payment.

The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose
as security for the jewelry.
G.R. No. 101163 January 11, 1993
We are not persuaded.
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B.
MOULIC, respondents.
BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as security, and
the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation,
are the issues in this Petition for Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be
sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty
Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979.
Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the
checks. The checks, however, could no longer be retrieved as they had already been negotiated.
Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December
1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in
cash instead, although MOULIC avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of
litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was
never sold and the checks were negotiated without her knowledge and consent. She also instituted a
Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and
ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial
court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by
the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the
reglementary period it would be of no consequence as the checks should never have been presented for

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pretrial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due
course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder in due course is a holder
who has taken the instrument under the following conditions: (a) That it is complete
and regular upon its face; (b) That he became the holder of it before it was overdue,
and without notice that it was previously dishonored, if such was the fact; (c) That he
took it in good faith and for value; (d) That at the time it was negotiated to him he had
no notice of any infirmity in the instrument or defect in the title of the person
negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a
holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies
in the person who disputes the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b)
petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner
took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any
defect of title of prior parties, and from defenses available to prior parties among themselves; STATE
may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of consideration.
MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were
issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of the
instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the
Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a)

By payment in due course by or on behalf of the principal debtor; (b) By payment in
due course by the party accommodated, where the instrument is made or accepted for
his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By
any other act which will discharge a simple contract for the payment of money; (e)
When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the
instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation
effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled"
on the instrument. The act of destroying the instrument must also be made by the holder of the instrument
intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money under
paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts
are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again,
none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation
where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to
excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need
for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is not
required to be given to the drawer in the following cases: (a) Where the drawer and the
drawee are the same person; (b) When the drawee is a fictitious person or a person not
having capacity to contract; (c) When the drawer is the person to whom the instrument
is presented for payment: (d) Where the drawer has no right to expect or require that
the drawee or acceptor will honor the instrument; (e) Where the drawer had
countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she
returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could not have expected her checks to be

honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to
serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the
instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings
taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or the
incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated
paper makes a contract with the parties on the face of the instrument. There is an implied representation
that funds or credit are available for the payment of the instrument in the bank upon which it is
drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the
checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders
the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee
bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment
on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon
Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed
amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the
property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the
mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale
of the property and its action cannot be taken to mean a waiver of its right to demand payment for the
whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such
deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency
resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For
instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the
deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold
on installment basis, in the event of foreclosure, the vendor "shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be
concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery
of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially
foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in
the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and
the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the
debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course,
STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as
Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one
entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT
HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of
P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for
recompense she may pursue against the VICTORIANOs as Third-Party Defendants.
Costs against private respondent. SO ORDERED.

G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA
CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.

CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of
all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a
period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by
the Philippine Fish Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to
have been indorsed by their respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden
Savings
to
withdraw
from
the
proceeds
of
the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13,
1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The
total withdrawal was P968.000.00. 4

FIRST DIVISION

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared
warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by
the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court
modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made
including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc.
and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees
and expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees
and expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition
for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which
cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay
for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the
latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not
negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently,
it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such
assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no
reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its
refusal to return the money that to all appearances belonged to the depositor, who could therefore
withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own
deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who
was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the
treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds.
There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden
Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures
of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to
make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling
more than one and a half million pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo
from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden Savings to
withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of
P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it
also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side
of the deposit slips through which the treasury warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is reserved to charge back to the
depositor's account any amount previously credited, whether or not such item is returned. This also
applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis
supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently
been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the
conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the
petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this
case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged
'with more or less rigor by the courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the

proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed
been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no
need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have
been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to
Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden Savings before it made its own
payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied
clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all.
On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the general
manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the
lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is
of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
xxx

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within
the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to
be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the
order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be
no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at
bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held:

We find the challenged decision to be basically correct. However, we will have to amend it insofar as it
directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was
allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he
has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to
Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already
been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the
debit. SO ORDERED.

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is
entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant
is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face
the words "payable from the appropriation for food administration, is actually an Order for payment out
of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a
negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they
were "genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement
and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel
this case is inapplicable to the present controversy.1wphi1 That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that the warrants were negotiable but
signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in
that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the
Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.

G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. COURT OF APPEALS and
MR. & MRS. ISABELO R. RACHO, 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 coowners who were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a
cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:

... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the GSIS
required their consent to the mortgage of the entire parcel of land which was covered with only one
certificate of title, with full knowledge that the loans secured thereby were solely for the benefit of the
appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having foreclosed the
mortgage without having given sufficient notice to them as required either as to their delinquency in the
payment of amortization or as to the subsequent foreclosure of the mortgage by reason of any default in
such payment. The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant to Sec
3 of Act 3135 is not the notice to which the mortgagor is entitled upon the application being made for an
extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed 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 so-called "Assumption of Mortgage" promising to exclude private respondents and their share
of the mortgaged property from liability to the mortgagee. There is no intimation that the former executed
such instrument for a consideration, thus confirming that they did so pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was
no objection in the court below regarding the admissibility of the testimony and documents that were
presented to prove that the private respondents signed the mortgage papers just to accommodate their coowners, 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

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.

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.

EN BANC
G.R. No. 16454

September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee, vs. THE PHILIPPINE NATIONAL

BANK, defendant-appellant.
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.