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NEGOTIABLE INSTRUMENTS

WEEK 1

Preliminary Consideration:

 Phil. Educ. Co. Inc. vs. Soriano, 39 SCRA 587

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:

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

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller
had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a
private checks were not generally accepted in payment of money orders, the teller advised him to see the
Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day notice was likewise served upon all
banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of America,
and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face
value of P200.00.

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On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of
America that money order No. 124688 attached to his letter had been found to have been irregularly
issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing
account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with
the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his
office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request
was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice
for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable
doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying
for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to
15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand

the notice given to the Bank of America on September 27, 1961, deducting from said
Bank's clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted
the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and
will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26,
1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post
Office, and that money orders, once issued, create a contractual relationship of debtor and creditor,

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respectively, between the government, on the one hand, and the remitters payees or endorses, on the
other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For
this reason, ours are generally construed in accordance with the construction given in the United States
to their own postal statutes, in the absence of any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the
reason behind this rule being that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a governmental power for
the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For instance, such
laws and regulations usually provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of
the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is deemed necessary." The conditions
thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving advice that the amount represented by the money order
in question had been deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand,
and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof
on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not
issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In
reality, however, said legal provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon the privilege granted to the
Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office.
Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth
assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with
costs.

 PAL vs. CA, 181 SCRA 557

Republic of the Philippines

SUPREME COURT
Manila

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EN BANC

G.R. No. L-49188 January 30, 1990

PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila,
Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, respondents.

GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental
question. Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery
to prevail over a more discerning and just approach? Should we not apply the ancient rule of statutory
construction that laws are to be interpreted by the spirit which vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari
against the order of the Court of First Instance of Manila which issued an alias writ of execution against
the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when
respondent Amelia Tan, under the name and style of Able Printing Press commenced a complaint for
damages before the Court of First Instance of Manila. The case was docketed as Civil Case No. 71307,
entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P.
Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against
petitioner Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual
damages, with legal interest thereon from plaintiffs extra-judicial demand made by the
letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00,
representing the unrealized profit of 10% included in the contract price of P200,000.00
plus legal interest thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and
for moral damages, with legal interest thereon from July 20, 1 967;

4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages
as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

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On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-
G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of
P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA
Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a
motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for
reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory and on
May 31, 1977, judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia
Tan filed a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of
Appeals. On October 11, 1977, the trial court, presided over by Judge Galano, issued its order of
execution with the corresponding writ in favor of the respondent. The writ was duly referred to Deputy
Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ
of execution stating that the judgment rendered by the lower court, and affirmed with modification by the
Court of Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of
execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the
respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said
Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering
the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to
surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon
Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent
Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of
Execution" with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge
issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of
Execution with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for
partial alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment
rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the
enforcement thereof. (CA Rollo, p. 34)

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On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day
directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal
interest thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through
a letter. Levy was also ordered for the further sum of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no
return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had
already been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by
the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository
bank of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its
manager and garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of
May 16, 1978. Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE

ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT

OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT

THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT

DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the implementing
officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here obtaining is
justified because even with the absence of a Sheriffs return on the original writ, the unalterable
fact remains that such a return is incapable of being obtained (sic) because the officer who is to
make the said return has absconded and cannot be brought to the Court despite the earlier order
of the court for him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition).
Obviously, taking cognizance of this circumstance, the order of May 11, 1978 directing the
issuance of an alias writ was therefore issued. (Annex D. Petition). The need for such a return as
a condition precedent for the issuance of an alias writ was justifiably dispensed with by the court
below and its action in this regard meets with our concurrence. A contrary view will produce an
abhorent situation whereby the mischief of an erring officer of the court could be utilized to
impede indefinitely the undisputed and awarded rights which a prevailing party rightfully deserves
to obtain and with dispatch. The final judgment in this case should not indeed be permitted to

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become illusory or incapable of execution for an indefinite and over extended period, as had
already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it
ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the
fruit and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of
Tax Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA
697, 698 [1967]). A judgment cannot be rendered nugatory by the unreasonable application of a strict rule
of procedure. Vested rights were never intended to rest on the requirement of a return, the office of which
is merely to inform the court and the parties, of any and all actions taken under the writ of execution.
Where such information can be established in some other manner, the absence of an executing officer's
return will not preclude a judgment from being treated as discharged or being executed through an alias
writ of execution as the case may be. More so, as in the case at bar. Where the return cannot be
expected to be forthcoming, to require the same would be to compel the enforcement of rights under a
judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a
judgment is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v.
Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his
judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ of
execution is the issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff
by check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won
her case should not be adjudged as having sued in vain. To decide otherwise would not only give her an
empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by
PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan
won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly
declared as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what,
technically, she should have been paid from the start, before 1967, without need of her going to court to
enforce her rights. And all because PAL did not issue the checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his
name did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the proper
person. Article 1240 of the Civil Code provides:

Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. (Emphasis supplied)

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Thus, payment must be made to the obligee himself or to an agent having authority, express or implied,
to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made
to one having apparent authority to receive the money will, as a rule, be treated as though actual authority
had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the
creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of
money due on ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See
40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the payment
to such a person so authorized is deemed payment to the creditor. Under ordinary circumstances,
payment by the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish
the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in
checks. The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a
debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402).
Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no
authority to accept anything other than money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar,
does not, per se, operate as a discharge of the judgment debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil
Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60,
61). A check, whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually realized (Art.
1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have
been no payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL.
The theory is that she has received no value for what had been awarded her. Because the checks were
drawn in the name of Emilio Z. Reyes, neither has she received anything. The same rule should apply.

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It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making.
We should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of
cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of
the bearer being waylaid or running off with what he is carrying for another. Payment in checks is
precisely intended to avoid the possibility of the money going to the wrong party. The situation is entirely
different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so properly.

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment
debt but the Court has never, in the least bit, suggested that judgment debtors should settle their
obligations by turning over huge amounts of cash or legal tender to sheriffs and other executing officers.
Payment in cash would result in damage or interminable litigations each time a sheriff with huge amounts
of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided
adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of
funds. If particularly big amounts are involved, escrow arrangements with a bank and carefully supervised
by the court would be the safer procedure. Actual transfer of funds takes place within the safety of bank
premises. These practices are perfectly legal. The object is always the safe and incorrupt execution of the
judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of
another. Making the checks payable to the judgment creditor would have prevented the encashment or
the taking of undue advantage by the sheriff, or any person into whose hands the checks may have
fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the
sheriff clearly made possible the misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia
Tan, the petitioner corporation, utilizing the services of its personnel who are or should be
knowledgeable about the accepted procedures and resulting consequences of the checks drawn,
nevertheless, in this instance, without prudence, departed from what is generally observed and
done, and placed as payee in the checks the name of the errant Sheriff and not the name of the
rightful payee. Petitioner thereby created a situation which permitted the said Sheriff to personally
encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit.
For the prejudice that resulted, the petitioner himself must bear the fault. The judicial guideline
which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a breach of
trust, the one who made it possible by his act of confidence must bear the loss. (Blondeau, et al.
v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made
possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers, of
requiring checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a
judgment debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees,

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the debtor must report the sheriff immediately to the court which ordered the execution or to the Supreme
Court for appropriate disciplinary action. Fees, commissions, and salaries are paid through regular
channels. This improper procedure also allows such officers, who have sixty (60) days within which to
make a return, to treat the moneys as their personal finds and to deposit the same in their private
accounts to earn sixty (60) days interest, before said finds are turned over to the court or judgment
creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up the
defense that said checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean
and complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of
litigants and the proper administration of justice. The temptation could be far greater, as proved to be in
this case of the absconding sheriff. The correct and prudent thing for the petitioner was to have issued the
checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee, without
the latter's agreement or consent, are as many as the ways that an artful mind could concoct to get
around the safeguards provided by the law on negotiable instruments. An angry litigant who loses a case,
as a rule, would not want the winning party to get what he won in the judgment. He would think of ways to
delay the winning party's getting what has been adjudged in his favor. We cannot condone that practice
especially in cases where the courts and their officers are involved.1âwphi1 We rule against the
petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money
judgment by levying on all the property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not exempt from execution, or on
a sufficient amount of such property, if they be sufficient, and selling the same, and paying to the
judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the
orders of the respondent judge granting the alias writ of execution may not be pronounced as a
nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the
requisite of payment by the officer to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment and none such payment had been concededly made yet by
the absconding Sheriff to the private respondent Amelia Tan. The ultimate and essential step to
complete the execution of the judgment not having been performed by the City Sheriff, the
judgment debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual
circumstances as those obtaining in this petition, the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App.
2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary),
whereas the satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof,
or the conversion by sale of the debtor's property into an amount equal to that due, and, it may be done
otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer are not
prerequisites to the satisfaction of a judgment when the same has already been realized in fact (Section
47, Rule 39). Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor

Page 10 of 69
 Page 11 of 69

to achieve. Section 15, Rule 39 merely provides the sheriff with his duties as executing officer including
delivery of the proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress
that the implementing officer's duty should not stop at his receipt of payments but must continue until
payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be
recovered under the alias writ of execution. This logically follows from our ruling that PAL is liable for both
the lost checks and interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally
supersede the trial court's judgment in Civil Case No. 71307. It merely modified the same as to the
principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the
respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution
against the petitioner is upheld without prejudice to any action it should take against the errant sheriff
Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions taken against Emilio Z.
Reyes.

SO ORDERED.

 BPI vs. Sps. Reynaldo Royeca, July 21, 2008

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 176664 July 21, 2008

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SPOUSES REYNALDO AND VICTORIA ROYECA, Respondents.

DECISION

NACHURA, J.:

Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision 1 dated July 12,
2006, and Resolution2 dated February 13, 2007, which dismissed its complaint for replevin and damages
and granted the respondents’ counterclaim for damages.

The case stems from the following undisputed facts:

On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and delivered to
Toyota Shaw, Inc. a Promissory Note3 for ₱577,008.00 payable in 48 equal monthly installments of
₱12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides for a penalty of 3%
for every month or fraction of a month that an installment remains unpaid.

To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage 4 in favor of
Toyota over a certain motor vehicle, more particularly described as follows:

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 Page 12 of 69

<
p>Make and Type 1993 Toyota Corolla 1.3 XL

Motor No. 2E-2649879

Serial No. EE100-9512571

Color D.B. Gray Met.

Toyota, with notice to respondents, executed a Deed of Assignment 5 transferring all its rights, title, and
interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).

Claiming that the respondents failed to pay four (4) monthly amortizations covering the period from May
18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000 asking for
the payment thereof, plus penalty.6 The respondents refused to pay on the ground that they had already
paid their obligation to FEBTC.

On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents with the
Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an alternative prayer
for the payment of ₱48,084.00 plus interest and/or late payment charges at the rate of 36% per annum
from May 18, 1997 until fully paid. The complaint likewise prayed for the payment of ₱24,462.73 as
attorney’s fees, liquidated damages, bonding fees and other expenses incurred in the seizure of the
vehicle. The complaint was later amended to substitute BPI as plaintiff when it merged with and absorbed
FEBTC.7

In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling ₱97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received the
following checks:

DATE BANK CHECK NO. AMOUNT

26 May 97 Landbank #610945 ₱13,824.15
6 June 97 Head Office #610946 12,381.63
30 May 97 FEBTC #17A00-11550P 12,021.00
15 June 97 Shaw Blvd. #17A00-11549P 12,021.00
30 June 97 " #17A00-11551P 12,021.00
18 June 97 Landbank #610947 11,671.00
18 July 97 Head Office #610948 11,671.00
18 August 97 #610949 11,671.00

The respondents further averred that they did not receive any notice from the drawee banks or from
FEBTC that these checks were dishonored. They explained that, considering this and the fact that the
checks were issued three years ago, they believed in good faith that their obligation had already been
fully paid. They alleged that the complaint is frivolous and plainly vexatious. They then prayed that they
be awarded moral and exemplary damages, attorney’s fees and costs of suit.9

During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994 and had
assumed the position of Account Analyst since its merger with BPI. He admitted that they had, in fact,

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 Page 13 of 69

received the eight checks from the respondents. However, two of these checks (Landbank Check No.
0610947 and FEBTC Check No. 17A00-11551P) amounting to ₱23,692.00 were dishonored. He recalled
that the remaining two checks were not deposited anymore due to the previous dishonor of the two
checks. He said that after deducting these payments, the total outstanding balance of the obligation was
₱48,084.00, which represented the last four monthly installments.

On February 23, 2005, the MeTC dismissed the case and granted the respondents’ counterclaim for
damages, thus:

WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of action, and on
the counterclaim, plaintiff is ordered to indemnify the defendants as follows:

a) The sum of PhP30,000.00 as and by way of moral damages;

b) The sum of PhP30,000.00 as and by way of exemplary damages;

c) The sum of PhP20,000.00 as and by way of attorney’s fees; and

d) To pay the costs of the suit.

SO ORDERED.10

On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the respondents to
pay the amount claimed by the petitioner. The dispositive portion of its Decision 11 dated August 11, 2005
reads:

WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9 dated
February 23, 2005 is REVERSED and a new one entered directing the defendants-appellees to pay the
plaintiff-appellant, jointly and severally,

1. The sum of ₱48,084.00 plus interest and/or late payment charges thereon at the rate of 36%
per annum from May 18, 1997 until fully paid;

2. The sum of ₱10,000.00 as attorney’s fees; and

3. The costs of suit.

SO ORDERED.12

The RTC denied the respondents’ motion for reconsideration.13

The respondents elevated the case to the Court of Appeals (CA) through a petition for review. They
succeeded in obtaining a favorable judgment when the CA set aside the RTC’s Decision and reinstated
the MeTC’s Decision on July 12, 2006.14 On February 13, 2007, the CA denied the petitioner’s motion for
reconsideration.15

The issues submitted for resolution in this petition for review are as follows:

I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF THEIR

OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.

II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.

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 Page 14 of 69

III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY

DAMAGES AND ATTORNEY’S FEES.16

The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers that,
under the law and existing jurisprudence, delivery of checks does not constitute payment. It points out
that this principle stands despite the fact that there was no notice of dishonor of the two checks and the
demand to pay was made three years after default.

On the other hand, the respondents postulate that they have established payment of the amount being
claimed by the petitioner and, unless the petitioner proves that the checks have been dishonored, they
should not be made liable to pay the obligation again.17

The petition is partly meritorious.

In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is offered
in opposition thereto.18Thus, the party, whether plaintiff or defendant, who asserts the affirmative of an
issue has the onus to prove his assertion in order to obtain a favorable judgment. For the plaintiff, the
burden to prove its positive assertions never parts. For the defendant, an affirmative defense is one which
is not a denial of an essential ingredient in the plaintiff’s cause of action, but one which, if established, will
be a good defense – i.e. an "avoidance" of the claim.19

In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who, between the
plaintiff and defendant, has the burden to prove the affirmative defense of payment:

As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must
allege non-payment, the general rule is that the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment.

When the existence of a debt is fully established by the evidence contained in the record, the burden of
proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to
the claim of the creditor. Where the debtor introduces some evidence of payment, the burden of going
forward with the evidence - as distinct from the general burden of proof - shifts to the creditor, who is then
under a duty of producing some evidence to show non-payment.21

In applying these principles, the CA and the RTC, however, arrived at different conclusions. While both
agreed that the respondents had the burden of proof to establish payment, the two courts did not agree
on whether the respondents were able to present sufficient evidence of payment — enough to shift the
burden of evidence to the petitioner. The RTC found that the respondents failed to discharge this burden
because they did not introduce evidence of payment, considering that mere delivery of checks does not
constitute payment.22 On the other hand, the CA concluded that the respondents introduced sufficient
evidence of payment, as opposed to the petitioner, which failed to produce evidence that the checks were
in fact dishonored. It noted that the petitioner could have easily presented the dishonored checks or the
advice of dishonor and required respondents to replace the dishonored checks but none was presented.
Further, the CA remarked that it is absurd for a bank, such as petitioner, to demand payment of a failed
amortization only after three years from the due date.

The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC, this is only
proof that respondents delivered eight checks in payment of the amount due. Apparently, this will not
suffice to establish actual payment.

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 Page 15 of 69

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment.23 Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery
of checks does not discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized. 24

To establish their defense, the respondents therefore had to present proof, not only that they delivered
the checks to the petitioner, but also that the checks were encashed. The respondents failed to do so.
Had the checks been actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they believed in good faith that
the checks were encashed because they were not notified of the dishonor of the checks and three years
had already lapsed since they issued the checks.1avvphi1

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were dishonored.
The burden of evidence is shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.25

To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed, fell
upon the respondents who would benefit from such fact. That payment was effected through the eight
checks was the respondents’ affirmative allegation that they had to establish with legal certainty. If the
petitioner were seeking to enforce liability upon the check, the burden to prove that a notice of dishonor
was properly given would have devolved upon it.26 The fact is that the petitioner’s cause of action was
based on the original obligation as evidenced by the Promissory Note and the Chattel Mortgage, and not
on the checks issued in payment thereof.

Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform the
respondents of the dishonor of the checks. A notice of dishonor is required only to preserve the right of
the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the check.
Otherwise, if the payee fails to give notice to them, they are discharged from their liability thereon, and the
payee is precluded from enforcing payment on the check. The respondents, therefore, cannot fault the
petitioner for not notifying them of the non-payment of the checks because whatever rights were
transgressed by such omission belonged only to the petitioner.

In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioner’s
possession of the documents pertaining to the obligation strongly buttresses its claim that the obligation
has not been extinguished. The creditor’s possession of the evidence of debt is proof that the debt has
not been discharged by payment.27 A promissory note in the hands of the creditor is a proof of
indebtedness rather than proof of payment. 28 In an action for replevin by a mortgagee, it is prima facie
evidence that the promissory note has not been paid.29 Likewise, an uncanceled mortgage in the
possession of the mortgagee gives rise to the presumption that the mortgage debt is unpaid. 30

Finally, the respondents posit that the petitioner’s claim is barred by laches since it has been three years
since the checks were issued. We do not agree. Laches is a recourse in equity. Equity, however, is
applied only in the absence, never in contravention, of statutory law. Thus, laches cannot, as a rule, abate
a collection suit filed within the prescriptive period mandated by the New Civil Code. 31 The petitioner’s
action was filed within the ten-year prescriptive period provided under Article 1144 of the New Civil Code.
Hence, there is no room for the application of laches.

Nonetheless, the Court cannot ignore what the respondents have consistently raised — that they were
not notified of the non-payment of the checks. Reasonable banking practice and prudence dictates that,
when a check given to a creditor bank in payment of an obligation is dishonored, the bank should
immediately return it to the debtor and demand its replacement or payment lest it causes any prejudice to
the drawer. In light of this and the fact that the obligation has been partially paid, we deem it just and

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equitable to reduce the 3% per month penalty charge as stipulated in the Promissory Note to 12% per
annum.32 Although a court is not at liberty to ignore the freedom of the parties to agree on such terms and
conditions as they see fit, as long as they contravene no law, morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous
or unconscionable, or if the principal obligation has been partly or irregularly complied with.33

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 12, 2006, and Resolution dated February 13, 2007, are REVERSED and SET
ASIDE. The Decision of the Regional Trial Court, dated August 11, 2005, is REINSTATED with the
MODIFICATION that respondents are ordered to deliver the possession of the subject vehicle, or in the
alternative, pay the petitioner ₱48,084.00 plus late penalty charges/interest thereon at the rate of 12% per
annum from May 18, 1997 until fully paid.

SO ORDERED.

Negotiability:

 Equitable Banking Corporation vs. IAC, G.R. No. 74451, May 25, 1988

DECISION

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. v. Liberato V. Casals,
Casville Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil
Case No. 25112), and read:jgc:chanrobles.com.ph

"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 plaintiff’s 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 plaintiff’s favor, in lieu of cash payment. Accordingly, on December
22, 1975, defendant Casville, through its president, defendant Casville, ordered from plaintiff two units of
garrett skidders . . .

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‘The purchase order for the garrett skidders bearing No. 0051 and dated December 22, 1975 (Exhibit ‘A’)
contained the following terms and conditions:jgc:chanrobles.com.ph

"Two (2) units GARRETT Skidders Model 30A complete or 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. First installment will be due one hundred eighty (180) days after date of shipment. Interest —
14% per annum’ (Exhibit ‘A’)

x x x

". . . in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the delivery
of one (1) unit of the skidders, 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 of favor on or before June 30, 1976 under the terms and
conditions agreed upon (Exhibit ‘B’)

"On May 3, 1976, in compliance with defendant Casville’s 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.

x x x

"On July 16, 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 Casals and 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:chanrob1es virtual 1aw library

‘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

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explanation:chanrob1es virtual 1aw library

‘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:chanrob1es
virtual 1aw library

‘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 deposit; 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-1’), defendant bank replied stating that it was ready to open
the letters of credit upon defendant’s compliance of the following terms and conditions:chanrob1es virtual
1aw library

‘c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust Receipts; e)
Chattel Mortgage on the equipment; and 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 P1,091,000.00 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 P145,500.00 (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, plaintiff’s 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-1’). 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 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.

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"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 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.

x x x

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the
pertinent portion of which reads:chanrob1es virtual 1aw library

x x x

"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."cralaw virtua1aw library

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-1," which was made payable

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"to the order of EQUITABLE BANKING CORPORATION A/C OF CASVILLE ENTERPRISES INC."cralaw
virtua1aw library

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:jgc:chanrobles.com.ph

"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 said 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
plaintiff’s defraudation.

x x x

Respondent Appellate Court upheld the above conclusions stating in addition:chanrobles law library

"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;

x x x

We disagree.

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

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

INC."cralaw virtua1aw library

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

Page 20 of 69
 Page 21 of 69

little more care. Thus, Article 1377 of the Civil Code, provides:jgc:chanrobles.com.ph

"Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity."cralaw virtua1aw library

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 transversally 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, 1986," 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-1," 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-1," 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:jgc:chanrobles.com.ph

"Payment for marginal deposit and other expenses re opening of L/C for account of Casville Ent."cralaw
virtua1aw library

and the memorandum:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

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 Casville 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., v. Nano, Et
Al., 61 Phil. 625 [1935]; Sta. Maria v. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951];
Republic of the Philippines v. 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."cralaw virtua1aw library

Page 21 of 69
 Page 22 of 69

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.

 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK
of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI)
No. D891,2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation
(Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement3 dated
February 4, 1981, and a Detached Assignment4dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was
originally filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the Central
Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed

a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred,
assigned and delivered unto Philippine Underwriters Finance Corporation (Philfinance) all
its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE
HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS: THREE
MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

Page 22 of 69
 Page 23 of 69

4. The aforesaid Detached Assignment (Annex "A") contains an express authorization

executed by the transferor intended to complete the assignment through the registration
of the transfer in the name of PhilFinance, which authorization is specifically phrased as
follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer
the said bond/certificates on the books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with

PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to
petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . .,
which CBCI was among those previously acquired by PhilFinance from Filriters as
averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to

repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE
HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27,
1981, when the checks it issued in favor of petitioner were dishonored for insufficient
funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the

Petitioner to enable the latter to have its title completed and registered in the books of the
respondent. And by means of said Detachment, Philfinance transferred and assigned all,
its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did
thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned
Detached Assignments (Annexes "B" and "D"), to the Securities Servicing Department of
the respondent, and requested the latter to effect the transfer of the CBCI on its books
and to issue a new certificate in the name of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to
do so notwithstanding petitioner's valid and just title over the same and despite repeated
demands in writing, the latest of which is hereto attached as Annex "E" and made an
integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in
person or by his attorney duly authorized in writing, and similarly noted
hereon, and upon payment of a nominal transfer fee which may be
required, a new Certificate shall be issued to the transferee of the
registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;

Page 23 of 69
 Page 24 of 69

12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its
name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank
of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby
calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of
the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the
trust fund doctrine and to the prejudice of policyholders and to all who have present or
future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-
President-Treasury of Filriters, without any board resolution, knowledge or consent of the
board of directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly assigning CBCI
No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe,

Vice-President-Treasury of Filriters (both of whom were holding the same positions in
Philfinance), without any consideration or benefit redounding to Filriters and to the grave
prejudice of Filriters, its policy holders and all who have present or future claims against
its policies, executed similar detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is
without the knowledge and consent of directors of Filriters, and not duly authorized in
writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and
not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a

requirement under the Insurance Code for its existence as an insurance company and
the pursuit of its business operations. The assignment of the CBCI is illegal act in the

Page 24 of 69
 Page 25 of 69

sense of malum in se or malum prohibitum, for anyone to make, either as corporate or

personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by

law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the solvency
deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship),
an inevitable result known to the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness
is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the
registered owner as the absolute owner and that the value of the registered certificates
shall be payable only to the registered owner; a sufficient notice to plaintiff that the
assignments do not give them the registered owner's right as absolute owner of the
CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides
that the registered certificates are payable only to the registered owner (Article II, Section
1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters
is not a regular transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited by
law. There was no attempt to get any clearance or authorization from the Insurance
Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or
regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI
by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters

Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal
Bank as null and void and of no force and effect;

Page 25 of 69
 Page 26 of 69

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters
Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise
failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No.
D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently,
Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters,
to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase
agreement dated February 4, 1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance failed to buy back the note on
maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to
appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the Central
Bank (CB). Central Bank, however, refused to effect the transfer and registration in view
of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently
treated by the lower court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court adjudge which of them
is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB
now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all
parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent
that the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known
as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that
any "assignment of registered certificates shall not be valid unless made . . . by the registered owner
thereof in person or by his representative duly authorized in writing."

Page 26 of 69
 Page 27 of 69

Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated as the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People v.
Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign
or transfer to Traders Royal Bank and which the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-
appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and
the two corporations have identical corporate officers, thus demanding the application of the doctrine or
piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters.
Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance
was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within
the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to
pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal
sum of FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being
equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum of
money. It is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable only to
Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of

Page 27 of 69
 Page 28 of 69

negotiability which should have served as an expression of consent that the instrument
may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission that the
same is a negotiable instrument, and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom
to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or
entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is

determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding circumstance in
order to more perfectly understand the intent and meaning of the parties, yet as they
have constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The duty of the
court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI
from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as
to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed of
assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to
Central Bank Circular No. 769, series of 1980, otherwise known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", under which the note
was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof
provides that any assignment of registered certificates shall not be valid unless made . . .
by the registered owner thereof in person or by his representative duly authorized in
writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for
and on behalf of Filriters, did not have the necessary written authorization from the Board
of Directors of Filriters to act for the latter. For lack of such authority, the assignment did
not therefore bind Filriters and violated at the same time Central Bank Circular No. 769
which has the force and effect of a law, resulting in the nullity of the transfer (People vs.

Page 28 of 69
 Page 29 of 69

Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign
or transfer to Traders Royal Bank and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate fiction to
defraud TRB into purchasing the subject CBCI, which purchase now is refused registration by the Central
Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be applied
in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the registered owner of the CBCI as to bar the
latter from claiming, as it has, that it never received any payment for that CBCI sold and
that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI
was merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its
(Philfinance's) financing operations, if it were to be consistent therewith, on the issued
raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals
should have ruled that such veil of corporate entity was, in fact, pierced, and the payment
by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable
remedy, and may be awarded only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or
business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the
court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime
was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests
of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence
on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the
identity of one shall be maintained as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be disregarded, 19 in
the absence of such grounds, the general rule must upheld. The fact that Filfinance owns majority shares
in Filriters is not by itself a ground to disregard the independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single stockholder or by another

Page 29 of 69
 Page 30 of 69

corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired
the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This should have put
the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or
its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's
name at any office of the Bank or any agency duly authorized by the Bank, and such
registration is noted hereon. After such registration no transfer thereof shall be valid
unless made at said office (where the Certificates has been registered) by the registered
owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted
hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or
any agency duly authorized by the Bank may deem and treat the bearer of this
Certificate, or if this Certificate is registered as herein authorized, the person in whose
name the same is registered as the absolute owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, and for all other purpose whether or not
this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner
was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify
of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides
that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates

shall not be valid unless made at the office where the same have been issued and
registered or at the Securities Servicing Department, Central Bank of the Philippines, and
by the registered owner thereof, in person or by his representative, duly authorized in
writing. For this purpose, the transferee may be designated as the representative of the
registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the agents
are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as
everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for
all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had
signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not
have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it

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is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the
subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can
do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short,

CBCI No. D891 in the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the

Insurance Commission sometime in early 1981 and this CBCI No. 891
was among the CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the

Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal
reserves under Section 213 of the Insurance Code equivalent to 40
percent of the premiums receipt and further, the Insurance Commission
requires this reserve to be invested preferably in government securities
or government binds. This is how this CBCI came to be purchased by the
company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus,
the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the maintenance of the required
reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the
claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is
hereby AFFIRMED.

SO ORDERED.

 Garcia vs. Llamas, 417 SCRA 292

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FIRST DIVISION

[G.R. No. 154127. December 8, 2003]

ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.

DECISION
PANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or
by the complete incompatibility between the old and the new agreements. Petitioner herein fails to show
either requirement convincingly; hence, the summary judgment holding him liable as a joint
and solidary debtor stands.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify
the November 26, 2001 Decision[2] and the June 26, 2002 Resolution[3] of the Court of Appeals (CA) in
CA-GR CV No. 60521. The appellate court disposed as follows:

UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains
to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the
award for attorneys fees and cost of suit is DELETED. The portion of the judgment that pertains to
x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de
Jesus is REMANDED to the court of origin for purposes of
receiving ex parte[Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.[4]

The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de
Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,]
[petitioner and de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and, despite
repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by reason of
the[ir] unjustified refusal, [respondent] was compelled to engage the services of counsel to whom he
agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus], plus P2,000.00 for every
appearance in court. Annexed to the complaint were the promissory note above-mentioned and a
demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner and de Jesus].

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Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the
promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been
paid by x xx de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of
the check and [respondents] acceptance thereof novated or superseded the note.

[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the reply
were the face of the check and the reverse side thereof.

For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum
of P120,000.00 by way of interests; that this was made when [respondents] daughter, one Nits Llamas-
Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where
x x x de Jesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated
leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the
months of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for
an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent]
nonetheless filed the instant case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees, plus P1,000.00 for every court
appearance.

During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial
brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he would no
[longer] present evidence. Given this development, the trial court gave [respondent] permission to present
his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia to file his comment
or opposition thereto.

Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present
his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case
for judgement on the pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioners and de Jesus] solidary liability under the promissory note cannot be any clearer, and that
the check issued by de Jesus did not discharge the loan since the check bounced. [5]

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case
as follows:

WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of

[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally,
the [respondent] the following sums, to wit:

1) P400,000.00 representing the principal amount plus 5% interest thereon per month from January 23,
1997 until the same shall have been fully paid, less the amount of P120,000.00 representing interests
already paid by x x x de Jesus;

2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt appearance,
and;

3) Cost of this suit.[6]

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Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he
was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the
RTC judgment, even though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor
because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check
-- which had been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.[7]

Issues

Petitioner submits the following issues for our consideration:

I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the
instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan

of P400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution

by x x x de Jesus or [the superseding of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to
financial difficulties, he be given an extension of time to pay his loan obligation
and that his retirement benefits from the Philippine National Police will answer for
said obligation.

II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and credence considering that subsequent
events showed that the principal obligor was in truth and in fact x x x de Jesus, as evidenced by the
foregoing circumstances showing his assumption of sole liability over the loan obligation.

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III

Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent
Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself
admitted in its Decision, which call for the presentation of evidence in a full-blown trial.[8]

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether
the defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary judgment -- was proper.

The Courts Ruling

The Petition has no merit.

First Issue:
Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the replacement of
the promissory note by the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law,[9] the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.[10] Article 1293 of the Civil Code defines novation as follows:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation. As
such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers,
and the creditor accepts, a third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary. [11] Both modes of substitution by the debtor
require the consent of the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement.[13] Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third
person to the rights of the creditor, an act known as subjective or personal novation.[14] For novation to
take place, the following requisites must concur:

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1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.[15]

Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point.[16] The test of incompatibility is whether the two obligations
can stand together, each one with its own independent existence.[17]
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check, or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the CA correctly observed, the check had
been issued precisely to answer for the obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also constitutes novation[18] --
change the terms and conditions of the obligation. Such payment was already provided for in the
promissory note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the formers place in the relation.[19] Well-
settled is the rule that novation is never presumed.[20] Consequently, that which arises from a purported
change in the person of the debtor must be clear and express.[21] It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the obligation, that
a third person was substituted in his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:

x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of
the obligation being solidary due to the fact that the promissory note expressly declared that the liability of
appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them simultaneously, and payment made
by one of them extinguishes the obligation. It therefore follows that in case the creditor fails to collect from
one of the solidary debtors, he may still proceed against the other or others. x x x [22]

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor. [23] Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express.[24] It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact fulfillment from either of
the solidary debtors.[25]
More important, De Jesus was not a third person to the obligation. From the beginning, he was a
joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not change the person of the debtor, because
a joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors.[26] It is up to the former to determine against whom to

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enforce collection.[27] Having made himself jointly and severally liable with De Jesus, petitioner is
therefore liable[28] for the entire obligation.[29]

Second Issue:
Accommodation Party

Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

PROMISSORY NOTE

P400,000.00

RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.

It is understood that our liability under this loan is jointly and severally [sic].

Done at Quezon City, Metro Manila this 23rd day of December, 1996.[30]

By its terms, the note was made payable to a specific person rather than to bearer or to order [31] -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL).Hence, petitioner cannot
avail himself of the NILs provisions on the liabilities and defenses of an accommodation party. Besides, a
non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may
have been created by the assent of the parties.[32] The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a
holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation
party. The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety -- the accommodation party being the surety.[33] It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original promissor and debtor from the
beginning. The liability is immediate and direct.[34]

Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after
a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that
(1) except as to the amount of damages, there is no genuine issue regarding any material fact; and (2)
the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which
the pleadings raise only a legal, not a genuine, issue regarding any material fact. [35]Consequently, facts
are asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or

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specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shown
by the pleadings, depositions or admissions.[36] A summary judgment may be applied for by either a
claimant or a defending party.[37]
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse partys pleading. The essential question is whether there are issues generated by the
pleadings.[38] A judgment on the pleadings may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer[40] apparently raised several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either payment or novation. However,
these are not factual issues requiring trial. We quote with approval the CAs observations:

Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid issues.
Firstly, Garcias claim that he was merely an accommodation party is belied by the promissory note that
he signed. Nothing in the note indicates that he was only an accommodation party as he claimed to
be. Quite the contrary, the promissory note bears the statement: It is understood that our liability under
this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant de Jesus already paid the
loan by means of a check collapses in view of the dishonor thereof as shown at the dorsal side of said
check.[41]

From the records, it also appears that petitioner himself moved to submit the case for judgment on
the basis of the pleadings and documents. In a written Manifestation,[42] he stated that judgment on the
pleadings may now be rendered without further evidence, considering the allegations and admissions of
the parties.[43]
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial
court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.

 METROBANK vs. CA, 194 SCRA 169

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

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

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Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of
all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over
a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by
the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned
by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been
indorsed by their respective payees, followed by Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the
warrants.3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13,
1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The
total withdrawal was P968.000.00.4

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

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by
the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court
modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

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1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and
Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit
was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to
withdraw the amount outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this petition
for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount
erroneously credited.

(a) Metrobank's right to charge back is not limited to instances where the checks or
treasury warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting
agent which cannot be held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made
to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo
Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case
are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that to all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw fit.

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It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own
deposit.7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who
was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the
treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds.
There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden
Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures
of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to
make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not received a single centavo
from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings to
withdraw — not once, not twice, but thrice — from the uncleared treasury warrants in the total amount of
P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it
also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week."8 For a bank with its long experience, this explanation is unbelievably
naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal
side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this bank, the right is reserved to
charge back to the depositor's account any amount previously credited, whether or not such item
is returned. This also applies to checks drawn on local banks and bankers and their branches as
well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have apparently
been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the
conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the

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petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this
case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be
judged 'with more or less rigor by the courts, according to whether the agency was or was not for
a compensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed
been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been
no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have
been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to
Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden Savings before it made its own
payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied
clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not
all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been established. 9 This was the
finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of
Appeals:10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established
by clear, positive and convincing evidence. This was not done in the present case.

A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is
of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:

Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the

following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

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(d) Must be payable to order or to bearer; and

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

xxx xxx xxx

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional

within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a particular

account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the
order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be
no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at
bar. This conclusion conforms to Abubakar vs. Auditor General11 where the Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and
is entitled to the rights and privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration, is
actually an Order for payment out of "a particular fund," and is not unconditional and does not
fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and
section [1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they
were "genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement
and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel
this case is inapplicable to the present controversy.1âwphi1 That case involved checks whereas this case
involves treasury warrants. Golden Savings never represented that the warrants were negotiable but
signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in
that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in
accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the
Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.

We find the challenged decision to be basically correct. However, we will have to amend it insofar as it
directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its
account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was
allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he

Page 43 of 69
 Page 44 of 69

has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to
Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already
been informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon,
if any, after the debit.

SO ORDERED.

 Phil. Education Co. vs. Soriano, 39 SCRA 587

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.:

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

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller
had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a
private checks were not generally accepted in payment of money orders, the teller advised him to see the

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Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his
own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day notice was likewise served upon all
banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of America,
and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face
value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of
America that money order No. 124688 attached to his letter had been found to have been irregularly
issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing
account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with
the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his
office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request
was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice
for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable
doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying
for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961, which is the rate of
interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and
moral damages in the amount of P1,000.00 or in such amount as will be proved and/or
determined by this Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to
15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand

the notice given to the Bank of America on September 27, 1961, deducting from said

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Bank's clearing account the sum of P200.00 representing the amount of postal money
order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of
P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted
the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other and
will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26,
1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post
Office, and that money orders, once issued, create a contractual relationship of debtor and creditor,
respectively, between the government, on the one hand, and the remitters payees or endorses, on the
other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For
this reason, ours are generally construed in accordance with the construction given in the United States
to their own postal statutes, in the absence of any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the
reason behind this rule being that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a governmental power for
the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For instance, such
laws and regulations usually provide for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of
the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to
deduct the value thereof from any amount due you if such step is deemed necessary." The conditions
thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is
clearly referred from the fact that, upon receiving advice that the amount represented by the money order
in question had been deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand,
and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof
on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not
issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In
reality, however, said legal provision does not apply to the letter in question because it does not provide
for a department regulation but merely sets down certain conditions upon the privilege granted to the
Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office.
Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth
assignments of error.

Page 46 of 69
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WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with
costs.

 Caltex Phil. vs. CA 212 SCRA 448

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat

Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000

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5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat
Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized Affidavit of Loss, as required by
defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February
9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the
required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss,
280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-
561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed of Assignment of Time Deposit
(Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the loan upon
its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.)
Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the

former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of
the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

Page 48 of 69
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11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell
due and on August 5, 1983, the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence
this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit
are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a
holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of
the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of
the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum

of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and surrender of this
certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued,
it is important to note that after the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has deposited" a certain amount
follows. The document further provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not to whoever purports to be the

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"bearer" but only to the specified person indicated therein, the depositor. In effect, the
appellee bank acknowledges its depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security
Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the
CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it was Angel
dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of

time deposit insofar as the bank is concerned?

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 Page 51 of 69

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined
from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the
light of surrounding circumstances in order to more perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have secretly intended as contradistinguished from what
their words express, but what is the meaning of the words they have used. What the parties meant must
be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that
the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the
bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have
with facility so expressed that fact in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the
wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously other parties not privy to the transaction between them
would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the plain import of what is written
thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect
this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing

Page 51 of 69
 Page 52 of 69

true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a)
the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the
receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner now labors under the presumption
that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine
National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined

by their intention, regardless of what language was used or what the
form of the transfer was. If it was intended to secure the payment of
money, it must be construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object and character might
still be qualified and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been
said that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be treated
as a pledge if the debt continues in inexistence and is not discharged by
the transfer, and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous language
or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of
a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was
no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the
amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by
reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract,
he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would
be a pledgee but the requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal
rights, 24 which inceptively provide:

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Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be

pledged. The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent
court quoted at the start of this opinion show that petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law
prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the execution of a pledge contract cannot affect
third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its
lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the better right over the
CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the
lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against
the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount covered
by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

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 Page 54 of 69

6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue
raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can
be premised on a multitude of other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the
judge or court of competent jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as well as in order to prevent the
ownership of the instrument that a duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of
the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory
but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb
indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he
may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who,
for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of
the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

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 Page 55 of 69

SO ORDERED.

 Salas vs. CA, January 22, 1990

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R. CV No.
00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the decision of the
Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the
same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a
motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by
a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation
(hereinafter referred to as private respondent) which financed the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice,
certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle
figured in an accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against
petitioner before the Regional Trial Court of San Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14% from
October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as attorney's
fees.

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 Page 56 of 69

The counterclaim of defendant is dismissed.

With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to
petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved from the
obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of which
is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as against the
pleader. A party cannot subsequently take a position contradictory of, or inconsistent with his
pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings,
or in the course of the trial or other proceedings, do not require proof and cannot be contradicted
unless previously shown to have been made through palpable mistake (Sec. 2, Rule 129,
Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness and due execution
of the instrument shall be deemed admitted unless the adverse party, under oath, specifically
denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8, Revised Rules of
Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory note is
the amount assumed by the plaintiff in financing the purchase of defendant's motor vehicle from
the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95 for 36 months.
Considering that the defendant was able to pay twice (as admitted by the plaintiff, defendant's
account became delinquent only beginning May, 1980) or in the total sum of P3,229.90, she is
therefore liable to pay the remaining balance of P54,908.30 at l4% per annum from October 2,
1980 until full payment.

WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the
defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2, 1980 until
full payment. The decision is AFFIRMED in all other respects. With costs to defendant. 2

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

In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad faith
and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and which fraud,
bad faith and misrepresentation supposedly released petitioner from any liability to private respondent
who should instead proceed against VMS. 3

Petitioner argues that in the light of the provision of the law on sales by description 4 which she alleges is
applicable here, no contract ever existed between her and VMS and therefore none had been assigned in
favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to the
case before it can be made to answer for damages because VMS was earlier sued by her for "breach of
contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil
Case No. 2916-0. She cites as authority the decision therein where the court originally ordered petitioner

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to pay the remaining balance of the motor vehicle installments in the amount of P31,644.30 representing
the difference between the agreed consideration of P49,000.00 as shown in the sales invoice and
petitioner's initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision was
however reversed later on, with the same court ordering defendant VMS instead to return to petitioner the
sum of P17,855.70. Parenthetically, said decision is still pending consideration by the First Civil Case
Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5

Private respondent in its comment, prays for the dismissal of the petition and counters that the issues
raised and the allegations adduced therein are a mere rehash of those presented and already passed
upon in the court below, and that the judgment in the "breach of contract" suit cannot be invoked as an
authority as the same is still pending determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a negotiable instrument which
will bar completely all the available defenses of the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which she never
denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as petitioner would
have it appear, where the assignee merely steps into the shoes of, is open to all defenses available
against and can enforce payment only to the same extent as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance Corp., 6 this
Court had the occasion to clearly distinguish between a negotiable and a non-negotiable instrument.

Among others, the instrument in order to be considered negotiable must contain the so-called "words of
negotiability — i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may be made payable to order. There
must always be a specified person named in the instrument and the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has indorsed and delivered the same. Without
the words "or order or "to the order of", the instrument is payable only to the person designated therein
and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being
a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against the latter. Such being the situation in
the above-cited case, it was held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be raised. 7

In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's claim
against petitioner is a promissory note which bears all the earmarks of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or
order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE

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 Page 58 of 69

HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine currency, which amount
includes interest at 14% per annum based on the diminishing balance, the said principal sum, to
be payable, without need of notice or demand, in installments of the amounts following and at the
dates hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the 21st
day of each month starting March 21, 1980 thru and inclusive of February 21, 1983. P_________
monthly for ______ months due and payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________ provided that interest at 14% per
annum shall be added on each unpaid installment from maturity hereof until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable instrument, having
complied with the requisites under the law as follows: [a] it is in writing and signed by the maker Juanita
Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed
or determinable future time which is "P1,614.95 monthly for 36 months due and payable on the 21 st day
of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having
taken the instrument under the following conditions: [a] it is complete and regular upon its face; [b] it
became the holder thereof before it was overdue, and without notice that it had previously been
dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the
latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. 12

Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and
free from defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. 13 This being so, petitioner cannot set up against respondent the
defense of nullity of the contract of sale between her and VMS.

Page 58 of 69
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Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that there
was in fact deception made upon her in that the vehicle she purchased was different from that actually
delivered to her, this matter cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach of contract"
case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate
incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is
concerned since it is not a party in this case. To even discuss the issue as to whether or not the
Violago Motor Sales Corporation is liable in the transaction in question would amount, to denial of
due process, hence, improper and unconstitutional. She should have impleaded Violago Motor
Sales.14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against
petitioner.

SO ORDERED.

 Rivera vs. Sps. Chua, January 14, 2015

FIRST DIVISION

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA

CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification
the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No.
02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661, 3 a case for
collection of a sum of money due a promissory note. While all three (3) lower courts upheld the validity
and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner
in G.R. No. 184458, the appellate court modified the trial courts’ consistent awards: (1) the stipulated
interest rate of sixty percent (60%) reduced to twelve percent (12%) per annum computed from the date
of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in a reduced
amount of P50,000.00.

Page 59 of 69
 Page 60 of 69

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and
questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472,
Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s reduction of
the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:chanroblesvirtuallawlibrary

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and
VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on
December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty
percent (20%) of the total amount due and payable as and for attorney’s fees which in no case shall be
less than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of
Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera,
as partial payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Rivera’s current account with the Philippine
Commercial International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise
drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to
payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued
in the amount of P133,454.00 with “cash” as payee. Purportedly, both checks were simply partial
payment for Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason “account closed.”

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the
principal of P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11
June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No.
163661.

Page 60 of 69
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In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject
Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were
always covered by a security; (3) at the time of the filing of the complaint, he still had an existing
indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the amount he received from the
Spouses Chua’s saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the
check for payment in the amount of P133,454.00; and (6) there was no demand for payment of the
amount of P120,000.00 prior to the encashment of PCIB Check No.
0132224. 5chanRoblesvirtualLawlibrary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness
thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:chanroblesvirtuallawlibrary

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the
testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner
(1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate
of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice
attended a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila;
attended a seminar on Effective Methodology in Teaching and Instructional design conducted by the NBI
Academy; seminar lecturer on Questioned Documents, Signature Verification and/or Detection; had
examined more than a hundred thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing
on several documents. After a thorough study, examination, and comparison of the signature on the
questioned document (Promissory Note) and the specimen signatures on the documents submitted to
him, he concluded that the questioned signature appearing in the Promissory Note and the specimen
signatures of [Rivera] appearing on the other documents submitted were written by one and the same
person. In connection with his findings, Magbojos prepared Questioned Documents Report No. 712-1000
dated 8 January 2001, with the following conclusion: “The questioned and the standard specimen
signatures RODGRIGO RIVERA were written by one and the same person.”

[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” in May 1998, he obtained a
loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of
[respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from
Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution
of the Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not
his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with
the space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in
with the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December
1998 [respondent] Salvador called him and told him that he had written P133,454.00 instead of
P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated
his averment that the signature appearing on the Promissory Note was not his signature and that he did
not execute the Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua:chanroblesvirtuallawlibrary

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WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the
rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from
11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorney’s fees. 7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted
the award of attorney’s fees to the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the
Decision dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the
Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and
reinstated the award of attorney’s fees in favor of the Spouses Chua:chanroblesvirtuallawlibrary

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that
the interest rate of 60% per annum is hereby reduced to 12% per annum and the award of attorney’s fees
is reinstated at the reduced amount of P50,000.00 Costs against [Rivera]. 9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the
Spouses Chua in G.R. No. 184472, respectively raising the following issues:chanroblesvirtuallawlibrary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE

RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY
[RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE
INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING

ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW
AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF
THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10chanRoblesvirtualLawlibrary

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR
WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60%
PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS
ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT,
UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a
Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court
specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory
Note.12chanRoblesvirtualLawlibrary

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire
ruling of the Court of Appeals in CA-G.R. SP No. 90609.

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Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with
the Spouses Chua who were money lenders, he has been able to maintain a loan account with them.
However, each of these loan transactions was respectively “secured by checks or sufficient collateral.”

Rivera points out that the Spouses Chua “never demanded payment for the loan nor interest thereof (sic)
from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December
31, 1995].”13chanRoblesvirtualLawlibrary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower
courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only
that the signature is not his and varies from his usual signature. He likewise makes a confusing defense
of having previously obtained loans from the Spouses Chua who were money lenders and who had
allowed him a period of “almost four (4) years” before demanding payment of the loan under the
Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau
of Investigation (NBI) handwriting expert on the integrity of the promissory note.

On that score, the appellate court aptly disabled Rivera’s contention:chanroblesvirtuallawlibrary

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a
forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was
forged. Save for the denial of Rivera that the signature on the note was not his, there is nothing in the
records to support his claim of forgery. And while it is true that resort to experts is not mandatory or
indispensable to the examination of alleged forged documents, the opinions of handwriting experts are
nevertheless helpful in the court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the
testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means “evidence which is of greater weight, or more
convincing than that which is offered in opposition to it.”

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima
facie case in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when
affirmed by the appellate court, are accorded the highest degree of respect and are considered
conclusive between the parties.15 A review of such findings by this Court is not warranted except upon a
showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are grounded
entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its factual
findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail
to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when
there is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the
specific evidence on which they are based, are premised on the absence of evidence, or are contradicted
by evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart
from the separate factual findings of the three (3) lower courts on the validity of Rivera’s signature
reflected in the Promissory Note.

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Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the
plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the whole case or
only to certain issues in the case.17chanRoblesvirtualLawlibrary

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to
the examination or the comparison of handwriting, the trial courts in this case, on its own, using the
handwriting expert testimony only as an aid, found the disputed document
valid.18chanRoblesvirtualLawlibrary

Hence, the MeTC ruled that:chanroblesvirtuallawlibrary

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the
conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the
Promissory Note) and standard specimen signatures “Rodrigo Rivera” “were written by one and the same
person”; actual view at the hearing of the enlarged photographs of the questioned signature and the
standard specimen signatures.19

Specifically, Rivera insists that: “[i]f that promissory note indeed exists, it is beyond logic for a money
lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in
default and has not been paying any interest for a loan incurred in February
1995.”20chanRoblesvirtualLawlibrary

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as “kumpadres,”
Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover
Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and
successive loan accommodations to Rivera: one, secured by a real estate mortgage and the other,
secured by only a Promissory Note.

Also completely plausible is that given the relationship between the parties, Rivera was allowed a
substantial amount of time before the Spouses Chua demanded payment of the obligation due under the
Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant
defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof rested
on the Spouses Chua having instituted the civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed
to discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and
subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question
left on where the respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses
Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate
court to apply Section 70 of the Negotiable Instruments Law (NIL).22chanRoblesvirtualLawlibrary

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do
not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a
negotiable instrument:chanroblesvirtuallawlibrary

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;

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(d) Must be payable to order or to bearer; and

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

On the other hand, Section 184 of the NIL defines what negotiable promissory note
is:chanroblesvirtuallawlibrary

SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act
is an unconditional promise in writing made by one person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses
Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees.

However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the
coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to
charge the person liable on the instrument, Rivera is still liable under the terms of the Promissory Note
that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes
demandable—31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he
failed to pay the amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the
Promissory Note.

Article 1169 of the Civil Code explicitly provides:chanroblesvirtuallawlibrary

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills
his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there
is an express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling
motive or the principal inducement for the creation of the obligation; and (4) where demand would be
useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of

interest:chanroblesvirtuallawlibrary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for. 23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default” until
the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note

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expressly provided that after 31 December 1995, default commences and the stipulation on payment of
interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995,
the due date of the obligation. On that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance
of their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay:chanroblesvirtuallawlibrary

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per
annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2)
the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of a
5% monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera,
as obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon
default.

Article 1226 of the Civil Code provides:chanroblesvirtuallawlibrary

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment
and reparation. It is an exception to the general rules on recovery of losses and damages. As an
exception to the general rule, a penal clause must be specifically set forth in the
obligation.25chanRoblesvirtualLawlibrary

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal
clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted
in the payment of the amount of P120,000.00. The measure of damages for the Rivera’s delay is limited
to the interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is
that provided by law.26chanRoblesvirtualLawlibrary

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a
month or 60% per annum. On this score, the appellate court ruled:chanroblesvirtuallawlibrary

It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31
December 1995. Given this circumstance, demand by the creditor is no longer necessary in order that
delay may exist since the contract itself already expressly so declares. The mere failure of [Spouses

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Chua] to immediately demand or collect payment of the value of the note does not exonerate [Rivera]
from his liability therefrom. Verily, the trial court committed no reversible error when it imposed interest
from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under
Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal
interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since
the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the
interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or
extrajudicial demand.[27chanRoblesvirtualLawlibrary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying
the petition of the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the
Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of
“bar by prior judgment” on whether the Court of Appeals correctly reduced the interest rate stipulated in
the Promissory Note.

Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur: (1) the
former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision
must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4)
there must be, between the first and the second action, identity of parties, of subject matter and of causes
of action.28chanRoblesvirtualLawlibrary

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject
matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’
disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R.
No. 184472, our ruling thereon affirming the Court of Appeals is a “bar by prior judgment.”

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases
involving the loan or forbearance of money.29 Thus, the legal interest accruing from the Promissory Note
is 12% per annum from the date of default on 1 January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the
advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the
rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular
No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is
divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to
30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and
executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when
this Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per
annumfrom 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1
July 2013 to date when this Decision becomes final and executor.31 We base this imposition of interest
on interest due earning legal interest on Article 2212 of the Civil Code which provides that “interest due
shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on
this point.”

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From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua
could already be determined with reasonable certainty given the wording of the Promissory
Note.32chanRoblesvirtualLawlibrary

We cite our recent ruling in Nacar v. Gallery Frames:33chanRoblesvirtualLawlibrary

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
“Damages” of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:ChanRoblesVirtualawlibrary

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, we
agree with the reduction thereof but not the ratiocination of the appellate court that the attorney’s fees are
in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already
answers as liquidated damages for Rivera’s default in paying his obligation. We award attorney’s fees,
albeit in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests.34 Thus, the award of P50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the
Spouses Chua:chanroblesvirtuallawlibrary

Face value of Stipulated Interest A & B Interest due earning legal Attorney’s fees Total Amount
the Promissory interest A & B
Note

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February 24, A. January 1, 1996 to June A. June 11, 1999 (date of Wholesale
1995 to 30, 2013 judicial demand) to June amount
December 31, 30, 2013
1995 B. July 1 2013 to date B. July 1, 2013 to date
when this Decision when this Decision
becomes final and becomes final and
executory executory
P120,000.00 A. 12 % per annum on the A. 12% per annum on the P50,000.00 Total amount
principal amount of total amount of column 2 of Columns
P120,000.00 B. 6% per annum on the 1-4
B. 6% per annum on the total amount of column 235
principal amount of
P120,000.00

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at
the rate of 6% per annum computed from its finality until full payment thereof, the interim period being
deemed to be a forbearance of credit.chanrobleslaw

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-
G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse
Salvador and Violeta Chua the following:chanroblesvirtuallawlibrary

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00 reckoned from 1 January
1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00 form 1 July 2013 to date
when this Decision becomes final and executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial
demand, to 30 June 2013, as interest due earning legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this
Decision becomes final and executor, as interest due earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full
payment thereof.
Costs against petitioner Rodrigo Rivera.

SO ORDERED.

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