G.R. No.

L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.
JOSE ZULUETA, defendant-appellee.

Natalio M. Balboa and Ramon B. de los Reyes for appellant.

Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the defendant upon a letter of credit and
a draft for the amount of $14,449.15. Although willing to pay the equivalent in pesos of the draft, plus bank
charges, the defendant objected to the 17% excise tax imposed by Republic Act No. 601 which the Bank tried
to collect. Both documents, he contended, had been issued and had matured before the approval of said Act,
therefore the excise tax should not be charged.

After the trial, the court rendered judgment exempting defendant from the 17% excise tax; but ordered him to
deliver to plaintiff the sum of P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning from January
9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange tax. This is the only issue
between the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26, 1948, Defendant-Appellee
applied for a commercial letter of credit with Plaintiff-Appellant, Philippine National Bank (Manila) and was
granted L/C No. 35171 (Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue,
New York City, U.S.A., for $14,449.15 for the purchase of an electric passenger elevator; on May 17, 1949, and
under the said letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90 day sight draft for $14,449.15 (Exhibit
"A") which draft was duly presented to and accepted by Defendant-Appellee on July 6, 1949. Said acceptance
matured on October 4, 1949. Upon Defendant-Appellee's signing a 90 day trust receipt (Exhibit "C") on June 3,
1949, Plaintiff-Appellant released to Defendant-Appellee the covering documents of the shipment. In the
meantime, debit advice (Exhibit "G") was received from Plaintiff-Appellant's New York Agency to the effect that
it advanced or paid the draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and charged Plaintiff-Appellant
the sum of $14,467.21 representing the face value of the draft (Exhibit "A") plus $18.06 as 1/8 of 1%
commission. After the maturity date (October 4, 1949) Plaintiff-Appellant presented the draft to Defendant-
Appellee for payment but the latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513, now Republic Act No. 601,
approved on March 28, 1951, imposing a 17% special excise tax (otherwise known as foreign exchange tax) on
the value in Philippine peso of foreign exchange sold by the Central Bank of the Philippines or its authorized
agents. Plaintiff-appellant, as any other commercial bank in the Philippines, is an authorized agent of the
Central Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or statements of collection (Exhibits
"D" and "D-1") to Defendant-Appellee but the latter failed and refused to effect payment thereof. In those
statements, the sum of P4,955.74 was included representing the 17% special excise tax on the peso value of
the draft for US $14,449.15 (Exhibit "A"), . . . .

Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on New York in favor
of Otis Elevator Co., 260 Eleventh Avenue, New York City for account of Ho. Jose C. Zulueta for the
sum of FOURTEEN THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15)
 DOLLARS against drawn at NINETY DAYS accompanied by shipping documents covering of One
COMPLETE ELECTRIC PASSENGER ELEVATOR . . .

Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine
Currency, the equivalent of the above amount or such portion thereof as may be drawn or paid upon
the faith of said credit, together with your usual charges, and I/we authorize you and your respective
correspondents to pay or to accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein defendant as the drawee.

From plaintiff's statement of its position it is not clear whether recovery is demanded upon the letter of credit, or
upon the draft Exhibit A. Plaintiff may, undoubtedly, proceed on either cause of action. (See Art. 571 Code of
Commerce; Sec. 51 Negotiable Instruments Law.)

Had the plaintiff elected to recover on said letter of credit, then it would meet with the doctrines in Araneta vs.
Philippine National Bank, 95 Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority opinion in that case,
plaintiff should receive the equivalent in pesos, on May 17, 1949, of what the New York Agency paid to Otis
Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority opinion, the equivalent in pesos
of the same amount of dollars on October 4, 1949. No. 17% tax on both dates. In converting dollars into pesos,
no 17% exchange tax would be imposable, since it was created only in March 1951. The plaintiff knows the
case, for it was a party to it; and anticipating, in this appeal, the obvious conclusions, it insists not so much on
the letter of credit, as on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by Otis
Elevator Co. in New York. It was addressed to defendant as drawee, who is due course accepted it. There is
no, question that upon accepting it, defendant became a party primarily liable 2; and the holder (Philippine
National Bank) may sue him, even if there had been no presentation for payment on the day of maturity. (Sec.
70 Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October 4, 1949 (plus bank fees). He
is under obligation to deliver such amount in pesos as were the equivalent of $14,449.15. At what rate of
exchange? The rate prevailing on the day of issuance, day of acceptance, day of maturity, the day suit is filed,
or that prevailing on the day judgment is rendered requiring him to pay? Herein lies the center of the
controversy. Appellant will win this appeal only if the rate on the last days above mentioned is held to be the
legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But this statute does not
certain any express provision on the question. We know the draft is a foreign bill of exchange, because, drawn
in New York, it is payable here. (See. 129 Negotiable Instruments Law.) We also know that although the
amount payable is expressed in dollars not current money here it is still negotiable, for it may be
discharged with pesos of equivalent amount 3. The problem arises when we try to determine the "equivalent
amount", because the rate of exchange fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect at the time the bill should have
been paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England 4 and could be taken as
enunciating the correct principle, inasmuch as our Negotiable Instruments Law, practically copied the American
Uniform Negotiable Instruments Law which in turn was based largely on the Bills of Exchange Act of England of
1882. In fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil. 855.

There is one decision applying the rate of exchange at the time judgment is entered. (11 C. J. S. p.264.) 5

This decision however seems not to have taken into account the Bills of Exchange Act above mentioned. And
we have rejected its view in the Westminster case, supra. Furthermore it related to a bill expressly
made payable in a foreign currency which is not the case here. And the theory would probably produce
undesirable effects upon commercial documents, for it would make the amount uncertain, the parties to the bill
not being able to foresee the day judgment would be rendered. 6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars; therefore he must be
ordered to pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in dollars. He agreed to pay the
equivalent of $14,419.15 dollars, in Philippine currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply Republic Act No. 529 and
say that his obligation "shall be discharged in Philippine currency measured at the prevailing rates of exchange
at the time the obligation was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17% tax, it may not be validly
burdened with such tax, because the law imposing it could not be deemed to have impaired obligations already
existing at the time of its approval..

The plaintiff's theory seems to be that in remitting dollars to its New York Agency, after it collects from the
defendant, it has to pay for the said excise tax. 9 The trial judge expressed the belief that such amount had been
remitted before the enactment of Republic Act 601, because considering the practice of banks of replenishing
their agencies abroad with necessary funds, he deemed it improbable that the Manila Office of the Bank in
two years had not reimburse its New York Agency for the amount advanced on account of the draft Exhibit A.
This belief most probably accorded with reality; because as early as May 17, 1949 (Exhibit G) the New York
Agency had "charged" the amount of this draft against the account of the Manila office there, which means
the Agency had reimbursed itself the amount of the draft out of the funds of the Manila Office then in its
possession (in New York) or coming to its possession afterwards. And it is unbelievable that in two years the
Manila office never had in New York sufficient funds to effect the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17, 1952, (Exhibit D)
enumerated these charges:

To your acceptance amounting to $14,449.15

Plus: Remitter's Commission 18.06

$14,567.21

Converted at 3/4 % P29,151.43

5% int. 5/17/49-10/19/52-1251 da. 4,995.68

P34,147.11

10% comm. on $14,449.15 2,911.51

 Documentary stamps 8.70

Air Mail 2.00

17% Excise Tax on P29,151.43 4,955.74

Other charges
3.00

From the above it may be deduced that the amount of the draft had been remitted or paid to the New York
Agency in May 1949, for the reason that Zulueta is charged with remitter's commission" and 5% interest on the
amount of the draft (and such commission) beginning from May 17, 1949. This necessarily impllies that in
accordance with Exhibit G, the New York Agency had been reimbursed of the draft's amount (or such amount
wasremitted) on May 17, 1949.10 Now, in May 1949 no 17% exchange tax was payable upon such remittance;
and the Manila office did not pay it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against appellant. So ordered.

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20,
1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and
dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC) is
hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisions
of this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuant
to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of
20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the
contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant
corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to
deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the
defendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and
assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma,
immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and
assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the
contract, that the defendant corporation, thru its general manager, took the first to open a letter of credit by
forwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application was
accompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover the
amount required to be deposited as a condition for the opening of letters of credit, we will appreciate it
if this application could be considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952,
and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would
therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the
extreme necessity for the immediate opening of the letter credit since she had by then made a tender to her
supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance
with the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them
before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a
letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the
condition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh.
10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application in
abeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition. As matter
of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In this
connection, please be advised that our application for opening of the letter of credit has been presented to the
bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to
aproximately $3,614,000.00 which we are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-
Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri
Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the
execution of the contract) the party named by the appellee as beneficiary of the letter of credit.1wph1.t

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit,
amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of
record that although the Burmese authorities had set August 4, 1952, as the deadline for the remittance of the
required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not
effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the
15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of
credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of
reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC,
communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and to
us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of Exhibits). This offer for substitution, however,
was rejected by the appellant in a resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused
her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected
she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was
brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of the
plaintiff-appellee.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted by
the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the
contemplated period. This failure must, therefore, be taken as the immediate cause for the consequent damage
which resulted. As it is then, the disposition of this case depends on a determination of who was responsible for
such failure. Stated differently, the issue is whether appellant's failure to open immediately the letter of credit in
dispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the contrary,
it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable instrument was not
promptly secured because the appellee , failed to seasonably furnish data necessary and required for opening
the same, namely, "(1) the amount of the letter of credit, (2) the person, company or corporation in whose favor
it is to be opened, and (3) the place and bank where it may be negotiated." Appellant would have this Court
believe, therefore, that had these informations been forthwith furnished it, there would have been no delay in
securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of
the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact.
Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation
of the ruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied,
therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to hold
trial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder the
lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to
name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts
were known to defendant even before the contract was executed because these facts were
necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she had
given the necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952) to
Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she
also pressed for the opening of the letter of credit on these occasions. These statements have not
been controverted and defendant NARIC, notwithstanding its previous intention to do so, failed to
present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which form part of the record of this case, it is clear
that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the
cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition
importation by the Bank for granting the same. We do not think the appellant corporation can refute the fact that
had it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit would
have been approved, opened and released as early as August 4, 1952. The letter of the Philippine National
Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of
credit ... has been approved by the Board of Directors with the condition that 50% marginal cash deposit be
paid and that drafts are to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of
the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as it
was well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letter
which accompanied the application filed by the appellant with the bank, a part of which letter was quoted earlier
in this decision. In the said accompanying correspondence, appellant admitted and owned that it did "not have
sufficient deposit with your institution (the PNB) with which to cover the amount required to be deposited as a
condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew
the bank requirements for opening letters of credit; second, that appellant also knew it could not meet those
requirement. When, therefore, despite this awareness that was financially incompetent to open a letter of credit
immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable,
confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for all and every
consequences that would result from the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it
should have a certained its ability and capacity to comply with the inevitably requirements in cash to
pay for such importation. Having announced the bid, it must be deemed to have impliedly assured
suppliers of its capacity and facility to finance the importation within the required period, especially
since it had imposed the supplier the 90-day period within which the shipment of the rice must be
brought into the Philippines. Having entered in the contract, it should have taken steps immediately to
arrange for the letter of credit for the large amount involved and inquired into the possibility of its
issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11 of
the Civil Code which provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a
decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the
losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncada v.
Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil
v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The
phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and
faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil Code of the
Philippines, citing authorities, p. 103.)
The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the
originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have
derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and
convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez
v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case and upon
which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of
Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F.
Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiff-
appellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her
supplier in Burma. Considering freights, insurance and charges incident to its shipment here and the forfeiture
of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity of
the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the
evidence and record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is
$180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of
the rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit
per metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the
contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by Exhibit
HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of credit,
Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and
Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per
ton for shipping and other handling expenses, so that she is already assured of a net profit of Fourteen
Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six
Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit
damages in the total sum of $406,000.00 from the failure of the projected contract to materialize. This
counterclaim was supported by a cost study made and submitted by the appellant itself and wherein it was
illustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amount
asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite a
number of expenses which the appellee under the contract, did not have to incur. Thus, under the cost study
submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import
License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400
000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee was
exempt, we are convicted of the fairness of the judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the decision
appeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso.
Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the
time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be
converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Should
it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange prevailing on
the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for
breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of money
expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the
rate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date of
defendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same
was laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now we
have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of
no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc.,
G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other than
Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the most
that could be demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate of
exchange at the time the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that
the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the
obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company,
in the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs.

G.R. No. L-49494 May 31, 1979

NELIA G. PONCE and VICENTE C. PONCE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents.
Romeo L. Mendoza & Gallardo S. Tongohan for petitioners.
Ramon M. Velayo for private respondent.

MELENCIO-HERRERA, J.:
This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8,
1978, reconsidering its Decision dated December 17, 1977 and reversing the judgment of the Court of First
Instance of Manila in favor of petitioners as well as the Resolutions, dated July 6, 1978 and November 27,
1978, denying petitioners' Motion for Reconsideration.
The factual background of the case is as follows:
On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Dio
executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine
Currency, payable, without interest, on or before July 31, 1969. It was further provided therein that should
the indebtedness be not paid at maturity, it shall draw interest at 12% per annum, without demand; that
should it be necessary to bring suit to enforce pay ment of the note, the debtors shall pay a sum equivalent
to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus
interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over
their properties or of the Carmen Planas Memorial, Inc.
Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce
and her husband) filed, on July 27, 1970, a Complaint against them with the Court of First Instance of Manila
for the recovery of the principal sum of P814,868.42, plus interest and damages.
Defendant Ma. Aurora C. Dio's Answer consisted more of a general denial and the contention that she did
not borrow any amount from plaintiffs and that her signature on the promissory note was obtained by
plaintiffs on their assurance that the same was for " formality only."
Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express
the true intent and agreement of the parties, the true agreement being that the obligation therein mentioned
would be assumed and paid entirely by defendant Felisa L. Mendoza; that she had signed said document only
as President of the Carmen Planas Memorial, Inc., and that she was not to incur any personal obligation as to
the payment thereof because the same would be repaid by defendant Mendoza and/or Carmen Planas
Memorial, Inc.
In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the
promissory note, but averred that it was a recapitulation of a series of transactions between her and the
plaintiffs, "with defendant Ma. Aurora C. Dio and Jesusa B. Afable coming only as accomodation parties." As
affirmative defense, defendant Mendoza contended that the promissory note was the result of usurious
transactions, and, as counterclaim, she prayed that plaintiffs be ordered to account for all the interests paid.
Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of
usury.
After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her
co-debtors had repeatedly failed to appear before the trial Court for the presentation of their evidence.
On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L.
Mendoza and Ma. Aurora C. Dio , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12%
interest per annum from July 31, 1969 until full payment, and a sum equivalent to 10% of the total amount
due as attorney's fees and costs.
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract
under consideration involved the payment of US dollars and was, therefore, illegal; and that under the in pari
delicto rule, since both parties are guilty of violating the law, neither one can recover. It is to be noted that
said defense was not raised in her Answer.
On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In
a Resolution dated February 27, 1978, the Court of Appeals,** denied respondent's Motion for
Reconsideration. However, in a Resolution dated June 8, 1978, the Court of Appeals acting on the Second
Motion for Reconsideration filed by private respondent, set aside the Decision of December 13, 1977,
reversed the judgment of the trial Court and dismissed the Complaint. The Court of Appeals opined that the
intent of the parties was that the promissory note was payable in US dollars, and, therefore, the transaction
was illegal with neither party entitled to recover under the in pari delicto rule.
Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November
27, 1978, petitioners filed the instant Petition raising the following Assignments of Error.
I
THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING
THE TRANSACTION OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE
PARTIES OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE
TRUE INTENT OR AGREEMENT OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS
EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE TERMS.
II
THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN
ASIAN ACT TO ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION
OF THE PARTIES HEREIN.
III
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B.
AFABLE COULD NOT FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC
ACT 529 AND THE DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN
THE TRIAL.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT
529 COVERS THE PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE
PARTIES AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS.
ALFREDO J. LUZ, NO.-27782, JULY 31, 1970.
In the Resolution dated June 8, 1978, the Court of Appeals made the following observations:
We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the
defendants to the plaintiffs. However, the sole issue raised in this second motion for reconconsideration is
not the existence of the obligation itself but the legality of the subject matter of the contract. If the subject
matter is illegal and against public policy, the doctrine of pari delicto applies.
xxx xxx xxx
We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note
does not mention any obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an
agreement that he would be paid in dollars by the defendants. The promissory note is payable in U.S. donors.
The in. tent of the parties prevails over the bare words of the written contracts.
xxx xxx xxx
The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari
delicto, no recovery can be made in favor of the plaintiffs for being themselves guilty of violating the law. 1
We are constrained to disagree.
Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950:
Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any
obligation contracted in the Philippines which provision purports to give the obligee the right to require
payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of
money of the Philippines measured thereby, be as it is hereby declared against public policy, and null voice
and of no effect and no such provision shall be contained in, or made with respect to, any obligation
hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the
proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by
foreign governments, their agencies and instrumentalities, and international financial and banking
institutions so long as the funds are Identifiable, as having emanated from the sources enumerated above;
(b) transactions affecting high priority economic projects for agricultural industrial and power development
as may be determined by the National Economic Council which are financed by or through foreign funds; (c)
forward exchange transactions entered into between banks or between banks and individuals or juridical
persons; (d) import-export and other international banking financial investment and industrial transactions.
With the exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which
cases the terms of the parties' agreement shag apply, every other domestic obligation heretofore or
hereafter incurred whether or not any such provision as to payment is contained therein or made with-
respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is
legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment
of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it
shall be discharge in Philippine currency measured at the prevailing rates of exchange at the time the
obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the
currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall
prevail All coin and currency, including Central Bank notes, heretofore and hereafter issued and d by the
Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA
4100, Section 1, approved June 19, 1964) (Empahsis supplied).
It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what
the law specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor's
claim for payment, as it specifically provides that "every other domestic obligation ... whether or not any
such provision as to payment is contained therein or made with respect thereto, shall be discharged upon
payment in any coin or currency which at the time of payment is legal tender for public and private debts." A
contrary rule would allow a person to profit or enrich himself inequitably at another's expense.
As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the
obligation in Philippine currency, i.e., P814,868.42. So that, while the agreement between the parties
originally involved a dollar transaction and that petitioners expected to be paid in the amount of
US$194,016.29, petitioners are not now insisting on their agreement with respondent Afable for the payment
of the obligation in dollars. On the contrary, they are suing on the basis of the promissory note whereby the
parties have already agreed to convert the dollar loan into Philippine currency at the rate of P4.20 to
$1.00. 2 It may likewise be pointed out that the Promissory Note contains no provision "giving the obligee the
right to require payment in a particular kind of currency other than Philippine currency, " which is what is
specifically prohibited by RA No. 529.
At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in
Philippine currency and consider that the intention of the parties was really to provide for payment of the
obligation would be made in dollars, petitioners can still recover the amount of US$194,016.29, which
respondent Afable and her co-debtors do not deny having received, in its peso equivalent. As held
in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta vs. National Rice &
Corn Corp., 3if there is any agreement to pay an obligation in a currency other than Philippine legal tender,
the same is nun and void as contrary to public policy, pursuant to Republic Act No. 529, and the most that
could be demanded is to pay said obligation in Philippine currency. In other words, what is prohibited by RA
No. 529 is the payment of an obligation in dollars, meaning that a creditor cannot oblige the debtor to pay
him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed
should be expressed in Philippine currency on the basis of the current rate of exchange at the time of
payment. 4
The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by
petitioners.
WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27,
1978 are hereby set aside, and judgment is hereby rendered reinstating the Decision of the Court of First
Instance of Manila.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-29900 June 28, 1974

IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitioner-
appellant,
vs.
SEGUNDINA CHUA VDA. DE PALANCA, oppositor-appellee.
Florentino B. del Rosario for petitioner-appellant.

Manuel V. San Jose for oppositor-appellee.

FERNANDO, J.:p

There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several
points were raised, the decisive issue is whether a creditor is barred by prescription in his attempt to collect on
a promissory note executed more than fifteen years earlier with the debtor sued promising to pay either upon
receipt by him of his share from a certain estate or upon demand, the basis for the action being the latter
alternative. The lower court held that the ten-year period of limitation of actions did apply, the note being
immediately due and demandable, the creditor admitting expressly that he was relying on the wording "upon
demand." On the above facts as found, and with the law being as it is, it cannot be said that its decision is
infected with error. We affirm.

From the appealed decision, the following appears: "The parties in this case agreed to submit the matter for
resolution on the basis of their pleadings and annexes and their respective memoranda submitted. Petitioner
George Pay is a creditor of the Late Justo Palanca who died in Manila on July 3, 1963. The claim of the
petitioner is based on a promissory note dated January 30, 1952, whereby the late Justo Palanca and Rosa
Gonzales Vda. de Carlos Palanca promised to pay George Pay the amount of P26,900.00, with interest
thereon at the rate of 12% per annum. George Pay is now before this Court, asking that Segundina Chua vda.
de Palanca, surviving spouse of the late Justo Palanca, he appointed as administratrix of a certain piece of
property which is a residential dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration No.
3114 in the name of Justo Palanca, assessed at P41,800.00. The idea is that once said property is brought
under administration, George Pay, as creditor, can file his claim against the administratrix." 1 It then stated that
the petition could not prosper as there was a refusal on the part of Segundina Chua Vda. de Palanca to
be appointed as administratrix; that the property sought to be administered no longer belonged to the
debtor, the late Justo Palanca; and that the rights of petitioner-creditor had already prescribed. The
promissory note, dated January 30, 1962, is worded thus: " `For value received from time to time since
1947, we [jointly and severally promise to] pay to Mr. [George Pay] at his office at the China Banking
Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at
the rate of 12% per annum upon receipt by either of the undersigned of cash payment from the Estate of
the late Don Carlos Palanca orupon demand'. . . . As stated, this promissory note is signed by Rosa
Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then came this paragraph: "The Court has
inquired whether any cash payment has been received by either of the signers of this promissory note
from the Estate of the late Carlos Palanca. Petitioner informed that he does not insist on this provision but
that petitioner is only claiming on his right under the promissory note ." 3 After which, came the ruling that
the wording of the promissory note being "upon demand," the obligation was immediately due. Since it
was dated January 30, 1952, it was clear that more "than ten (10) years has already transpired from that
time until to date. The action, therefore, of the creditor has definitely prescribed." 4 The result, as above
noted, was the dismissal of the petition.

In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the correctness of
the rulings of the lower court as to the effect of the refusal of the surviving spouse of the late Justo Palanca to
be appointed as administratrix, as to the property sought to be administered no longer belonging to the debtor,
the late Justo Palanca, and as to the rights of petitioner-creditor having already prescribed. As noted at the
outset, only the question of prescription need detain us in the disposition of this appeal. Likewise, as intimated,
the decision must be affirmed, considering the clear tenor of the promissory note.
From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that
the satisfaction of his credit could he realized either through the debtor sued receiving cash payment from the
estate of the late Carlos Palanca presumptively as one of the heirs, or, as expressed therein, "upon demand."
There is nothing in the record that would indicate whether or not the first alternative was fulfilled. What is
undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory note on
January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit is rather obvious.
Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article
1113 of the Spanish Civil Code of 1889. As far back as Floriano v. Delgado, 5 a 1908 decision, it has been
applied according to its express language. The well-known Spanish commentator, Manresa, on this point,
states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de este, se
fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y que es consecuencia
de aquel: la exigibilidad immediata." 6

The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was
much too late. For again, according to the Civil Code, which is based on Section 43 of Act No. 190, the
prescriptive period for a written contract is that of ten years. 7 This is another instance where this Court has
consistently adhered to the express language of the applicable norm. 8 There is no necessity therefore of
passing upon the other legal questions as to whether or not it did suffice for the petition to fail just
because the surviving spouse refuses to be made administratrix, or just because the estate was left with
no other property. The decision of the lower court cannot be overturned.

WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.

G.R. No. L-77194 March 15, 1988

VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR VILLANUEVA, JOSE ABELLO,
REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER LACSON, TITO
TAGARAO, EDUARDO SUATENGCO, AUGUSTO LLAMAS, RODOLFO SIASON, PACIFICO MAGHARI,
JR., JOSE JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, respondents, ANGEL H. SEVERINO, JR., GLICERIO JAVELLANA, GLORIA P. DE LA
PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.

MELENCIO-HERRERA, J.:

Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in their individual
capacities and in representation of other sugar producers, planters and millers, said to be so numerous that it is
impracticable to bring them all before the Court although the subject matter of the present controversy is of
common interest to all sugar producers, whether parties in this action or not.

Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government office tasked
with the function of regulating and supervising the sugar industry until it was superseded by its co-respondent
Sugar Regulatory Administration (SRA, for brevity) under Executive Order No. 18 on May 28, 1986. Although
said Executive Order abolished the PHILSUCOM, its existence as a juridical entity was mandated to continue
for three (3) more years "for the purpose of prosecuting and defending suits by or against it and enables it to
settle and close its affairs, to dispose of and convey its property and to distribute its assets."

Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking corporation.

Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their sugarcane in different mill
districts of Negros Occidental, were allowed to intervene by the Court, since they have common cause with
petitioners and respondents having interposed no objection to their intervention. Subsequently, on January
14,1988, the National Federation of Sugar Planters (NFSP) also moved to intervene, which the Court allowed
on February 16,1988.

Petitioners and Intervenors have come to this Court praying for a Writ of mandamus commanding respondents:

TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS

BANK BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE
SAID BANK; NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE
SUGAR COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO
ARE THE TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES VALUED AT
P36,548.000.00, AND 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE SAID
INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF Pl.00 PER PICUL FROM
SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR 1978-79
UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D. # 388.

Respondent Bank does not take issue with either petitioners or its correspondents as it has no beneficial or
equitable interest that may be affected by the ruling in this Petition, but welcomes the filing of the Petition since
it will settle finally the issue of legal ownership of the questioned shares of stock.

Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no trust results
from Section 7 of P.D. No. 388; that the stabilization fees collected are considered government funds under the
Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to the sugar producers
would be irregular, if not illegal; and that this suit is barred by laches.

The Solicitor General aptly summarizes the basic issues thus: (1) whether the stabilization fees collected from
sugar planters and millers pursuant to Section 7 of P.D. No. 388 are funds in trust for them, or public funds; and
(2) whether shares of stock in respondent Bank paid for with said stabilization fees belong to the PHILSUCOM
or to the different sugar planters and millers from whom the fees were collected or levied.

P. D. No. 388, promulgated on February 2,1974, which created the PHILSUCOM, provided for the collection of
a Stabilization Fund as follows:

SEC. 7. Capitalization, Special Fund of the Commission, Development and Stabilization Fund.
There is hereby established a fund for the commission for the purpose of financing the
growth and development of the sugar industry and all its components, stabilization of the
domestic market including the foreign market to be administered in trust by the Commission
and deposited in the Philippine National Bank derived in the manner herein below cited from
the following sources:

a. Stabilization fund shall be collected as provided for in the various provisions of this Decree.
 b. Stabilization fees shall be collected from planters and millers in the amount of Two (P2.00)
Pesos for every picul produced and milled for a period of five years from the approval of this
Decree and One (Pl.00) Peso for every picul produced and milled every year thereafter.

Provided: That fifty (P0.50) centavos per picul of the amount levied on planters, millers and
traders under Section 4(c) of this Decree will be used for the payment of salaries and wages
of personnel, fringe benefits and allowances of officers and employees for the purpose of
accomplishing and employees for the purpose of accomplishing the efficient performance of
the duties of the Commission.

Provided, further: That said amount shall constitute a lien on the sugar quedan and/or
warehouse receipts and shall be paid immediately by the planters and mill companies, sugar
centrals and refineries to the Commission. (paragraphing and bold supplied).

Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be administered in trust by the
Commission." However, while the element of an intent to create a trust is present, a resulting trust in favor of
the sugar producers, millers and planters cannot be said to have ensued because the presumptive intention of
the parties is not reasonably ascertainable from the language of the statute itself.

The doctrine of resulting trusts is founded on the presumed intention of the parties; and as a
general rule, it arises where, and only where such may be reasonably presumed to be the
intention of the parties, as determined from the facts and circumstances existing at the time of
the transaction out of which it is sought to be established (89 C.J.S. 947).

No implied trust in favor of the sugar producers either can be deduced from the imposition of the levy. "The
essential Idea of an implied trust involves a certain antagonism between the cestui que trust and the trustee
even when the trust has not arisen out of fraud nor out of any transaction of a fraudulent or immoral character
(65 CJ 222). It is not clearly shown from the statute itself that the PHILSUCOM imposed on itself the obligation
of holding the stabilization fund for the benefit of the sugar producers. It must be categorically demonstrated
that the very administrative agency which is the source of such regulation would place a burden on itself
(Batchelder v. Central Bank of the Philippines, L-25071, July 29,1972,46 SCRA 102, citing People v. Que Po
Lay, 94 Phil. 640 [1954]).

Neither can petitioners place reliance on the history of respondents Bank. They recite that at the beginning, the
Bank was owned by the Roman-Rojas Group. Because it underwent difficulties early in the year 1978, Mr.
Roberto S. Benedicto, then Chairman of the PHILSUCOM, submitted a proposal to the Central Bank for the
rehabilitation of the Bank. The Central Bank acted favorably on the proposal at the meeting of the Monetary
Board on March 31, 1978 subject to the infusion of fresh capital by the Benedicto Group. Petitioners maintain
that this infusion of fresh capital was accomplished, not by any capital investment by Mr. Benedicto, but by
PHILSUCOM, which set aside the proceeds of the P1.00 per picul stabilization fund to pay for its subscription in
shares of stock of respondent Bank. It is petitioners' submission that all shares were placed in PHILSUCOM's
name only out of convenience and necessity and that they are the true and beneficial owners thereof.

In point of fact, we cannot see our way clear to upholding petitioners' position that the investment of the
proceeds from the stabilization fund in subscriptions to the capital stock of the Bank were being made for and
on their behalf. That could have been clarified by the Trust Agreement, dated May 28, 1986, entered into
between PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge, and respondent
RPB- Trust Department' as "Trustee," acknowledging that PHILSUCOM holds said shares for and in behalf of
the sugar producers," the latter "being the true and beneficial owners thereof." The Agreement, however, did
not get off the ground because it failed to receive the approval of the PHILSUCOM Board of Commissioners as
required in the Agreement itself.

The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of the adverse opinion of
the SRA, Resident Auditor, dated June 25,1986, which was aimed by the Chairman of the Commission on
Audit, on January 26,1987.

On February 19, 1987, the SRA, resolved to revoke the Trust Agreement "in the light of the ruling of the
Commission on Audit that the aforementioned Agreement is of doubtful validity."

From the legal standpoint, we find basis for the opinion of the Commission on Audit reading:

That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory

Administration, in particular, owns and stocks. While it is true that the collected stabilization
fees were set aside by PHILSUCOM to pay its subscription to RPB, it did not collect said fees
for the account of the sugar producers. That stabilization fees are charges/levies on sugar
produced and milled which accrued to PHILSUCOM under PD 338, as amended. ...

The stabilization fees collected are in the nature of a tax, which is within the power of the State to impose for
the promotion of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D.
No. 388). The collections made accrue to a "Special Fund," a "Development and Stabilization Fund," almost
Identical to the "Sugar Adjustment and Stabilization Fund" created under Section 6 of Commonwealth Act
567. 1 The tax collected is not in a pure exercise of the taxing power. It is levied with a regulatory purpose,
to provide means for the stabilization of the sugar industry. The levy is primarily in the exercise of the
police power of the State (Lutz vs. Araneta, supra.).

The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the population
of the State is affected to such an extent by public interests as to be within the police power of
the sovereign. (Johnson vs. State ex rel. Marey, 128 So. 857, cited in Lutz vs. Araneta, supra).

The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a
special purpose that of "financing the growth and development of the sugar industry and all its components,
stabilization of the domestic market including the foreign market the fact that the State has taken possession of
moneys pursuant to law is sufficient to constitute them state funds, even though they are held for a special
purpose (Lawrence vs. American Surety Co., 263 Mich 586, 249 ALR 535, cited in 42 Am. Jur. Sec. 2, p. 718).
Having been levied for a special purpose, the revenues collected are to be treated as a special fund, to be, in
the language of the statute, "administered in trust' for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of the Government. That is
the essence of the trust intended (See 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935
Constitution, Article VI, Sec. 23(l]). 2

The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are deposited
in the Philippine National Bank and not in the Philippine Treasury, moneys from which may be paid out only in
pursuance of an appropriation made by law (1987) Constitution, Article VI, Sec. 29[1],1973 Constitution, Article
VIII, Sec. 18[l]).

That the fees were collected from sugar producers, planters and millers, and that the funds were channeled to
the purchase of shares of stock in respondent Bank do not convert the funds into a trust fired for their benefit
nor make them the beneficial owners of the shares so purchased. It is but rational that the fees be collected
from them since it is also they who are to be benefited from the expenditure of the funds derived from it. The
investment in shares of respondent Bank is not alien to the purpose intended because of the Bank's character
as a commodity bank for sugar conceived for the industry's growth and development. Furthermore, of note is
the fact that one-half, (1/2) or PO.50 per picul, of the amount levied under P.D. No. 388 is to be utilized for the
"payment of salaries and wages of personnel, fringe benefits and allowances of officers and employees of
PHILSUCOM" thereby immediately negating the claim that the entire amount levied is in trust for sugar,
producers, planters and millers.

To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be
used for purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be
utilized for the benefit of the entire sugar industry, "and all its components, stabilization of the domestic market,"
including the foreign market the industry being of vital importance to the country's economy and to national
interest.

WHEREFORE, the Writ of mandamus is denied and the Petition hereby dismissed. No costs.

This Decision is immediately executory.

SO ORDERED.

G.R. No. 74451 May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL CO., respondents.

William R. Veto for petitioner.

Pelaez, Adriano & Gregorio for respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse
judgment against it rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority
Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, 2 be annulled and set
aside.

The facts pertinent to this Petition, as summarized by the Trial Court and adopted by reference by Respondent
Appellate Court, emanated from the case entitled "Edward J. Nell Co. vs. Liberato V. Casals, Casville
Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil Case No.
25112), and read:

From the evidence submitted by the parties, the Court finds that sometime in 1975 defendant
Liberato Casals went to plaintiff Edward J. Nell Company and told its senior sales engineer,
Amado Claustro that he was interested in buying one of the plaintiff's garrett skidders. Plaintiff
was a dealer of machineries, equipment and supplies. Defendant Casals represented himself
as the majority stockholder, president and general manager of Casville Enterprises, Inc., a
firm engaged in the large scale production, procurement and processing of logs and lumber
products, which had a plywood plant in Sta. Ana, Metro Manila.

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs
executive vice-president, Apolonio Javier, for negotiation in connection with the manner of
payment. When Javier asked for cash payment for the skidders, defendant Casals informed
him that his corporation, defendant Casville Enterprises, Inc., had a credit line with defendant
Equitable Banking Corporation. Apparently, impressed with this assertion, Javier agreed to
have the skidders paid by way of a domestic letter of credit which defendant Casals promised
to open in plaintiffs favor, in lieu of cash payment. Accordingly, on December 22, 1975,
defendant Casville, through its president, defendant Casals, ordered from plaintiff two units of
garrett skidders ...

The purchase order for the garrett skidders bearing No. 0051 and dated December 22, 1975
(Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described in the bulletin

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE EDWARD J.

NELL CO. or ORDER payable in thirty six (36) months and will be opened within ninety (90)
days after date of shipment. at first installment will be due one hundred eighty (180) days after
date of shipment. Interest-14% per annum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the
delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de Oro, on
or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the information
that an irrevocable Domestic Letter of Credit would be opened in plaintiff's favor on or before
June 30, 1976 under the terms and conditions agreed upon (Exhibit "B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff shipped
to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the amount of
P10,640.00 because of the verbal assurance of defendant Casville that it would be covered by
the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of P300,000.00
postdated August 4, 1976, which was followed by another check of same date. Plaintiff
considered these checks either as partial payment for the skidder that was already delivered
to Cagayan de Oro or as reimbursement for the marginal deposit that plaintiff was supposed
to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that
their application for a letter of credit for the payment of the Garrett skidders had been
approved by the Equitable Banking Corporation. However, the defendants said that they
would need the sum of P300,000.00 to stand as collateral or marginal deposit in favor of
Equitable Banking Corporation and an additional amount of P100,000.00, also in favor of
Equitable Banking Corporation, to clear the title of the Estrada property belonging to
defendant Casals which had been approved as security for the trust receipts to be issued by
the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by defendant Casville

Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate the
transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of
P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable to the
order of Equitable Banking Corporation and with the following notation or memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance
on Estrada Property to be used as security for trust receipt for opening L/C of
Garrett Skidders in favor of the Edward J. Nell Co." Said check together with
the cash disbursement voucher (Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening of L/C for
account of Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were presented to
Severino Santos, executive vice president of defendant bank, Santos did not accept them
because the terms and conditions required by the bank for the opening of the letter of credit
had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to
cover its purchase from plaintiff of two Garrett skidders, under the following terms and
conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for
P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to secure the
Trust Receipts; e) We shall chattel mortgage the equipments purchased even after payment
of the first L/C as additional security for the balance of the second L/C and f) Other conditions
you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was
ready to open the letters of credit upon defendant's compliance of the following terms and
conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust
Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and conditions
that our bank may impose.
Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three postdated
checks. In said letter, plaintiff was informed of the requirements imposed by the defendant
bank pointing out that the "cash marginal required under paragraph (c) is 30% of
Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada property or a
total of P427,300.00" and that the check covering said amount should be made payable "to
the Order of EQUITABLE BANKING CORPORATION for the account of Casville Enterprises
Inc." Defendant Casville also stated that the three (3) enclosed postdated checks were
intended as replacement of the checks that were previously issued to plaintiff to secure the
sum of P427,300.00 that plaintiff would advance to defendant bank for the account of
defendant Casville. All the new checks were postdated November 19, 1976 and drawn in the
sum of Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H").

On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the Register
of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal covering two
pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a

representative of defendant Casville, went to see Severino Santos to find out the status of the
credit line being sought by defendant Casville. Santos assured Umali that the letters of credit
would be opened as soon as the requirements imposed by defendant bank in its letter dated
August 11, 1976 had been complied with by defendant Casville.

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of
EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and drawn
against the first National City Bank (Exhibit "E-l"). The check did not contain the notation found
in the previous check issued by the plaintiff (Exhibit "2") but the substance of said notation
was reproduced in a covering letter dated August 16,1976 that went with the check (Exhibit
"E"). Both the check and the covering letter were sent to defendant bank through defendant
<re||an1w>

Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals
because it believed that no one, including defendant Casals, could encash the same as it was
made payable to the defendant bank alone. Besides, defendant Casals was known to the
bank as the one following up the application for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant bank and the bank teller accepted the same for
deposit in defendant Casville's checking account. After depositing said check, defendant
Casville, acting through defendant Casals, then withdrew all the amount deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three checks
(Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by defendant
Casville as collateral were all dishonored for having been drawn against a closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed the
mortgage executed by defendant Casville on the Estrada property which was sold in a public
auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit knowing
that it took time to process the same. However, when the three checks issued to it by
defendant Casville were dishonored, plaintiff became apprehensive and sent Umali on
November 29, 1976, to inquire about the status of the application for the letters of credit.
 When plaintiff was informed that no letters of credit were opened by the defendant bank in its
favor and then discovered that defendant Casville had in the meanwhile withdrawn the entire
amount of P427,300.00, without paying its obligation to the bank plaintiff filed the instant
action.

While the the instant case was being tried, defendants Casals and Casville assigned the
garrett skidder to plaintiff which credited in favor of defendants the amount of P450,000.00, as
partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they
show lack of interest in disputing plaintiff's claim by not appearing in most of the hearings, but
they also assigned to plaintiff the garrett skidder which is an action of clear recognition of their
liability.

What is left for the Court to determine, therefore, is only the liability of defendant bank to
plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the pertinent
portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are ordered
to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the amount of
plaintiff's check which defendant bank erroneously credited to the account of defendant
Casville and which defendants Casal and Casville misappropriated, with 12% interest thereon
from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the sum
of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly, the Bank) is
liable to private respondent Edward J. Nell Co. (NELL, for short) for the value of the second check issued by
NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE

ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously credited to the Casville
account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay NELL the value of
the check in the sum of P427,300.00, with legal interest. Explained the Trial Court:
 The Court finds that the check in question was payable only to the defendant bank and to no
one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of
the check after or under the name of defendant bank, the payee was still the latter. The
addition of said words did not in any way make Casville Enterprises, Inc. the Payee of the
instrument for the words merely indicated for whose account or in connection with what
account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not negotiable
since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and
"NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING
CORPORATION.

But said teller should have exercised more prudence in the handling of Id check because it
was not made out in the usual manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and he should have clarified the
matter with his superiors. Instead of doing so, however, the teller decided to rely on his own
judgment and at the risk of making a wrong decision, credited the entire amount in the name
of defendant Casville although the latter was not the payee named in the check. Such mistake
was crucial and was, without doubt, the proximate cause of plaintiffs defraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of
Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant bank
to apply the value of the check as payment for the letter of credit which Casville Enterprises,
Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5). The issuance of the
subject check was precisely to meet the bank's prior requirement of payment before issuing
the letter of credit previously applied for by Casville Enterprises in favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE

ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. 3 As worded, it could be accepted as deposit to the account of the party named after the
symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed
against NELL who caused the ambiguity and could have also avoided it by the exercise of a little more
care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable.
Neither was it a crossed check. The rubber-stamping transversall on the face of the subject check of the words
"Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-negotiable, Teller- No. 4,
August 17, 1976," separately boxed, was made only by the Bank teller in accordance with customary bank
practice, and not by NELL as the drawer of the check, and simply meant that thereafter the same check could
no longer be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16 August 1976
check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its own defraudation: (a) The
original check of 5 August 1976, Exhibit "2," was payable to the order solely of "Equitable Banking
Corporation." NELL changed the payee in the subject check, Exhibit "E", however, to "Equitable Banking
Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also eliminated both the cash
disbursement voucher accompanying the check which read:

Payment for marginal deposit and other expense re opening of L/C for account of Casville
Enterprises.

and the memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in favor of
the Edward Ashville J Nell Co.

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August 1976,
which Casals, sinisterly enough, suppressed from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously, had his own
antagonistic interests to promote. Thus it was that Casals did not purposely present the subject check to the
Executive Vice-President of the Bank, who was aware of the negotiations regarding the Letter of Credit, and
who had rejected the previous check, Exhibit "2," including its three documents because the terms and
conditions required by the Bank for the opening of the Letter of Credit had not yet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even
advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of goods, the price of
which is to be covered by a letter of credit, to advance the marginal deposit for the same.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine to secure the
subject check and had accepted the deposit with it of two (2) titles of real properties as collateral for said
postdated checks. Thus, NELL was erroneously confident that its interests were sufficiently protected. Never
had it suspected that those postdated checks would be dishonored, nor that the subject check would be utilized
by Casals for a purpose other than for opening the letter of credit.

In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville Enterprises to
perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau, et al., vs. Nano, et al., 61
Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of
the Philippines vs. Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).

... As between two innocent persons, one of whom must suffer the consequence of a breach
of trust, the one who made it possible by his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October 1985,
and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, are hereby
SET ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI. is modified in that petitioner
Equitable Banking Corporation is absolved from any and all liabilities to the private respondent, Edward J. Nell
Company, and the Amended Complaint against petitioner bank is hereby ordered dismissed. No costs.

SO ORDERED.

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

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.

The Government Corporate Counsel for petitioner.

Lorenzo A. Sales for private respondents.

REGALADO , J.:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government Service Insurance
System (hereinafter referred to as GSIS) and subsequently, another deed of mortgage, dated April 14, 1958, in
connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A
parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City,
co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also
executed a 'promissory note" which states in part:

... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY,
promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P
11,500.00) Philippine Currency, with interest at the rate of six (6%) per centum compounded
monthly payable in . . . (120)equal monthly installments of . . . (P 127.65) each. 3

On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under
which they obligated themselves to assume the aforesaid obligation to the GSIS and to secure the release of
the mortgage covering that portion of the land belonging to herein private respondents and which was
mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5

Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold
at public auction on December 3, 1962. 6

More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint against the
petitioner and the Lagasca spouses in the former Court of

First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all
other documents executed in relation thereto in favor of the Government Service Insurance System" be
declared null and void. It was further prayed that they be allowed to recover said property, and/or the
GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land.
Additionally, they asked for actual and moral damages and attorney's fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-
owners who were solely benefited by the loans from the GSIS.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a
cause of action. 8

Said decision was reversed by the respondent Court of Appeals 9 which held that:

... although formally they are co-mortgagors, they are so only for accomodation (sic) in that
the GSIS required their consent to the mortgage of the entire parcel of land which was
covered with only one certificate of title, with full knowledge that the loans secured thereby
were solely for the benefit of the appellant (sic) spouses who alone applied for the loan.

xxxx

'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having
foreclosed the mortgage without having given sufficient notice to them as required either as to
their delinquency in the payment of amortization or as to the subsequent foreclosure of the
mortgage by reason of any default in such payment. The notice published in the newspaper,
'Daily Record (Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not the notice to which
the mortgagor is entitled upon the application being made for an extrajudicial foreclosure. ... 10

On the foregoing findings, the respondent court consequently decreed that-

In view of all the foregoing, the judgment appealed from is hereby reversed, and another one
entered (1) declaring the foreclosure of the mortgage void insofar as it affects the share of the
appellants; (2) directing the GSIS to reconvey to appellants their share of the mortgaged
property, or the value thereof if already sold to third party, in the sum of P 35,000.00, and (3)
ordering the appellees Flaviano Lagasca and Esther Lagasca to pay the appellants the sum of
P 10,00.00 as moral damages, P 5,000.00 as attorney's fees, and costs. 11

The case is now before us in this petition for review.

In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who
has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held
liable on the instrument to a holder for value although the latter knew him to be only an accommodation party.

This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note
hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable
instruments. These documents do not comply with the fourth requisite to be considered as such under Section
1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified
party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance
shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the documents
"only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the
loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This appears to be duly
supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS to arrange for and
deduct the monthly amortizations on the loans from the salary as an army officer of Flaviano Lagasca
without likewise affecting deductions from the salary of Isabelo Racho who was also an army sergeant.
Then there is also the undisputed fact, as already stated, that the Lagasca spouses executed a so-called
"Assumption of Mortgage" promising to exclude private respondents and their share of the mortgaged
property from liability to the mortgagee. There is no intimation that the former executed such instrument
for a consideration, thus confirming that they did so pursuant to their original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there was
no objection in the court below regarding the admissibility of the testimony and documents that were
presented to prove that the private respondents signed the mortgage papers just to accommodate their
co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls under the exception to
said rule, there being allegations in the complaint of private respondents in the court below regarding the
failure of the mortgage contracts to express the true agreement of the parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private respondents are without
liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is
contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not
parties to the principal obligation may secure the latter by pledging or mortgaging their own property

So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses
would not invalidate the mortgage with respect to private respondents' share in the property. In consenting
thereto, even assuming that private respondents may not be assuming personal liability for the debt, their share
in the property shall nevertheless secure and respond for the performance of the principal obligation. The
parties to the mortgage could not have intended that the same would apply only to the aliquot portion of the
Lagasca spouses in the property, otherwise the consent of the private respondents would not have been
required.

The supposed requirement of prior demand on the private respondents would not be in point here since the
mortgage contracts created obligations with specific terms for the compliance thereof. The facts further show
that the private respondents expressly bound themselves as solidary debtors in the promissory note
hereinbefore quoted.

Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of respondent
court that lack of notice to the private respondents of the extrajudicial foreclosure sale impairs the validity
thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No. 3135, as amended,
does not require personal notice on the mortgagor, quoting the requirement on notice in such cases as
follows:

Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at
least three public places of the municipality where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall also be published once a
week for at least three consecutive weeks in a newspaper of general circulation in the
municipality or city.

There is no showing that the foregoing requirement on notice was not complied with in the foreclosure sale
complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property or the payment of the value thereof Indubitably,
whether or not private respondents herein benefited from the loan, the mortgage and the extrajudicial
foreclosure proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of Appeals and
REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.