is not confined solely to the president of the corporation. The Board
of Directors of MICO can also borrow money, arrange letters of
credit, execute trust receipts and promissory notes on behalf of the
corporation.[35] Significantly, this power of the Board of Directors according to
the by-laws of MICO, may be delegated to any of its standing committee,

officer or agent.[36] Hence, PBCom had every right to rely on the Certification
issued by MICO's corporate secretary, P.B. Barrera, that Chua Siok Suy was
duly authorized by its Board of Directors to borrow money and obtain credit
facilities in behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel dated October
9, 1982, addressed to private respondent PBCom purportedly to show
that PBCom knew that Chua Siok Suy allegedly used the credit and good
names of the petitioner-sureties for his benefit, and that petitionersuretieswere made to sign blank documents and were furnished copies of the
same. The letter, however, is in fact merely a reply of petitioners-sureties
counsel to PBComs demand for payment of MICOs obligations, and appears
to be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the
decision of the trial court which stated that there was no proof that the
proceeds of the loans were ever delivered to MICO. Although the private
respondents witness, Mr. Gardiola, testified that the proceeds of the loans
were deposited in MICOs current account with PBCom, his testimony was
allegedly not supported by any bank record, note or memorandum. A careful
scrutiny of the record including the transcript of stenographic notes reveals,
however, that although private respondent PBCom was willing to produce the
corresponding account ledger showing that the proceeds of the loans were
credited to MICOs current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in the
testimony of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J which as you
have
said
previously
(sic)
availed
originally
by
defendant Mico Metals Corp. sometime in 1979, my question now
is, do you know what happened to the proceeds of the
original availment?
A: Well, it was credited to the current account of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the account
of Mico Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best
evidence is the so-called current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not be
disclosed without the consent of the person concerned. (sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account
defendant Mico Metals Corp. is the subject matter of this case.

of

xxx xxx xxx

Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the secrecy
of the bank deposit. (sic)
xxx xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds of the
three (3) promissory notes were credited to the accounts
of Mico Metals Corporation, now do you know what kind of current
account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of
defendant Mico Metals Corporation and it cannot disclosed without
the authority of the depositor. (sic)[37]
That proceeds of the loans which were originally availed of in 1979 were
delivered to MICO is bolstered by the fact that more than a year later,
specifically on July 14, 1980, MICO through its president, petitioner-surety
Charles Lee, requested for an additional loan of Four Million Pesos
(P4,000,000.00) from PBCom. The fact that MICO was requesting for an

additional loan implied that it has already availed of earlier loans

fromPBCom.
Petitioners allege that PBCom presented no evidence that it remitted
payments to cover the domestic and foreign letters of credit. Petitioners
placed much reliance on the erroneous decision of the trial court which
stated that private respondent PBCom allegedly failed to prove that it
actually made payments under the letters of credit since the bank drafts
presented as evidence show that they were made in favor of the Bank of
Taiwan and First Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural persons.
They involve bank to bank transactions. Historically, the letter of credit was
developed to facilitate the sale of goods between, distant and unfamiliar
buyers and sellers. It was an arrangement under which a bank, whose credit
was acceptable to the seller, would at the instance of the buyer agree to pay
drafts drawn on it by the seller, provided that certain documents are
presented such as bills of lading accompanied the corresponding drafts.
Expansion in the use of letters of credit was a natural development in
commercial banking.[38] Parties to a commercial letter of credit include (a) the
buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the
opening bank which is usually the buyers bank which actually issues the
letter of credit, (d) the notifying bank which is the correspondent bank of the
opening bank through which it advises the beneficiary of the letter of credit,
(e) negotiating bank which is usually any bank in the city of the beneficiary.
The services of the notifying bank must always be utilized if the letter of
credit is to be advised to the beneficiary through cable, (f) the paying bank
which buys or discounts the drafts contemplated by the letter of credit, if
such draft is to be drawn on the opening bank or on another designated bank
not in the city of the beneficiary. As a rule, whenever the facilities of the
opening bank are used, the beneficiary is supposed to present his drafts to
the notifying bank for negotiation and (g) the confirming bank which, upon
the request of the beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to
bank transactions, involve more than just one bank. Consequently, there is
nothing unusual in the fact that the drafts presented in evidence by
respondent bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of Taiwan by
Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the
foreign letter of credit. Having paid the supplier, the Bank of Taiwan then
presented the bank draft for reimbursement by PBComs correspondent bank
in Taiwan, the Irving Trust Company which explains the reason why on its
face, the draft was made payable to the Bank of Taiwan. Irving Trust
Company accepted and endorsed the draft to PBCom. The draft was later

transmitted to PBCom to support the latters claim for payment from MICO.
MICO accepted the draft upon presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal possession
of the merchandise be transferred to PBCom by way of trust receipts.
Petitioners insist that assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same would be illegal
since PBCom, being a banking institution, is not authorized by law to engage
in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral of
the merchandise imported or purchased.[39] A trust receipt, therefor, is a
document of security pursuant to which a bank acquires a security interest in
the goods under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit, with the
trust receipt as a security for the loan. The transaction involves a loan
feature represented by a letter of credit, and a security feature which is in
the covering trust receipt which secures an indebtedness.
Petitioners averments with regard to the second issue are no less
incredulous. Petitioners contend that the letters of credit, surety agreements
and loan transactions did not ripen into valid and binding contracts
since no part of the proceeds of the loan transactions were delivered to MICO
or to any of the petitioners-sureties. Petitioners-sureties allege that
Chua Siok Suy was the beneficiary of the proceeds of the loans and that the
latter made them sign the surety agreements in blank. Thus, they maintain
that they should not be held accountable for any liability that might
arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as
president of MICO Metals Corporation, who first requested for a
discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as
evidenced by his letter dated March 2, 1979.[40] On the same day, Charles
Lee, as President of MICO, requested for a Letter of Credit and Trust Receipt
line in the sum of Three Million Pesos (P3,000,000.00).[41] Still, on the same
day, Charles Lee again as President of MICO, wrote another letter to PBCOM
requesting for a financing line in the sum of One Million Five Hundred
Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit
for the opening of MICOs foreign and local letters of credit withPBCom.
[42]
More than a year later, it was also Charles Lee, again in his capacity as
president of MICO, who asked for an additional loan in the sum of Four Million
Pesos (P4,000,000.00). The claim therefore of petitioners that it was
Chua Siok Suy, in connivance with the respondent PBCom, who applied for
and obtained the loan transactions and letters of credit strains credulity
considering that even the Deed of the Real Estate Mortgage in favor

of PBCom was executed by petitioner-surety Mariano Sio in his capacity as

general manager of MICO[43] to secure the loan accommodations obtained by
MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety
agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate
treasurer, for his part testified that he signed booklets of checks, surety
agreements and promissory notes in blank; that he signed the documents in
blank despite his misgivings since Chua Siok Suy assured him that the
transaction can easily be taken cared of since Chua Siok Suy personally knew
the Chairman of the Board of PBCom; that he was not receiving salary as
treasurer of Mico Metals and since Chua Siok Suy had a direct hand in the
management of Malayan Sales Corporation, of which Yap is an employee, he
(Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified
that he worked as office manager for MICO from 1978-1982. As office
manager, he was the one in charge of transacting business like purchasing,
selling and paying the salary of the employees. He was also in charge of the
handling of documents pertaining to surety agreements, trust receipts and
promissory notes;[44] that when he first joined MICO Metals Corporation, he
was able to read the by-laws of the corporation and he came to know that
only the chairman and the president can borrow money in behalf of the
corporation; that Chua Siok Suy once called him up and told him to secure an
invoice so that a credit line can be opened in the bank with a local letter of
credit; that when the invoice was secured, he (Co) brought it together with
the application for a credit line to Chua Siok Suy, and that he questioned the
authority of Chua Siok Suy pointing out that he (Co) is not empowered to
sign the document inasmuch as only the latter, as president, was authorized
to do so. However, Chua Siok Suy allegedly just said that he had already
talked with the Chairman of the Board of PBCom; and that
ChuaSiok Suy reportedly said that he needed the money to finance a project
that he had with the Taipei government. Co also testified that he knew of the
application for domestic letter of credit in the sum of Three Hundred FortyEight Thousand Pesos (P348,000.00); and that a certain Moises Rosetewas
authorized to claim the check covering the Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) from PBCom; and that after claiming the
check Rosete brought it to Perez Battery Center for indorsement after which
the same was deposited to the personal account of Chua Siok Suy.[45]
We consider as incredible and unacceptable the claim of petitionerssureties that the Board of Directors of MICO was so careless about the
business affairs of MICO as well as about their own personal reputation and
money that they simply relied on the say so of Chua Siok Suy on matters
involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of
Court, it is presumed that a person takes ordinary care of his concerns.
Hence, the natural presumption is that one does not sign a document
without first informing himself of its contents and consequences. Said

presumption acquires greater force in the case at bar where not only one but
several documents were executed at different times and at different places
by the petitioner sureties and Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not
duly authorized to negotiate for loans in behalf of MICO from PBCom.
Petitioners allegation, however, is belied by the July 28, 1980 Certification
issued by the corporate secretary of PBCom, Atty. P.B. Barrera,
thatMICO's Board of Directors gave Chua Siok Suy full authority to negotiate
for loans in behalf of MICO with PBCom. In fact, the Certification even
provided that Chua Siok Suys authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board. Notably,
petitioners failed to contest the genuineness of the said Certification which is
notarized and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to negotiate for
loans in behalf of MICO.
There was no need for PBCom to personally inform the petitionerssureties individually about the terms of the loans, letters of credit and other
loan documents. The petitioners-sureties themselves happen to comprise the
Board of Directors of MICO, which gave full authority to Chua Siok Suyto
negotiate for loans in behalf of MICO. Notice to MICOs authorized
representative, Chua Siok Suy, was notice to MICO. The Certification issued
byPBComs corporate secretary, Atty. P.B. Barrera, indicated that
Chua Siok Suy had full authority to negotiate and sign the necessary
documents, inbehalf
of
MICO
for
loans
from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized
Certification of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no consideration
whatsoever on the surety agreements, we need only point out that the
consideration for the sureties is the very consideration for the principal
obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries
Corporation vs. Court of Appeals,[46] we ruled that the consideration
necessary to support a surety obligation need not pass directly to the surety,
a consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes the
contract effective between the parties thereto. It is not necessary that a
guarantor or surety should receive any part or benefit, if such there be,
accruing to his principal.
Petitioners placed too much reliance on the rule in evidence that the
burden of proof does not shift whereas the burden of going forward with the
evidence does pass from party to party. It is true that said rule is not
changed by the fact that the party having the burden of proof has introduced
evidence which established prima facie his assertion because such evidence
does not shift the burden of proof; it merely puts the adversary to the
necessity of producing evidence to meet the prima facie case. Where the

defendant merely denies, either generally or otherwise, the allegations of the

plaintiffs pleadings, the burden of proof continues to rest on the plaintiff
throughout the trial and does not shift to the defendant until the plaintiffs
evidence has been presented and duly offered. The defendant has then no
burden except to produce evidence sufficient to create a state of equipoise
between his proof and that of the plaintiff to defeat the latter, whereas the
plaintiff has the burden, as in the beginning, of establishing his case by a
preponderance of evidence.[47] But where the defendant has failed to present
and marshall evidence sufficient to create a state of equipoise between his
proof and that of plaintiff, the prima facie case presented by the plaintiff will
prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has in
fact presented sufficient documentary and testimonial evidence that proved
by preponderance of evidence its subject collection case against the
defendants who are the petitioners herein. In view of all the foregoing, the
Court of Appeals committed no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R.
CV No. 27480 entitled, Philippine Bank of Communications vs. MicoMetals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for defendantsappellees.

DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing
the complaint filed by the Philippine Education Co., Inc. against Mauricio A.
Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post
Office ten (10) money orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller had made out money
ordersnumbered 124685, 124687-124695, Montinola offered to pay for them
with a private checks were not generally accepted in payment of money
orders, the teller advised him to see the Chief of the Money Order Division,
but instead of doing so, Montinola managed to leave building with his own
check and the ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of
the unpaid money orders, an urgent message was sent to all postmasters,
and the following day notice was likewise served upon all banks, instructing
them not to pay anyone of the money orders aforesaid if presented for
payment. The Bank of America received a copy of said notice three days
later.
On April 23, 1958 one of the above-mentioned money orders numbered
124688 was received by appellant as part of its sales receipts. The following
day it deposited the same with the Bank of America, and one day thereafter
the latter cleared it with the Bureau of Posts and received from the latter its
face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money
Order Division of the Manila Post Office, acting for and in behalf of his coappellee, Postmaster Enrico Palomar, notified the Bank of America that
money order No. 124688 attached to his letter had been found to have been
irregularly issued and that, in view thereof, the amount it represented had
been deducted from the bank's clearing account. For its part, on August 2 of
the same year, the Bank of America debited appellant's account with the
same amount and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to
reconsider the action taken by his office deducting the sum of P200.00 from
the clearing account of the Bank of America, but his request was denied. So
was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to
the Secretary of Public Works and Communications, but the latter sustained
the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with
theft in the Court of First Instance of Manila (Criminal Case No. 43866) but
after trial he was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the
Municipal Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be
ordered:
(a) To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing
account the sum of P200.00 represented by postal money order
No. 124688, or in the alternative indemnify the plaintiff in the
same amount with interest at 8-% per annum from September
27, 1961, which is the rate of interest being paid by plaintiff on
its overdraft account;
(b) To pay to the plaintiff out of their own personal funds, jointly
and severally, actual and moral damages in the amount of
P1,000.00 or in such amount as will be proved and/or determined
by this Honorable Court: exemplary damages in the amount of
P1,000.00, attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be
deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of
facts reproduced at pages 12 to 15 of the Record on Appeal, the abovenamed court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendants to countermand the notice given to the Bank of
America on September 27, 1961, deducting from said Bank's
clearing account the sum of P200.00 representing the amount of
postal money order No. 124688, or in the alternative, to
indemnify the plaintiff in the said sum of P200.00 with interest
thereon at the rate of 8-% per annum from September 27,
1961 until fully paid; without any pronouncement as to cost and
attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after
the parties had resubmitted the same stipulation of facts, the appealed
decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief
are related to the other and will therefore be discussed jointly. They raise this
main issue: that the postal money order in question is a negotiable
instrument; that its nature as such is not in anyway affected by the letter
dated October 26, 1948 signed by the Director of Posts and addressed to all
banks with a clearing account with the Post Office, and that money orders,
once issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the remitters
payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in
force in the United States. For this reason, ours are generally construed in
accordance with the construction given in the United States to their own
postal statutes, in the absence of any special reason justifying a departure
from this policy or practice. The weight of authority in the United States is
that postal money orders are not negotiable instruments (Bolognesi vs. U.S.
189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason
behind this rule being that, in establishing and operating a postal money
order system, the government is not engaging in commercial transactions
but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed
upon money orders by postal laws and regulations are inconsistent with the
character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money
orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the
conditions laid down in the letter of the Director of Posts of October 26, 1948
(Exhibit 3) to the Bank of America for the redemption of postal money orders
received by it from its depositors. Among others, the condition is imposed
that "in cases of adverse claim, the money order or money orders involved
will be returned to you (the bank) and the, corresponding amount will have
to be refunded to the Postmaster, Manila, who reserves the right to deduct
the value thereof from any amount due you if such step is deemed
necessary." The conditions thus imposed in order to enable the bank to

continue enjoying the facilities theretofore enjoyed by its depositors, were

accepted by the Bank of America. The latter is therefore bound by them.
That it is so is clearly referred from the fact that, upon receiving advice that
the amount represented by the money order in question had been deducted
from its clearing account with the Manila Post Office, it did not file any
protest against such action.
Moreover, not being a party to the understanding existing between the
postal officers, on the one hand, and the Bank of America, on the other,
appellant has no right to assail the terms and conditions thereof on the
ground that the letter setting forth the terms and conditions aforesaid is void
because it was not issued by a Department Head in accordance with Sec. 79
(B) of the Revised Administrative Code. In reality, however, said legal
provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon
the privilege granted to the Bank of Amrica to accept and pay postal money
orders presented for payment at the Manila Post Office. Such being the case,
it is clear that the Director of Posts had ample authority to issue it pursuant
to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues
raised in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same
is hereby affirmed with costs.
G.R. No. L-1405

July 31, 1948

BENJAMIN ABUBAKAR, petitioner,

vs.
THE AUDITOR GENERAL, respondent.
Viray and Viola Viray for petitioner.
First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel
Tomacruz for respondent.
BENGZON, J.:
We are asked to overrule the decision of the Auditor General refusing to
authorize the payment of Treasury warrant No. A-2867376 for P1,000 which

was issued in favor of Placido S. Urbanes on December 10, 1941, but is now
in the hands of herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money
available for the redemption of treasury warrants issued before January 2,
1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this warrant
does not come within the purview of said appropriation; and second, because
on of the requirements of his office had not been complied with, namely, that
it must be shown that the holders of warrants covering payment or
replenishment of cash advances for official expenditures (as this warrant is)
received them in payment of definite government obligations.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass
upon the second.
There is no doubt as to the authenticity and date of the treasury warrant.
There is no question that it was regularly indorsed by the payee and is now
in the custody of the herein petitioner who is a private individual. On the
other hand, it is admitted that the warrant was originally made payable to
Placido S. Urbanes in his capacity as disbursing officer of the Food
Administration for "additional cash advance for Food Production Campaign in
La Union" (Annex A). It is thus apparent that this is a treasury warrant issued
in favor of a public officer or employeeand held in possession by a private
individual. Such being the case, the Auditor General can hardly be blamed
for not authorizing its redemption out of an appropriation specifically for
"treasury warrants issued ... in favor of and held in possession
by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant
was not issued in favor of a private individual. It was issued in favor of
a government employee.
The distinction is not without a difference. Outstanding treasury warrants
issued prior to January 2, 1942, amount to more than four million pesos. The
appropriation herein mentioned is only for P1,750,000. Obviously Congress
wished to provide for redemption of one class of warrants those issued to
private individuals as distinguished from those issued in favor of
government officials. Basis for the discrimination is not lacking. Probably the
Government is not so sure that those warrants to officials have all been
properly used by the latter during the Japanese occupation or maybe it wants
to conduct further inquiries as to the equities of the present holders thereof.

The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument an dis entitled to the rights and privileges of a holder
in due course, free from defenses. But this treasury warrant is not within the
scope of the negotiable instruments law. For one thing, the document
bearing on its face the words "payable from the appropriation for food
administration," is actually an order for payment out of "a particular fund,"
and is not unconditional, and does not fulfill one of the essential
requirements of a negotiable instrument. (Section 3 last sentenced and
section 1[b] of the Negotiable Instruments Law.) In the United States,
government warrants for the payment of money are not negotiable
instruments nor commercial proper1
Anyway the question here is not whether the Government should eventually
pay this warrant, or is ultimately responsible for it, but whether the Auditor
General erred in refusing to permit payment out of the particular
appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not.
Petition dismissed, with costs.
Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.
PHILIPPINE NATIONAL BANK, G.R. No. 170325
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
ERLANDO T. RODRIGUEZ Promulgated:
and NORMA RODRIGUEZ,
Respondents. September 26, 2008
x--------------------------------------------------x
DECISION
REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its
proceeds, is it payable to order or bearer? What is the fictitious-payee rule
and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of
the Amended 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 codefendants 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
of P500,000.00;

in

the

amount

(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 plaintiffsappellees (Spouses Rodriguez) that their cause of action arose
from the alleged breach of contract by the defendant-appellant
(PNB) when it paid the value of the checks to PEMSLA despite the
checks being payable to order. Rather, we are more convinced by
the strong and credible evidence for the defendant-appellant
with regard to the plaintiffs-appellees and PEMSLAs business
arrangement that the value of the rediscounted checks of the
plaintiffs-appellees 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
defendant-appellant.
According
to
plaintiff-appellee
Erlando
Rodriguez
testimony, PEMSLA allegedly issued post-dated checks to its
qualified members who had applied for loans. However, because
of 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 plaintiffs-appellees to make a profit by issuing rediscounted
checks, while the officers of PEMSLA and other members would
be able to claim their loans, despite the fact that they were
disqualified for one reason or another. They were able to achieve
this conspiracy by using other members who had loaned lesser
amounts of money or had not applied at all. x x x.[8] (Emphasis
added)

The CA found that the checks were bearer instruments, thus they do not
require indorsement for negotiation; and that spouses Rodriguez and PEMSLA
conspired with each other to accomplish this money-making scheme. The
payees in the checks were fictitious payees because they were not the
intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter
alia, that the checks on their faces were unquestionably payable to order;
and that PNB committed a breach of contract when it paid the value of the
checks to PEMSLA without indorsement from the payees.They also argued
that their cause of action is not only against PEMSLA but also against PNB to
recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision,
the last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable
to the plaintiffs-appellees Sps. Rodriguez for the following:

1.

Actual damages in the amount of P2,345,804

with interest at 6% per annum from 14 May
1999 until fully paid;

2.

Moral damages in the amount of P200,000;

3.

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)
(b)

When it is expressed to be so payable; or

When it is payable to a person named therein or
bearer; or
(c)
When it is payable to the order of a fictitious or nonexisting 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 USSupreme
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 3405 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
[25]
employees. In Bank of the Philippine Islands v. Court of Appeals, 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 crossclaim 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 RTCdismissal 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.
G.R. No. L-2516

September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel
Tomacruz for respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He

delivered it to Lee Hua Hong in exchange for money which the latter handed
in act. On November 18, 1946, the next business day, the check was
presented by Lee Hua Hong to the drawee bank for payment, but it was
dishonored for insufficiency of funds, the balance of the deposit of Ang Tek
Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified
that "on November 16, 1946, appellant went to his (complainant's) office, at
1217 Herran, Paco, Manila, and asked him to exchange Exhibit A which he
(appellant) then brought with him with cash alleging that he needed badly
the sum of P4,000 represented by the check, but could not withdraw it from
the bank, it being then already closed; that in view of this request and
relying upon appellant's assurance that he had sufficient funds in the blank
to meet Exhibit A, and because they used to borrow money from each other,
even before the war, and appellant owns a hotel and restaurant known as
the North Bay Hotel, said complainant delivered to him, on the same date,
the sum of P4,000 in cash; that despite repeated efforts to notify him that
the check had been dishonored by the bank, appellant could not be located
any-where, until he was summoned in the City Fiscal's Office in view of the
complaint for estafa filed in connection therewith; and that appellant has not
paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had
been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post dating a check, or issuing such check in
payment of an obligation the offender knowing that at the time he had no
funds in the bank, or the funds deposited by him in the bank were not
sufficient to cover the amount of the check, and without informing the payee
of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held
liable. In this connection, it must be stated that, as explained in People vs.
Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated
check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash"
and had not been endorsed by Ang Tek Lian, the defendant is not guilty of
the offense charged. Based on the proposition that "by uniform practice of all

banks in the Philippines a check so drawn is invariably dishonored," the

following line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check
(Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the appellant
could not be said to have acted fraudulently because the complainant,
in so accepting the check as it was drawn, must be considered, by
every rational consideration, to have done so fully aware of the risk he
was running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are too,
where no such requirement had been made . It depends upon the
circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to
the order of "cash" is a check payable to bearer, and the bank may pay it to
the person presenting it for payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N.
Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104
N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh
Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See
also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash
"does not purport to be the name of any person", and hence the
instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . . (Zollmann, Banks and Banking,
Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and /or assurance against
possible complications, for instance, (a) forgery of drawer's signature, (b)
loss of the check by the rightful owner, (c) raising of the amount payable,
etc. The bank may therefore require, for its protection, that the indorsement
of the drawer or of some other person known to it be obtained. But

where the Bank is satisfied of the identity and /or the economic standing of
the bearer who tenders the check for collection, it will pay the instrument
without further question; and it would incur no liability to the drawer in thus
acting.
A check payable to bearer is authority for payment to holder. Where a
check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment,
need not have the holder identified, and is not negligent in falling to do
so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p.
343.)
. . . Consequently, a drawee bank to which a bearer check is presented
for payment need not necessarily have the holder identified and
ordinarily may not be charged with negligence in failing to do so. See
Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer
check, "no matter what facts unknown to it may have occurred prior to
the presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check
without further inquiry, it is entirely reasonable for the bank to insist
that holder give satisfactory proof of his identity. . . . (Paton's Digest,
Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A
was totally unconnected with its dishonor. The Court of Appeals declared that
it was returned unsatisfied because the drawer had insufficient funds not
because the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty
imposed on the appellant, the writ ofcertiorari is denied and the decision of
the Court of Appeals is hereby affirmed, with costs.
G.R. No. L-18103

June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendantappellant.

Antonio Gonzalez for appellant.

Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc
Donough and Johnson; Julian Wolfson; Ross and Lawrence; Francis B.
Mahoney, and Jose A. Espiritu, amici curiae.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in
this jurisdiction of a provision in a promissory note whereby in case the same
is not paid at maturity, the maker authorizes any attorney to appear and
confess judgment thereon for the principal amount, with interest, costs, and
attorney's fees, and waives all errors, rights to inquisition, and appeal, and
all property exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil Refining &
By-Products Company, Inc., executed and delivered to the Philippine National
Bank, a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the Philippine
National Bank sixty-one thousand only pesos at Philippine National
Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any
attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the above
sum with interest, cost of suit and attorney's fees of ten (10) per cent
for collection, a release of all errors and waiver of all rights to
inquisition and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received. No. ____
Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action in
the Court of First Instance of Manila, to recover P61,000, the amount of the
note, together with interest and costs. Mr. Elias N. Rector, an attorney
associated with the Philippine National Bank, entered his appearance in
representation of the defendant, and filed a motion confessing judgment.
The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Recto. Later, attorney Antonio
Gonzalez appeared for the defendant and filed a demurrer, and when this
was overruled, presented an answer. The trial judge rendered judgment on
the motion of attorney Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise
squarely the question which was suggested in the beginning of this opinion.
In view of the importance of the subject to the business community, the
advice of prominent attorneys-at-law with banking connections, was
solicited. These members of the bar responded promptly to the request of
the court, and their memoranda have proved highly useful in the solution of
the question. It is to the credit of the bar that although the sanction of
judgement notes in the Philippines might prove of immediate value to
clients, every one of the attorneys has looked upon the matter in a big way,
with the result that out of their independent investigations has come a
practically unanimous protest against the recognition in this jurisdiction of
judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute expressly
or tacitly recognizes a confession of judgment commonly called a judgment
note. On the contrary, the provisions of the Code of Civil Procedure, in
relation to constitutional safeguards relating to the right to take a man's
property only after a day in court and after due process of law, contemplate
that all defendants shall have an opportunity to be heard. Further, the
provisions of the Code of Civil Procedure pertaining to counter claims argue
against judgment notes, especially as the Code provides that in case the
defendant or his assignee omits to set up a counterclaim, he cannot
afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96,

97.) At least one provision of the substantive law, namely, that the validity
and fulfillment of contracts cannot be left to the will of one of the contracting
parties (Civil Code, art. 1356), constitutes another indication of fundamental
legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law
(Act No. 2031) expressly recognizes judgment notes, and that they are
enforcible under the regular procedure. The Negotiable Instruments Law, in
section 5, provides that "The negotiable character of an instrument
otherwise negotiable is not affected by a provision which ". . . (b) Authorizes
a confession of judgment if the instrument be not paid at maturity." We do
not believe, however, that this provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law which
merely provides that, in jurisdiction where judgment notes are recognized,
such clauses shall not affect the negotiable character of the instrument.
Moreover, the same section of the Negotiable Instruments. Law concludes
with these words: "But nothing in this section shall validate any provision or
stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear
and confess judgment against the maker. This situation, in reality, has its
advantages for it permits us to reach that solution which is best grounded in
the solid principles of the law, and which will best advance the public
interest.
The practice of entering judgments in debt on warrants of attorney is of
ancient origin. In the course of time a warrant of attorney to confess
judgement became a familiar common law security. At common law, there
were two kinds of judgments by confession; the one a judgment by cognovit
actionem, and the other by confessionrelicta verificatione. A number of
jurisdictions in the United States have accepted the common law view of
judgments by confession, while still other jurisdictions have refused to
sanction them. In some States, statutes have been passed which have either
expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the
absence of statute, there is a conflict of authority as to the validity of a
warrant of attorney for the confession of judgement. The weight of opinion is
that, unless authorized by statute, warrants of attorney to confess judgment
are void, as against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City
vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am.
St. Rep., 612). The record in this case discloses that on October 4, 1990, the
defendant executed and delivered to the plaintiff an obligation in which the
defendant authorized any attorney-at-law to appear for him in an action on
the note at any time after the note became due in any court of record in the
State of Missouri, or elsewhere, to waive the issuing and service of process,
and to confess judgement in favor of the First National Bank of Kansas City
for the amount that might then be due thereon, with interest at the rate
therein mentioned and the costs of suit, together with an attorney's fee of 10
per cent and also to waive and release all errors in said proceedings and
judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff
filed a petition in the Circuit Court to which was attached the abovementioned instrument. An attorney named Denham appeared pursuant to
the authority given by the note sued on, entered the appearance of the
defendant, and consented that judgement be rendered in favor of the
plaintiff as prayed in the petition. After the Circuit Court had entered a
judgement, the defendants, through counsel, appeared specially and filed a
motion to set it aside. The Supreme Court of Missouri, speaking through Mr.
Justice Graves, in part said:
But going beyond the mere technical question in our preceding
paragraph discussed, we come to a question urged which goes to the
very root of this case, and whilst new and novel in this state, we do not
feel that the case should be disposed of without discussing and passing
upon that question.
xxx

xxx

xxx

And if this instrument be considered as security for a debt, as it was by

the common law, it has never so found recognition in this state. The
policy of our law has been against such hidden securities for debt. Our
Recorder's Act is such that instruments intended as security for debt
should find a place in the public records, and if not, they have often
been viewed with suspicion, and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place a
debtor in the absolute power of his creditor. The field for fraud is too
far enlarged by such an instrument. Oppression and tyranny would
follow the footsteps of such a diversion in the way of security for debt.

Such instruments procured by duress could shortly be placed in

judgment in a foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse
judgment is rendered, and this statutory right is by the instrument
stricken down. True it is that such right is not claimed in this case, but
it is a part of the bond and we hardly know why this pound of flesh has
not been demanded. Courts guard with jealous eye any contract
innovations upon their jurisdiction. The instrument before us,
considered in the light of a contract, actually reduces the courts to
mere clerks to enter and record the judgment called for therein. By our
statute (Rev. St. 1899, sec. 645) a party to a written instrument of this
character has the right to show a failure of consideration, but this right
is brushed to the wind by this instrument and the jurisdiction of the
court to hear that controversy is by the whose object is to oust the
jurisdiction of the courts are contrary to public policy and will not be
enforced. Thus it is held that any stipulation between parties to a
contract distinguishing between the different courts of the country is
contrary to public policy. The principle has also been applied to a
stipulation in a contract that a party who breaks it may not be sued, to
an agreement designating a person to be sued for its breach who is
nowise liable and prohibiting action against any but him, to a provision
in a lease that the landlord shall have the right to take immediate
judgment against the tenant in case of a default on his part, without
giving the notice and demand for possession and filing the complaint
required by statute, to a by-law of a benefit association that the
decisions of its officers on claim shall be final and conclusive, and to
many other agreements of a similar tendency. In some courts, any
agreement as to the time for suing different from time allowed by the
statute of limitations within which suit shall be brought or the right to
sue be barred is held void.
xxx

xxx

xxx

We shall not pursue this question further. This contract, in so far as it

goes beyond the usual provisions of a note, is void as against the
public policy of the state, as such public policy is found expressed in
our laws and decisions. Such agreements are iniquitous to the
uttermost and should be promptly condemned by the courts, until such

time as they may receive express statutory recognition, as they have

in some states.
xxx

xxx

xxx

From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A.
[N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered
authority. The notes referred to in the record contained waiver of
presentment and protest, homestead and exemption rights real and
personal, and other rights, and also the following material provision: "And we
do hereby empower and authorize the said A. B. Farquhar Co. Limited, or
agent, or any prothonotary or attorney of any Court of Record to appear for
us and in our name to confess judgement against us and in favor of said A. B.
Farquhar Co., Limited, for the above named sum with costs of suit and
release of all errors and without stay of execution after the maturity of this
note." The Supreme Court of West Virginia, on consideration of the validity of
the judgment note above described, speaking through Mr. Justice Miller, in
part said:
As both sides agree the question presented is one of first impression in
this State. We have no statutes, as has Pennsylvania and many other
states, regulating the subject. In the decision we are called upon to
render, we must have recourse to the rules and principles of the
common law, in force here, and to our statute law, applicable, and to
such judicial decisions and practices in Virginia, in force at the time of
the separation, as are properly binding on us. It is pertinent to remark
in this connection, that after nearly fifty years of judicial history this
question, strong evidence, we think, that such notes, if at all, have
never been in very general use in this commonwealth. And in most
states where they are current the use of them has grown up under
statutes authorizing them, and regulating the practice of employing
them in commercial transactions.
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It is contended, however, that the old legal maxim, qui facit per alium,
facit per se, is as applicable here as in other cases. We do not think so.
Strong reasons exist, as we have shown, for denying its application,

when holders of contracts of this character seek the aid of the courts
and of their execution process to enforce them, defendant having had
no day in court or opportunity to be heard. We need not say in this
case that a debtor may not, by proper power of attorney duly
executed, authorize another to appear in court, and by proper
endorsement upon the writ waive service of process, and confess
judgement. But we do not wish to be understood as approving or
intending to countenance the practice employing in this state
commercial paper of the character here involved. Such paper has
heretofore had little if any currency here. If the practice is adopted into
this state it ought to be, we think, by act of the Legislature, with all
proper safeguards thrown around it, to prevent fraud and imposition.
The policy of our law is, that no man shall suffer judgment at the hands
of our courts without proper process and a day to be heard. To give
currency to such paper by judicial pronouncement would be to open
the door to fraud and imposition, and to subject the people to wrongs
and injuries not heretofore contemplated. This we are unwilling to do.
A case typical of those authorities which lend support to judgment notes is
First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The
Supreme Court of New Mexico, in a per curiam decision, in part, said:
In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar and Co. vs.
Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas.
[1914 A]. 640, and First National Bank of Kansas City vs. White, 220
Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are
examples of such holding.) By just what course of reasoning it can be
said by the courts that such judgments are against public policy we are
unable to understand. It was a practice from time immemorial at
common law, and the common law comes down to us sanctioned as
justified by the reason and experience of English-speaking peoples. If
conditions have arisen in this country which make the application of
the common law undesirable, it is for the Legislature to so announce,
and to prohibit the taking of judgments can be declared as against the
public policy of the state. We are aware that the argument against
them is that they enable the unconscionable creditor to take
advantage of the necessities of the poor debtor and cut him off from
his ordinary day in court. On the other hand, it may be said in their
favor that it frequently enables a debtor to obtain money which he

could by no possibility otherwise obtain. It strengthens his credit, and

may be most highly beneficial to him at times. In some of the states
there judgments have been condemned by statute and of course in
that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as
security to a creditor accompanying a promissory note confers a valid
power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note; that
our cognovit statute does not cover the same field as that occupied by
the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice;
and that the practice of taking judgments upon warrants of attorney as
it was pursued in this case is not against any public policy of the state,
as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it may
be said that they are based on the practice of the English-American common
law, and that the doctrines of the common law are binding upon Philippine
courts only in so far as they are founded on sound principles applicable to
local conditions.
Judgments by confession as appeared at common law were considered an
amicable, easy, and cheap way to settle and secure debts. They are a quick
remedy and serve to save the court's time. They also save the time and
money of the litigants and the government the expenses that a long
litigation entails. In one sense, instruments of this character may be
considered as special agreements, with power to enter up judgments on
them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney are
void as against public policy, because they enlarge the field for fraud,
because under these instruments the promissor bargains away his right to a
day in court, and because the effect of the instrument is to strike down the
right of appeal accorded by statute. The recognition of such a form of
obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can
readily be seen that judgement notes, instead of resulting to the advantage
of commercial life in the Philippines might be the source of abuse and

oppression, and make the courts involuntary parties thereto. If the bank has
a meritorious case, the judgement is ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication
and should only be considered as valid when given express legislative
sanction.
The judgment appealed from is set aside, and the case is remanded to the
lower court for further proceedings in accordance with this decision. Without
special finding as to costs in this instance, it is so ordered.