Chapter1: GENERAL CONSIDERATION 18 July 97 Head Office #610948 11,671.

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BPI VS SPOUSES ROYECA
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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 Resolution[2] 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 Note[3] for P577,008.00 payable in 48 equal monthly
installments of P12,021.00, 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.
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, attorneys 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, received the eight checks from the respondents. However, two of these checks (Landbank
Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to P23,692.00 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 P48,084.00, which represented the last four monthly installments.

To secure the payment of said Promissory Note, respondents executed a Chattel On February 23, 2005, the MeTC dismissed the case and granted the respondents
Mortgage[4] in favor of Toyota over a certain motor vehicle, more particularly described as follows: counterclaim for damages, thus:
Make and Type 1993 Toyota Corolla 1.3 XL
Motor No. 2E-2649879 WHEREFORE, judgment is hereby rendered dismissing the complaint
Serial No. EE100-9512571 for lack of cause of action, and on the counterclaim, plaintiff is ordered to
Color D.B. Gray Met. indemnify the defendants as follows:

Toyota, with notice to respondents, executed a Deed of Assignment[5] transferring all its a) The sum of PhP30,000.00 as and by way of moral damages;
rights, title, and interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC). 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 attorneys fees; and
Claiming that the respondents failed to pay four (4) monthly amortizations covering the period d) To pay the costs of the suit.
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 SO ORDERED.[10]
they had already paid their obligation to FEBTC.
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the
On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents to pay the amount claimed by the petitioner. The dispositive portion of its
respondents with the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, Decision[11] dated August 11, 2005 reads:
with an alternative prayer for the payment of P48,084.00 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 WHEREFORE, premises considered, the Decision of the Metropolitan
of P24,462.73 as attorneys fees, liquidated damages, bonding fees and other expenses incurred in the Trial Court, Branch 9 dated February 23, 2005 is REVERSED and a new one
seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff when it merged entered directing the defendants-appellees to pay the plaintiff-appellant, jointly and
with and absorbed FEBTC.[7] severally,

In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing 1. The sum of P48,084.00 plus interest and/or late
Department of FEBTC eight (8) postdated checks in different amounts totaling P97,281.78. The payment charges thereon at the rate of 36% per
Acknowledgment Receipt,[8] which they attached to the Answer, showed that FEBTC received the annum from May 18, 1997 until fully paid;
following checks: 2. The sum of P10,000.00 as attorneys fees; and
3. The costs of suit.
DATE BANK CHECK NO. AMOUNT
26 May 97 Landbank #610945 P13,824.15 SO ORDERED.[12]
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 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 RTCs Decision and
reinstated the MeTCs Decision on July 12, 2006.[14] On February 13, 2007, the CA denied the petitioners
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.
III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS 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.[18] Thus, 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 plaintiffs 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.
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.
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 petitioners
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
petitioners possession of the documents pertaining to the obligation strongly buttresses its claim that the
obligation has not been extinguished. The creditors 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 petitioners 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
petitioners 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 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 P48,084.00 plus late penalty charges/interest
thereon at the rate of 12% per annum from May 18, 1997 until fully paid.
SO ORDERED.
[G.R. No. 113236. March 5, 2001]
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs., COURT OF
APPEALS and LUZON DEVELOPMENT BANK, respondents.
DECISION
QUISUMBING, J.:
This petition assails the decision[1] dated December 29, 1993 of the Court of Appeals in CA-G.R. CV
No. 29546, which affirmed the judgment[2] of the Regional Trial Court of Pasay City, Branch 113 in Civil
Case No. PQ-7854-P, dismissing Firestones complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
[D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central
Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had
as one of its client-depositors the Fojas-Arca Enterprises Company (Fojas-Arca for brevity). Fojas-Arca
maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals
of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant
to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a Franchised Dealership Agreement (Exh. B)
whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiffs products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased
on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these
purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In
turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were
honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied
[sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally
sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff
extended to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered
to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to
wit:
DATE WITHDRAWAL AMOUNT
SLIP NO.
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
Sep. 15, 1978 42130 981,500.00
These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank
forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous
special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the
amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the
absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No.
42128 dated July 15, 1978, in the amount of P981,500.00 plaintiffs belief was all the more strengthened
that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and
payment of Fojas-Arcas credit purchased then outstanding at the time. On this basis, plaintiff was
induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement
(Exh. B).
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No.
42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00
were dishonored and not paid for the reason NO ARRANGEMENT. As a consequence, the Citibank
debited plaintiffs account for the total sum of P2,078,092.80 representing the aggregate amount of the
above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it
suffered is caused by and directly attributable to defendants gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the
satisfaction of the damages suffered by it. And due to defendants refusal to pay plaintiffs claim, plaintiff
has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and
attorneys fees which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions
mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if
it were checks, the truth being that when the special withdrawal slips were received by defendant, it only
verified whether or not the signatures therein were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has
to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly
stated therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the
transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor
give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an
extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor
Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause
of action against it (pp. 1-3, Dec.; pp. 368-370, id).[3]
Petitioners complaint[4] for a sum of money and damages with the Regional Trial Court of Pasay City,
Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of
defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development
Bank was liable for damages under Article 2176[5] in relation to Articles 19[6] and 20[7] of the Civil
Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent:
1) the acceptance and payment of the special withdrawal slips without the presentation of the depositors
passbook thereby giving the impression that the withdrawal slips are instruments payable upon
presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure
of respondent bank to seasonably warn petitioner that it would not honor two of the four special
withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal
and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified
the depositor to present the passbook whenever it received a collection note from another bank, belying
petitioners claim that respondent bank was negligent in not requiring a passbook under the subject
transaction. The appellate court also found that the special withdrawal slips in question were not
purposely given the appearance of checks, contrary to petitioners assertions, and thus should not have
been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no
obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have
been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or
negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the two
intermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New
Civil Code.[8]
The issue for our consideration is whether or not respondent bank should be held liable for damages
suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased
tires from the former with special withdrawal slips drawn upon Fojas-Arcas special savings account with
respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the
same to petitioners current account, then presented the slips for payment to respondent bank. It was at
this point that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129
dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due
to insufficiency of Fojas-Arcas funds on deposit. That information came about six months from the time
Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the
amount of these withdrawal slips from petitioners account, causing the alleged pecuniary damage
subject of petitioners cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.[9]
Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not
apply in this case.[10] Petitioner itself concedes this point.[11] Thus, respondent bank was under no
obligation to give immediate notice that it would not make payment on the subject withdrawal slips.
Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect
these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent
bank could not be expected immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development
Bank, had honored and paid the previous withdrawal slips, automatically credited petitioners current
account with the amount of the subject withdrawal slips, then merely waited for the same to be honored
and paid by respondent bank. It presumed that the withdrawal slips were good.
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips.
The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its
freedom to circulate freely as a substitute for money.[12] The withdrawal slips in question lacked this
character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of millions of pesos.[13] The fact that the other
withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that
subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to
treat the accounts of its clients with the highest degree of care.[14]
In the ordinary and usual course of banking operations, current account deposits are accepted by the
bank on the basis of deposit slips prepared and signed by the depositor, or the latters agent or
representative, who indicates therein the current account number to which the deposit is to be credited,
the name of the depositor or current account holder, the date of the deposit, and the amount of the
deposit either in cash or in check.[15]
The withdrawal slips deposited with petitioners current account with Citibank were not checks, as
petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But
having erroneously accepted them as such, Citibank and petitioner as account-holder must bear the
risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the
risk and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.
[G.R. No. 123031. October 12, 1999]
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, VICENTE
ALEGRE, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails respondent appellate courts Decision,[1] dated December 8,
1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch
132. The dispositive portion of the trial courts decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay plaintiff [herein
private respondent]:
(1) the principal sum of P514,390.94 with legal interest thereon computed from August 6, 1991 until fully
paid; and
(2) the costs of suit.
SO ORDERED.[2]
Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in money market
operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
(P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note
for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos
(P516,238.67) covered private respondents placement plus interest at twenty and a half (20.5%) percent
for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred
fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the
private respondent as proceeds of his matured investment plus interest. The CHECK was drawn from
petitioners current account number 0011-0803-59, maintained with the Bank of the Philippine Islands
(BPI), main branch at Makati City.
On June 17, 1991, private respondents wife deposited the CHECK with Rizal Commercial Banking Corp.
(RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the Check
(is) Subject of an Investigation. BPI took custody of the CHECK pending an investigation of several
counterfeit checks drawn against CIFCs aforestated checking account. BPI used the check to trace the
perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several
occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent
to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel,
made a formal demand for the payment of his money market placement. In turn, CIFC promised to
replace the CHECK but required an impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint[3] for recovery of a sum of money
against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil
action[4] for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged
that BPI unlawfully deducted from CIFCs checking account, counterfeit checks amounting to one million,
seven hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos
(P1,724,364.58). The action included the prayer to collect the amount of the CHECK paid to Vicente
Alegre but dishonored by BPI.
Meanwhile, in response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a motion for
leave of court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right,
for contribution and indemnity, with respect to Alegres claim. CIFC asserted that the CHECK it issued in
favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFCs motion. However, BPI moved to dismiss the third-party
complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the
motion, the trial court dismissed the third-party complaint on November 4, 1992, after finding that the
third party complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with
RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito
Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the
original copy and forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20,
1993, he testified that on July 16, 1993, BPI encashed and deducted the said amount from the account
of CIFC, but the proceeds, as well as the CHECK remained in BPIs custody. The banks move was in
accordance with the Compromise Agreement[5] it entered with CIFC to end the litigation in RTC-Makati,
Branch 147. The compromise agreement, which was submitted for the approval of the said court,
provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P 20,000 litigation
expenses as full and final settlement of all of plaintiffs claims as contained in the Amended Complaint
dated September 10, 1992. The aforementioned amount shall be credited to plaintiffs current account
No. 0011-0803-59 maintained at defendants Main Branch upon execution of this Compromise
Agreement.
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant: otherwise stated, the
defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up the defense of
payment/discharge stipulated in par. 2 above.[6]
On July 27, 1993, BPI filed a separate collection suit[7] against Vicente Alegre with the RTC-Makati,
Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A.
Anda and forged several checks of BPIs client, CIFC. The total amount of counterfeit checks was P
1,724,364.58. BPI prevented the encashment of some checks amounting to two hundred ninety five
thousand, seven hundred seventy-five pesos and seven centavos (P295,775.07). BPI admitted that the
CHECK, payable to Vicente Alegre for P514,390.94, was deducted from BPIs claim, hence, the balance
of the loss incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos and
fifty-seven centavos (P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The
records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision of
the trial court.
Hence this appeal,[8] in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court holding that
petitioner was not discharged from the liability of paying the value of the subject check to private
respondent after BPI has debited the value thereof against petitioners current account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article 1249 of the
Civil Code in the instant case. The applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts findings that the
petitioner was guilty of negligence and delay in the performance of its obligation to the private
respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts decision ordering
petitioner to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Courts dismissal of petitioners
third-party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT BPI CHECK NO. 513397 WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF PETITIONER
AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the
pertinent laws to govern its money market transaction with private respondent, and not paragraph 2 of
Article 1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability of
paying the value of the CHECK due to the following circumstances:
1) There was ACCEPTANCE of the subject check by BPI, the drawee bank, as defined under the
Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily liable for the
payment of the check, and consequently, the drawer, herein petitioner, was discharged from its liability
thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioners account
amounted to and/or constituted a discharge of the drawers (petitioners) liability under the
instrument/subject check.[9]
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill - Where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-four hours after such delivery or such other
period as the holder may allow, to return the bill accepted or non-accepted to the Holder, he will be
deemed to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses from the
forged checks allegedly committed by the private respondent, the check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly
provides for the medium in the payment of debts. It provides that:
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.
Considering the nature of a money market transaction, the above-quoted provision should be applied in
the present controversy. As held in Perez vs. Court of Appeals,[10] a money market is a market dealing
in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a borrower through a middleman or
dealer.[11]
In the case at bar, the money market transaction between the petitioner and the private respondent is in
the nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in
money. Yet, when he presented it to RCBC for encashment, as early as June 17, 1991, the same was
dishonored by non-acceptance, with BPIs annotation: Check (is) subject of an investigation. These facts
were testified to by BPIs manager. Under these circumstances, and after the notice of dishonor,[12] the
holder has an immediate right of recourse against the drawer,[13] and consequently could immediately
file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid
tender of payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals,[14] this Court held:
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 (citation omitted). A check, whether a managers
check or ordinary check, 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.)[15]
Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFCs
current account, this did not ipso facto operate as a discharge or payment of the instrument. Although
the value of the CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente
Alegre. Instead, BPI offset the amount against the losses it incurred from forgeries of CIFC checks,
allegedly committed by Alegre. The confiscation of the value of the check was agreed upon by CIFC and
BPI. The parties intended to amicably settle the collection suit filed by CIFC with the RTC-Makati,
Branch 147, by entering into a compromise agreement, which reads:
xxx
2. Thereupon, defendant shall debit the sum of P 514,390.94 from the aforesaid current account
representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise stated, the
defendant shall not be liable to the plaintiff. Plaintiff however (sic) set-up the defense of
payment/discharge stipulated in par. 2 above.[16]
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced.[17] It is an agreement between two or more persons who, for
preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which
they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of
losing.[18] The compromise agreement could not bind a party who did not sign the compromise
agreement nor avail of its benefits.[19] Thus, the stipulations in the compromise agreement is
unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an
agreement between CIFC and BPI. Although Alegres money was in custody of the bank, the banks
possession of it was not in the concept of an owner. BPI cannot validly appropriate the money as its
own. The codal admonition on this issue is clear:
Art. 1317 -
No one may contract in the name of another without being authorized by the latter, or unless he has by
law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by
the person on whose behalf it has been executed, before it is revoked by the other contracting party.[20]
BPIs confiscation of Alegres money constitutes garnishment without the parties going through a valid
proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his
claim the property of the defendant in the hands of a third person or money owed to such third person or
a garnishee to the defendant.[21] The garnishment procedure must be upon proper order of RTC-
Makati, Branch 62, the court who had jurisdiction over the collection suit filed by BPI against Alegre. In
effect, CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender of
payment involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the obligee for the formers obligation and demanding that the latter accept the same.[22]
Tender of payment cannot be presumed by a mere inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the
following requisites must concur: (a) identity of parties or at least such as to represent the same interest
in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same
acts; and (c) the identity in the two cases should be such that the judgment which may be rendered in
one would, regardless of which party is successful, amount to res judicata in the other.[23]
The trial courts ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance Corporation vs.
Bank of the Philippine Islands now pending before Branch 147 of this Court and the Third Party
Complaint in the instant case would readily show that the parties are not only identical but also the cause
of action being asserted, which is the recovery of the value of BPI Check No. 513397 is the same. In
Civil Case No. 92-1940 and in the Third Party Complaint the rights asserted and relief prayed for, the
reliefs being founded on the facts, are identical.
xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint is hereby
ordered dismissed on ground of lis pendens.[24]
We agree with the observation of the respondent court that, as between the third party claim filed by the
petitioner against BPI in Civil Case No. 92-515 and petitioners ancillary claim against the bank in Civil
Case No. 92-1940, there is identity of parties as well as identity of rights asserted, and that any judgment
that may be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that In case plaintiff is
adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI
Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant
shall not be liable to the plaintiff.[25] Clearly, this stipulation expressed that CIFC had already
abandoned any further claim against BPI with respect to the value of BPI Check No. 513397. To ask this
Court to allow BPI to be a party in the case at bar, would amount to res judicata and would violate terms
of the compromise agreement between CIFC and BPI. The general rule is that a compromise has upon
the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or
which by implication from its terms should be deemed to have been included therein.[26] This holds true
even if the agreement has not been judicially approved.[27]
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.
[G.R. No. 105188. January 23, 1998]
MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner, vs. A. U.
VALENCIA and CO. INC., FELIX PEARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and
DELFIN JAO, respondents.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa
seeks to reverse and set aside 1) the Decision dated 27 January 1992 of the Court of Appeals which
affirmed with modification the decision of the trial court; and, 2) the Resolution dated 22 April 1992 of the
same court, which denied petitioners motion for reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to
as respondent Valencia, for brevity) and Felix Pearroyo (hereinafter called respondent Pearroyo), filed
with the Regional Trial Court of Pasig, Branch 151, a complaint for specific performance against herein
petitioner Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of
Angela M. Butte, sold to respondent Pearroyo, through respondent Valencia, a parcel of land, consisting
of 286.60 square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and
covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to
the alleged sale, the said property, together with several other parcels of land likewise owned by Angela
M. Butte, had been mortgaged by her to the Associated Banking Corporation (now Associated Citizens
Bank); that after the alleged sale, but before the title to the subject property had been released, Angela
M. Butte passed away; that despite representations made by herein respondents to the bank to release
the title to the property sold to respondent Pearroyo, the bank refused to release it unless and until all
the mortgaged properties of the late Angela M. Butte were also redeemed; that in order to protect his
rights and interests over the property, respondent Pearroyo caused the annotation on the title of an
adverse claim as evidenced by Entry No. P.E. - 6118/T-28993, inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title to the property, sometime in
April 1977, that respondents Valencia and Pearroyo discovered that the mortgage rights of the bank had
been assigned to one Tomas L. Parpana (now deceased), as special administrator of the Estate of
Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner had been collecting monthly rentals
in the amount of P800.00 from the tenants of the property, knowing that said property had already been
sold to private respondents on 15 June 1973; that despite repeated demands from said respondents,
petitioner refused and failed to deliver the title to the property. Thereupon, respondents Valencia and
Pearroyo filed a complaint for specific performance, praying that petitioner be ordered to deliver to
respondent Pearroyo the title to the subject property (TCT 28993); to turn over to the latter the sum of
P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is
delivered to respondent Pearroyo; to pay respondents the sum of P20,000.00 as attorneys fees; and to
pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking
Corporation (now Associated Citizens Bank). He contended, however, that the complaint did not state a
cause of action; that the real property in interest was the Testate Estate of Angela M. Butte, which
should have been joined as a party defendant; that the case amounted to a claim against the Estate of
Angela M. Butte and should have been filed in Special Proceedings No. A-17910 before the Probate
Court in Quezon City; and that, if as alleged in the complaint, the property had been assigned to Tomas
L. Parpana, as special administrator of the Estate of Ramon Papa, Jr., said estate should be impleaded.
Petitioner, likewise, claimed that he could not recall in detail the transaction which allegedly occurred in
1973; that he did not have TCT No. 28993 in his possession; that he could not be held personally liable
as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated
that as a result of the filing of the case, he was compelled to hire the services of counsel for a fee of
P20,000.00, for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making
common cause with respondents Valencia and Pearroyo, respondent Jao alleged that the subject lot
which had been sold to respondent Pearroyo through respondent Valencia was in turn sold to him on 20
August 1973 for the sum of P71,500.00, upon his paying earnest money in the amount of P5,000.00. He,
therefore, prayed that judgment be rendered in favor of respondents Valencia and Pearroyo; and, that
after the delivery of the title to said respondents, the latter in turn be ordered to execute in his favor the
appropriate deed of conveyance covering the property in question and to turn over to him the rentals
which aforesaid respondents sought to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioners refusal to deliver the title to the property
to respondents Valencia and Pearroyo, who in turn failed to deliver the said title to him, he suffered
mental anguish and serious anxiety for which he sought payment of moral damages; and, additionally,
the payment of attorneys fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party
complaint against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos
(respondent Reyes spouses, for short). He averred, among others, that the late Angela M. Butte was the
owner of the subject property; that due to non-payment of real estate tax said property was sold at public
auction by the City Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for
the sum of P14,000.00; that the one-year period of redemption had expired; that respondents Valencia
and Pearroyo had sued petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery
of the title to the property; that the same aforenamed respondents had acknowledged that the price paid
by them was insufficient, and that they were willing to add a reasonable amount or a minimum of
P55,000.00 to the price upon delivery of the property, considering that the same was estimated to be
worth P143,000.00; that petitioner was willing to reimburse respondent Reyes spouses whatever amount
they might have paid for taxes and other charges, since the subject property was still registered in the
name of the late Angela M. Butte; that it was inequitable to allow respondent Reyes spouses to acquire
property estimated to be worth P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that
judgment be rendered cancelling the tax sale to respondent Reyes spouses; restoring the subject
property to him upon payment by him to said respondent Reyes spouses of the amount of P14,000.00,
plus legal interest; and, ordering respondents Valencia and Pearroyo to pay him at least P55,000.00 plus
everything they might have to pay the Reyes spouses in recovering the property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioners right to
redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former
to redeem the property in question, by paying the sum of P14,000.00 plus legal interest of 12% thereon
from January 21, 1980;

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Pearroyo covering the
property in question and to deliver peaceful possession and enjoyment of the said property to the said
plaintiff, free from any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to
pay to plaintiff Felix Pearroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a deed of absolute sale over the
same property, upon the latters payment to the former of the balance of the purchase price of
P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay intervenor the sum of P5,000.00
plus legal interest of 12% from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorneys fees and litigation
expenses.
SO ORDERED.[1]
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among
others that the sale was never consummated as he did not encash the check (in the amount of
P40,000.00) given by respondents Valencia and Pearroyo in payment of the full purchase price of the
subject lot. He maintained that what said respondents had actually paid was only the amount of
P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was
dismissed because of failure to file their appellants brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial
courts decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is MODIFIED,
by ordering the defendant-appellant to deliver to plaintiff-appellees the owners duplicate of TCT No.
28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question or, if the
owners duplicate certificate cannot be produced, to authorize the Register of Deeds to cancel it and
issue a certificate of title in the name of Felix Pearroyo. In all other respects, the decision appealed from
is AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED.[2]
In affirming the trial courts decision, respondent court held that contrary to petitioners claim that he did
not encash the aforesaid check, and therefore, the sale was not consummated, there was no evidence
at all that petitioner did not, in fact, encash said check. On the other hand, respondent Pearroyo testified
in court that petitioner Papa had received the amount of P45,000.00 and issued receipts therefor.
According to respondent court, the presumption is that the check was encashed, especially since the
payment by check was not denied by defendant-appellant (herein petitioner) who, in his Answer, merely
alleged that he can no longer recall the transaction which is supposed to have happened 10 years
ago.[3]
On petitioners claim that he cannot be held personally liable as he had acted merely as attorney-in-fact
of the owner, Angela M. Butte, respondent court held that such contention is without merit. This action
was not brought against him in his personal capacity, but in his capacity as the administrator of the
Testate Estate of Angela M. Butte.[4]
On petitioners contention that the estate of Angela M. Butte should have been joined in the action as the
real party in interest, respondent court held that pursuant to Rule 3, Section 3 of the Rules of Court, the
estate of Angela M. Butte does not have to be joined in the action. Likewise, the estate of Ramon Papa,
Jr., is not an indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that Ramon
Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is basic law that contracts
bind only those who are parties thereto.[5]
Respondent court observed that the conditions under which the mortgage rights of the bank were
assigned are not clear. In any case, any obligation which the estate of Angela M. Butte might have to the
estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia and Pearroyo are not bound
by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion was denied by
respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN QUESTION
WAS CONSUMMATED IS GROUNDED ON SPECULATION OR CONJECTURE, AND IS CONTRARY
TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED
BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT
PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS
CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M. BUTTE
AND THE ESTATE OF RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS CASE.[6]
Petitioner argues that respondent Court of Appeals erred in concluding that the alleged sale of the
subject property had been consummated. He contends that such a conclusion is based on the erroneous
presumption that the check (in the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil
Code, which provides, in part, that payment by checks shall produce the effect of payment only when
they have been cashed or when through the fault of the creditor they have been impaired.[7] Petitioner
insists that he never cashed said check; and, such being the case, its delivery never produced the effect
of payment. Petitioner, while admitting that he had issued receipts for the payments, asserts that said
receipts, particularly the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not prove
payment. He avers that there must be a showing that said check had been encashed. If, according to
petitioner, the check had been encashed, respondent Pearroyo should have presented PCIB Check No.
761025 duly stamped received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respondents
Valencia and Pearroyo, as evidenced by a letter addressed to him in which said respondents wrote, in
part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M.
Butte to pay you the aforementioned amount of P75,000.00 for the release and cancellation of subject
propertys mortgage. The money is with me and if it is alright with you, I would like to tender the payment
as soon as possible. x x x.[8]

We find no merit in petitioners arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given petitioner Myron C. Papa the
amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos
(P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts,[9] and having issued receipts therefor.[10] Petitioners
assertion that he never encashed the aforesaid check is not subtantiated and is at odds with his
statement in his answer that he can no longer recall the transaction which is supposed to have
happened 10 years ago. After more than ten (10) years from the payment in part by cash and in part by
check, the presumption is that the check had been encashed. As already stated, he even waived the
presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed,
pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditors
unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence
in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which it was given.[11] It has,
likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of
loss or injury[12] unless presentment is otherwise excused. This is in harmony with Article 1249 of the
Civil Code under which payment by way of check or other negotiable instrument is conditioned on its
being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a
check would be a creditor under this provision and if its non-payment is caused by his negligence,
payment will be deemed effected and the obligation for which the check was given as conditional
payment will be discharged.[13]
Considering that respondents Valencia and Pearroyo had fulfilled their part of the contract of sale by
delivering the payment of the purchase price, said respondents, therefore, had the right to compel
petitioner to deliver to them the owners duplicate of TCT No. 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that
the conditions under which said mortgage rights of the bank were assigned are not clear. Indeed, a
perusal of the original records of the case would show that there is nothing there that could shed light on
the transactions leading to the said assignment of rights; nor is there any evidence on record of the
conditions under which said mortgage rights were assigned. What is certain is that despite the said
assignment of mortgage rights, the title to the subject property has remained in the name of the late
Angela M. Butte.[14] This much is admitted by petitioner himself in his answer to respondents complaint
as well as in the third-party complaint that petitioner filed against respondent-spouses Arsenio B. Reyes
and Amanda Santos.[15] Assuming arquendo that the mortgage rights of the Associated Citizens Bank
had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights
validly exist and constitute a lien on the property, the estate may file the appropriate action to enforce
such lien. The cause of action for specific performance which respondents Valencia and Pearroyo have
against petitioner is different from the cause of action which the estate of Ramon Papa, Jr. may have to
enforce whatever rights or liens it has on the property by reason of its being an alleged assignee of the
banks rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the
Rules of Court, an executor or administrator may sue or be sued without joining the party for whose
benefit the action is presented or defended, thus:
Sec. 3. Representative parties. - A trustee of an express trust, a guardian, executor or administrator, or a
party authorized by statute, may sue or be sued without joining the party for whose benefit the action is
presented or defended; but the court may, at any stage of the proceedings, order such beneficiary to be
made a party. An agent acting in his own name and for the benefit of an undisclosed principal may sue
or be sued without joining the principal except when the contract involves things belonging to the
principal.[16]
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of
the action can be had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has
over the property may still be enforced regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated
27 January 1992 is AFFIRMED.
SO ORDERED.
G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK,
respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9
February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors
Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No.
2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as
drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However,
the checks were dishonored for having been drawn against insufficient funds.
 note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent participation in respect thereof, to petitioner.
Pilipinas Bank ("Pilipinas"). It reads as follows:
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking
PILIPINAS BANK private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly
Makati Stock Exchange Bldg., referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly
Ayala Avenue, Makati, agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did
Metro Manila not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
February 9, 1981
——————— Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial
VALUE DATE satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him
said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the
TO Raul Sesbreño promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC
PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
April 6, 1981
———————— In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
MATURITY DATE Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC
PN No. 2731, which to date apparently remains in the custody of the SEC.4
NO. 10805
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an
DENOMINATED CUSTODIAN RECEIPT action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private
respondents Delta and Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES complaint and counterclaims for lack of merit and for lack of cause of action, with costs against
FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent herein petitioner.
indicated.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT March 1989, the Court of Appeals denied the appeal and held:6
NUMBER DATE VALUE BY HOLDER PAYEE
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
UNDERWRITERS
FINANCE CORP. This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731
when its entire face value was already obligated or earmarked for set-off or compensation is difficult to
We further certify that these securities may be inspected by you or your duly authorized representative at comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and legally
any time during regular banking hours. obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of
Upon your written instructions we shall undertake physical delivery of the above securities fully assigned the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement
to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days against it. (p. 11, Decision)
after its maturity.
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in
PILIPINAS BANK toto. Cost against plaintiff-appellant.
(By Elizabeth De Villa
Illegible Signature)1 Petitioner moved for reconsideration of the above Decision, without success.

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the
amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was
asking for the physical delivery of the underlying promissory note. Petitioner then examined the original
of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would
mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and
private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to
give due course to the petition and required the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that
respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805
issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to
the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor
the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not
necessary for present purposes to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the
extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-
negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-
maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee
Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by
Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note10 and
because maker Delta and payee Philfinance intended that this Note would be offset against the
outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not
against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid,
petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN
No. 2731 against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be
negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable
instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be
assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a
negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be
negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but
the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the assignee taking subject to the equities between the
original parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning
or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be
quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No.
143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00
each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon
Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is
scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of
transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the
Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not
disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by
the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this:
Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on
10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e.,
P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both
also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in
cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity and
enforceability of the assignment in favor of petitioner.14 Delta's argument that Philfinance's sale or
assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is
never lightly inferred,15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every point.16 Nothing of
the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals,17 the Court,
speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As defined by
Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments
(involving large amounts) where lenders and borrowers do not deal directly with each other but through a
middle manor a dealer in the open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in
any manner conveyed to another person or entity, with or without recourse". The fundamental function of
the money market device in its operation is to match and bring together in a most impersonal manner
both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to provide quick mobility of money and
securities."
The impersonal character of the money market device overlooks the individuals or entities concerned.
The issuer of a commercial paper in the money market necessarily knows in advance that it would be
expenditiously transacted and transferred to any investor/lender without need of notice to said issuer. In
practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to
the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the Philippine
commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal
basis. And as specifically required by Presidential Decree No. 678, the investing public must be given
adequate and effective protection in availing of the credit of a borrower in the commercial paper
market.18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731
and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights
under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and
indeed none could have taken place. The essential requirements of compensation are listed in the Civil
Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No.
143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before
the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the
assignment to petitioner would have prevented compensation had taken place between Philfinance and
Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner,
Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to
the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment
effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became
owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14
July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner but
also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of
his rights as assignee after compensation had taken place by operation of law because the offsetting
instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely substituted in the place of the
assignor 20 and that the assignee acquires his rights subject to the equities — i.e., the defenses —
which the debtor could have set up against the original assignor before notice of the assignment was
given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set
up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis
supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment,
pays his creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay
before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the
duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt
or notice.22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC
PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not
have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected
on 9 February 1981. He could have notified Delta as soon as his money market placement matured on
13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet
to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981
when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805
issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta
at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and
because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to
petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent
Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends
that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805
with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully
assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face
value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9
February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had
been assigned to petitioner by payee Philfinance;24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any
time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No.
2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship
receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting
Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon
maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial
court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical
delivery to him of DMC PN No. 2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a
solidary obligation to pay the amount represented by a portion of the Note assigned to him by
Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The
solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under
article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation
requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis
petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability
upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private
respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was
taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and
private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner
Sesbreño.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating
Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the
depository was owed, however, to petitioner Sesbreño as beneficiary of the custodianship or depository
agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money market transaction entered into
by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-
vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control
of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to
constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It
will be seen that custodianship agreements are designed to facilitate transactions in the money market
by providing a basis for confidence on the part of the investors or placers that the instruments bought by
them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have need of
them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon
demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a
term for such return may have been established in the said contract.26 Accordingly, any stipulation in
the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement
or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any
party that needs the equalizing protection of the law in money market transactions, it is the members of
the general public whom place their savings in such market for the purpose of generating interest
revenues.27 The custodian bank, if it is not related either in terms of equity ownership or management
control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional
banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to
protect the interest of its client the borrower or dealer as against the placer of funds. The providers of
such funds must be safeguarded from the impact of stipulations privately made between the borrowers
or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with
it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or
offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the
demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in
obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon
receipt of "written instructions" from petitioner Sesbreño. The ostensible term written into the DCR (i.e.,
"should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense
against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner Sesbreño at the time the money market placement
with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or
depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent
with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became
entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-
beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note
deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation
inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by
petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost
by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per
annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas
should be treated as one corporate entity — need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either
by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead
Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities,
but has been able only to cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on
the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or
another of the three (3) concededly related companies used the other two (2) as mere alter egos or that
the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is
simply not enough evidence of record to justify disregarding the separate corporate personalities of delta
and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to
petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R.
CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET
ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against
Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for
damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per
annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals
are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED
Chapter 2: NEGOTIABILITY
RIRESTONE TIRE: 2ND CASE
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);
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).
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.
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 "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;

After trial, the court a quo rendered its decision dismissing the instant complaint. 3 (b) Must contain an unconditional promise or order to pay a sum certain in money;

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, (c) Must be payable on demand, or at a fixed or determinable future time;
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 (d) Must be payable to order or to bearer; and
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 (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The instant petition is bereft of merit.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
the issues involved in this recourse. 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.
SECURITY BANK
AND TRUST COMPANY xxx xxx xxx
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines Atty. Calida:
SUCAT OFFICEP 4,000.00
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?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be
read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have
with facility so expressed that fact in clear and categorical terms in the documents, instead of having the
word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the
wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the
bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what
is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for
resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls
for the application of the elementary rule that the interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to
the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has,
by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17
praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or
particularity (a) the due date or dates 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:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any document
evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against
and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere
rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract,
but a rule of substantive law prescribing a condition without which the execution of a pledge contract
cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its
lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in
the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the
CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can
be premised on a multitude of other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court
of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be
not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be
issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part
of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary
verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that
he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly,
none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA CASTILLO, respondents.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of
all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association was, at the time these events happened, operating
in Calapan, Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over
a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by
the Philippine Fish Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to
have been indorsed by their respective payees, followed by Gomez as second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing.2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask
whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13,
1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The
total withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared
warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by
the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it
had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion
for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court
modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was
made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association,
Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the
amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this petition
for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously
credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo
Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case
are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that to all appearances belonged to the depositor, who could
therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to
its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The proceeds of the warrants were
withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own
deposit.7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who
was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the
treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds.
There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden
Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the
signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that
Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed
Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was 1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not received a single centavo
from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings
to withdraw — not once, not twice, but thrice — from the uncleared treasury warrants in the total amount
of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it
also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply
because of "the lapse of one week."8 For a bank with its long experience, this explanation is
unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal
side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is reserved to charge back to the
depositor's account any amount previously credited, whether or not such item is returned. This also
applies to checks drawn on local banks and bankers and their branches as well as on this bank, which
are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis
supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back to the depositor's account any amount previously
credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently
been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the
conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract,
the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of
this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged
'with more or less rigor by the courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any
case that clearance could be implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only added to its belief that the treasury warrants had
indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been
no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would
have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof
to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the
supposed dishonor of the warrants was not communicated to Golden Savings before it made its own
payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that
is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been established.9 This was the
finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of
Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by
clear, positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is
of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the
order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the
case at bar. This conclusion conforms to Abubakar vs. Auditor 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
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.

G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-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.
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,
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.
PHILIPPINE NATIONAL BANK
Vs
ERLANDO T. RODRIGUEZ Promulgated:
and NORMA RODRIGUEZ,
DECISION
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to
order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of the Amended Decision[1] of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).[2]
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank
(PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-
4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their business, they had a
discounting[3] arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA),
an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the
spouses would replace the postdated checks with their own checks issued in the name of the members.
It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited
by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total
amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all
members of PEMSLA.[4]
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason Account Closed. The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the
Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses
Rodriguez incurred losses from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They
sought to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.
In its Answer,[5] PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually
did not intend for the named payees to receive the proceeds of the checks. Consequently, the payees
were considered as fictitious payees as defined under the Negotiable Instruments Law (NIL). Being
checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere
delivery. PNBs Answer included its cross-claim against its co-defendants PEMSLA and the MCP,
praying that in the event that judgment is rendered against the bank, the cross-defendants should be
ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were
dismissed. The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or
restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No.
810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit,
Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal
rate of interest thereon to be computed from the filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of
damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their
having incurred great dificulty (sic) especially in the residential subdivision business, which was not
pushed through and the contractor even threatened to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorneys fees in the amount of P150,000.00 considering that this case does not involve very
complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.[6]
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order.
In a Decision[7] dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court
a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of
action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value
of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by
the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and
PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees
would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for
PEMSLAs checks with the full value of the said loans. This is the only obvious explanation as to why all
the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for presentment to
the defendant-appellant that led to this present controversy. It also appears that the teller who accepted
the said checks was PEMSLAs officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were
never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part
of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly issued post-dated
checks to its qualified members who had applied for loans. However, because of PEMSLAs insufficiency
of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor
of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the
officers of PEMSLA and other members would be able to claim their loans, despite the fact that they
were disqualified for one reason or another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not applied at all. x x x.[8] (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were fictitious payees because they were not the
intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their
faces were unquestionably payable to order; and that PNB committed a breach of contract when it paid
the value of the checks to PEMSLA without indorsement from the payees. They also argued that their
cause of action is not only against PEMSLA but also against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of
which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for
the following:
1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999
until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorneys fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING
WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated
in this case on 22 July 2004.
SO ORDERED.[9]
The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks
to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to
PEMSLA without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to order or to bearer and who
bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply
proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the
bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final
may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of
achieving justice for the litigants.[10]
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court
does not sanction careless disposition of cases by courts of justice. The highest degree of diligence
must go into the study of every controversy submitted for decision by litigants. Every issue and factual
detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before
the promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check
is considered as a bearer instrument. A check is a bill of exchange drawn on a bank payable on
demand.[11] It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. It may be drawn payable to the order of
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.
SEC. 9. When payable to bearer. The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the
person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank.[12] (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of negotiation. Under Section
30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer,
it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder
completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the
NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known to the person making it
so payable. Thus, checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent.
We have yet to discuss a broader meaning of the term fictitious as used in the NIL. It is for this reason
that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since
our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the
United States.[13]
A review of US jurisprudence yields that an actual, existing, and living payee may also be fictitious if the
maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check for convenience or to cover up
an illegal activity.[14] Thus, a check made expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check,
the payee is considered a fictitious payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer
of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any intention that the payee should
receive the proceeds of the check.[15]
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.[16] In the said
case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back
of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal
profit. When the corporation filed an action against the bank to recover the amount of the checks, the
claim was denied.
The US Supreme Court held in Mueller that when the person making the check so payable did not intend
for the specified payee to have any part in the transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery.
Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make
payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.[17]
The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc.[18]
upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the drawer
of the check who was in a better position to prevent the loss in the first place. Due care is not even
required from the drawee or depositary bank in accepting and paying the checks. The effect is that a
showing of negligence on the part of the depositary bank will not defeat the protection that is derived
from this rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip
it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme
Court in Getty:
Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might
have well induced a prudent banker to investigate and other permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there is a commercial bad faith exception to UCC 3-
405, applicable when the transferee acts dishonestly where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x
Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC
3-405 but imposes on all parties an obligation to act with honesty in fact. x x x[19] (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees
of the checks.
In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that
the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA that had a rediscounting
arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were fictitious in its broader
context.
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend
for the named payees to be part of the transaction involving the checks. At most, the banks thesis shows
that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the
part of the payees, however, was not tantamount to a lack of intention on the part of respondents-
spouses that the payees would not receive the checks proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a
requisite condition of a fictitious-payee situation that the maker of the check intended for the payee to
have no interest in the transaction.
Because of a failure to show that the payees were fictitious in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank
bears the loss.[20]
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations.[21] This Court has recognized the unique public
interest possessed by the banking industry and the need for the people to have full trust and confidence
in their banks.[22] For this reason, banks are minded to treat their customers accounts with utmost care,
confidence, and honesty.[23]
In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the
drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the drawers account.[24]
In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against
respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions
of the drawers. Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,[25] this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater
than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise
the highest degree of diligence in the selection and supervision of their employees.[26]
PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.[27]
PNBs argument that there is no loss to compensate since no demand for payment has been made by
the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason Account Closed. These PEMSLA checks were the corresponding
payments to the Rodriguez checks. Since they could not encash the PEMSLA checks, respondents-
spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to
named payees, PNB was duty-bound by law and by banking rules and procedure to require that the
checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be
held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to
the complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure
to file an answer is a ground for a declaration that defendant
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be
without prejudice to whatever action the bank might take against its co-defendants in the trial court.
To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to
P50,000.00.[29]
WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award
for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal,
or administrative action PNB might take against PEMSLA, MPC, and the employees involved.
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of
Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946,
the check Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to the order of
"cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in act. On
November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee
bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek
Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946,
appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to exchange
Exhibit A — which he (appellant) then brought with him — with cash alleging that he needed badly the
sum of P4,000 represented by the check, but could not withdraw it from the bank, it being then already
closed; that in view of this request and relying upon appellant's assurance that he had sufficient funds in
the blank to meet Exhibit A, and because they used to borrow money from each other, even before the
war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant
delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts to notify him
that the check had been dishonored by the bank, appellant could not be located any-where, until he was
summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection therewith; and
that appellant has not paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is
whether under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By
post dating a check, or issuing such check in payment of an obligation the offender knowing that at the
time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient to cover
the amount of the check, and without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it
must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been endorsed
by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the proposition that "by
uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the following
line of reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did
so with full knowledge that it would be dishonored upon presentment. In that sense, the appellant could
not be said to have acted fraudulently because the complainant, in so accepting the check as it was
drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he
was running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the
Bank required the indorsement of the drawer before honoring a check payable to "cash." But cases there
are too, where no such requirement had been made . It depends upon the circumstances of each
transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a
check payable to bearer, and the bank may pay it to the person presenting it for payment without the
drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York
(1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104
N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash "does not purport to be the name
of any person", and hence the instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it without any indorsement. . . .
(Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand
identification and /or assurance against possible complications, — for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank
may therefore require, for its protection, that the indorsement of the drawer — or of some other person
known to it — be obtained. But where the Bank is satisfied of the identity and /or the economic standing
of the bearer who tenders the check for collection, it will pay the instrument without further question; and
it would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and
is payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment,
need not have the holder identified, and is not negligent in falling to do so. . . . (Michie on Banks and
Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment need not
necessarily have the holder identified and ordinarily may not be charged with negligence in failing to do
so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for suspecting any irregularity, it
will be protected in paying a bearer check, "no matter what facts unknown to it may have occurred prior
to the presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely
reasonable for the bank to insist that holder give satisfactory proof of his identity. . . . (Paton's Digest,
Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected
with its dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer had
insufficient funds — not because the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the
writ of certiorari is denied and the decision of the Court of Appeals is hereby affirmed, with costs.
SO ORDERED.
ILANO VS ESPAOL
DECISION
CARPIO MORALES, J.:
The Court of Appeals having affirmed the dismissal by Branch 20 of the Regional Trial Court (RTC) of
Cavite at Imus, for lack of cause of action, Civil Case No. 2079-00, the complaint filed by herein
petitioner Victoria J. Ilano for Revocation/Cancellation of Promissory Notes and Bills of Exchange
(Checks) with Damages and Prayer for Preliminary Injunction or Temporary Restraining Order (TRO),[1]
against herein respondents 15 named defendants (and several John Does), a recital of the pertinent
allegations in the complaint, quoted verbatim as follows, is in order:
xxx
3. That defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She has been with them
for several years already, and through the years, defendant ALONZO was able to gain the trust and
confidence of [petitioner] and her family;
4. That due to these trust and confidence reposed upon defendant ALONZO by [petitioner], there were
occasions when defendant ALONZO was entrusted with [petitioners] METROBANK Check Book
containing either signed or unsigned blank checks, especially in those times when [petitioner] left for the
United States for medical check-up;
5. Sometime during the second week of December 1999, or thereabouts, defendant ALONZO by means
of deceit and abuse of confidence succeeded in procuring Promissory Notes and signed blank checks
from [petitioner] who was then recuperating from illness;
6. That as stated, aside from the said blank checks, defendant ALONZO likewise succeeded in inducing
[petitioner] to sign the Promissory Notes antedated June 8, 1999 in the amount of PESOS: ONE
MILLION FOUR HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED SEVENTY TWO (Php
1,428,272.00) payable to defendants EDITH CALILAP and DANILO CALILAP, and another Promissory
Noted dated March 1999 in the amount of PESOS: ONE MILLION (Php 1,000,000.00) payable to the
same defendants EDITH CALILAP and DANILO CALILAP, copies of said Promissory Notes are hereto
attached as Annexes A and A-1 hereof;
7. That another Promissory Note antedated October 1, 1999 thru the machination of defendant
ALONZO, was signed by [petitioner] in the amount of PESOS: THREE MILLION FORTY SIX
THOUSAND FOUR HUNDRED ONE (Php 3,046,401.00) excluding interest, in favor of her co-
defendants ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN REYES, JANE
BACAREL and CHERRY CAMACLANG, a copy of said Promissory Note is hereto attached as Annex B
hereof;
8. That the Promissory Notes and blank checks were procured thru fraud and deceit. The consent of the
[petitioner] in the issuance of the two (2) aforementioned Promissory Notes was vitiated. Furthermore,
the same were issued for want of consideration, hence, the same should be cancelled, revoked or
declared null and void;
9. That as clearly shown heretofore, defendant ALONZO in collusion with her co-defendants, ESTELA
CAMACLANG, ALLAN CAMACLANG and ESTELITA LEGASPI likewise was able to induce plaintiff to
sign several undated blank checks, among which are:
all in the total amount of Php 3,031,600.00, copies of said checks are hereto attached as Annexes C, C-
1, C-2, C-3 and C-4, respectively;
10. That aside from the checks mentioned heretofore, defendant ALONZO, confederated and conspired
with the following co-defendants, FLORA CABRERA, NEMIA CASTRO, EDITH CALILAP, DANILO
CALILAP, GLORIA DOMINGUEZ, CARMENCITA GONZALES and ANNILYN C. SABALE and took
advantage of the signature of [petitioner] in said blank checks which were later on completed by them
indicated opposite their respective names and the respective amount thereof, as follows:
Copy attached as Annexes D, D-1, D-2, D-3, D-4, D-5, D-6, D-7, D-8, D-9 and D-10, respectively;
Furthermore, defendant ALONZO colluded and conspired with defendant NEMIA CASTO in procuring
the signature of [petitioner] in documents denominated as Malayang Salaysay dated July 22, 1999 in the
amount of PESOS: ONE HUNDRED FIFTY THOUSAND (Php 150,000.00) and another Malayang
Salaysay dated November 22, 1999 in the amount of PESOS: ONE HUNDRED THOUSAND (Php
100,000.00) Annexes D-11 and D-12 hereof;
11. That said defendants took undue advantage of the signature of [petitioner] in the said blank checks
and furthermore forged and or falsified the signature of [petitioner] in other unsigned checks and as it
was made to appear that said [petitioner] is under the obligation to pay them several amounts of money,
when in truth and in fact, said [petitioner] does not owe any of said defendant any single amount;
12. That the issuance of the aforementioned checks or Promissory Notes or the aforementioned
Malayang Salaysay to herein defendants were tainted with fraud and deceit, and defendants conspired
with one another to defraud herein [petitioner] as the aforementioned documents were issued for want of
consideration;
13. That the aforesaid defendants conspiring and confederating together and helping one another
committed acts of falsification and defraudation which they should be held accountable under law;
14. The foregoing acts, and transactions, perpetrated by herein defendants in all bad faith and malice,
with malevolence and selfish intent are causing anxiety, tension, sleepless nights, wounded feelings,
and embarrassment to [petitioner] entitling her to moral damages of at least in the amount of PESOS:
FIVE HUNDRED THOUSAND (Php 500,000.00);
15. That to avoid repetition of similar acts and as a correction for the public good, the defendants should
be held liable to [petitioner] for exemplary damages in the sum of not less than the amount of PESOS:
TWO HUNDRED THOUSAND (Php 200,000.00);
16. That to protect the rights and interest of the [petitioner] in the illegal actuations of the defendants, she
was forced to engage the services of counsel for which she was obliged to pay the sum of PESOS: ONE
HUNDRED THOUSAND (Php 100,000.00) by way of Attorneys fees plus the amount of PESOS: THREE
THOUSAND (Php 3,000.00) per appearance in court;
x x x (Emphasis and underscoring supplied)
The named defendants-herein respondents filed their respective Answers invoking, among other
grounds for dismissal, lack of cause of action, for while the checks subject of the complaint had been
issued on account and for value, some had been dishonored due to ACCOUNT CLOSED; and the
allegations in the complaint are bare and general
By Order[2] dated October 12, 2000, the trial court dismissed petitioners complaint for failure to allege
the ultimate facts-bases of petitioners claim that her right was violated and that she suffered damages
thereby.
On appeal to the Court of Appeals, petitioner contended that the trial court
A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND LAW ON WHICH THE
APPEALED ORDER WAS BASED, THEREBY RENDERING SAID ORDER NULL AND VOID.
B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO ALLEGE ULTIMATE FACTS ON
WHICH [PETITIONER] RELIES ON HER CLAIM THEREBY DISMISSING THE CASE FOR LACK OF
CAUSE OF ACTION.
C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION TO DISMISS THAT CONTAINED A
FAULTY NOTICE OF HEARING AS THE SAME IS MERELY ADDRESSED TO THE BRANCH CLERK
OF COURT.[3]
In its Decision[4] of March 21, 2003 affirming the dismissal order of the trial court, the appellate court
held that the elements of a cause of action are absent in the case:
xxx
Such allegations in the complaint are only general averments of fraud, deceit and bad faith. There were
no allegations of facts showing that the acts complained of were done in the manner alleged. The
complaint did not clearly ascribe the extent of the liability of each of [respondents]. Neither did it state
any right or cause of action on the part of [petitioner] to show that she is indeed entitled to the relief
prayed for. In the first place, the record shows that subject checks which she sought to cancel or revoke
had already been dishonored and stamped ACCOUNT CLOSED. In fact, there were already criminal
charges for violation of Batas Pambansa Blg. 22 filed against [petitioner] previous to the filing of the civil
case for revocation/cancellation. Such being the case, there was actually nothing more to cancel or
revoke. The subject checks could no longer be negotiated. Thus, [petitioners] allegation that the
[respondents] were secretly negotiating with third persons for their delivery and/or assignment, is
untenable.
In the second place, we find nothing on the face of the complaint to show that [petitioner] denied the
genuineness or authenticity of her signature on the subject promissory notes and the allegedly signed
blank checks. She merely alleged abuse of trust and confidence on the part of [Alonzo]. Even assuming
arguendo that such allegations were true, then [petitioner] cannot be held totally blameless for her
predicament as it was by her own negligence that subject instruments/signed blank checks fell into the
hands of third persons. Contrary to [petitioners] allegations, the promissory notes show that some of the
[respondents] were actually creditors of [petitioner] and who were issued the subject checks as
securities for the loan/obligation incurred. Having taken the instrument in good faith and for value, the
[respondents] are therefore considered holders thereof in due course and entitled to payment.
x x x (Underscoring supplied)
Hence, the present petition for review on certiorari, petitioner faulting the appellate court:
1. . . . in sustaining the dismissal of the complaint upon the ground of failure to state a cause of action
when there are other several causes of action which ventilate such causes of action in the complaint;
2. . . . in finding that a requirement that a Decision which should express therein clearly and distinctly the
facts and the law on which it is based does not include cases which had not reached pre-trial or trial
stage;
3. . . . in not finding that a notice of hearing which was addressed to the Clerk of Court is totally defective
and that subsequent action of the court did not cure the flaw.[5]
In issue then is whether petitioners complaint failed to state a cause of action.
A cause of action has three elements: (1) the legal right of the plaintiff, (2) the correlative obligation of
the defendant, and (3) the act or omission of the defendant in violation of said legal right. In determining
the presence of these elements, inquiry is confined to the four corners of the complaint[6] including its
annexes, they being parts thereof.[7] If these elements are absent, the complaint becomes vulnerable to
a motion to dismiss on the ground of failure to state a cause of action.[8]
As reflected in the above-quoted allegations in petitioners complaint, petitioner is seeking twin reliefs,
one for revocation/cancellation of promissory notes and checks, and the other for damages.
Thus, petitioner alleged, among other things, that respondents, through deceit, abuse of confidence
machination, fraud, falsification, forgery, defraudation, and bad faith, and with malice, malevolence and
selfish intent, succeeded in inducing her to sign antedated promissory notes and some blank checks,
and [by taking] undue advantage of her signature on some other blank checks, succeeded in procuring
them, even if there was no consideration for all of these instruments on account of which she suffered
anxiety, tension, sleepless nights, wounded feelings and embarrassment.
While some of the allegations may lack particulars, and are in the form of conclusions of law, the
elements of a cause of action are present. For even if some are not stated with particularity, petitioner
alleged 1) her legal right not to be bound by the instruments which were bereft of consideration and to
which her consent was vitiated; 2) the correlative obligation on the part of the defendants-respondents to
respect said right; and 3) the act of the defendants-respondents in procuring her signature on the
instruments through deceit, abuse of confidence machination, fraud, falsification, forgery, defraudation,
and bad faith, and with malice, malevolence and selfish intent.
Where the allegations of a complaint are vague, indefinite, or in the form of conclusions, its dismissal is
not proper for the defendant may ask for more particulars.[9]
With respect to the checks subject of the complaint, it is gathered that, except for Check No.
0084078,[10] they were drawn all against petitioners Metrobank Account No. 00703-955536-7.
Annex D-8[11] of the complaint, a photocopy of Check No. 0085134, shows that it was dishonored on
January 12, 2000 due to ACCOUNT CLOSED. When petitioner then filed her complaint on March 28,
2000, all the checks subject hereof which were drawn against the same closed account were already
rendered valueless or non-negotiable, hence, petitioner had, with respect to them, no cause of action.
With respect to above-said Check No. 0084078, however, which was drawn against another account of
petitioner, albeit the date of issue bears only the year − 1999, its validity and negotiable character at the
time the complaint was filed on March 28, 2000 was not affected. For Section 6 of the Negotiable
Instruments Law provides:
Section 6. Omission; seal; particular money. The validity and negotiable character of an instrument are
not affected by the fact that
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been given therefor; o
(c) Does not specify the place where it is drawn or the place where it is payable; o
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is to be made.
x x x (Emphasis supplied)
However, even if the holder of Check No. 0084078 would have filled up the month and day of issue
thereon to be December and 31, respectively, it would have, as it did, become stale six (6) months or
180 days thereafter, following current banking practice.[12]
It is, however, with respect to the questioned promissory notes that the present petition assumes merit.
For, petitioners allegations in the complaint relative thereto, even if lacking particularity, does not as
priorly stated call for the dismissal of the complaint.
WHEREFORE, the petition is PARTLY GRANTED.
The March 21, 2003 decision of the appellate court affirming the October 12, 2000 Order of the trial
court, Branch 20 of the RTC of Imus, Cavite, is AFFIRMED with MODIFICATION in light of the foregoing
discussions
The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its docket and take further
proceedings thereon only insofar as the complaint seeks the revocation/cancellation of the subject
promissory notes and damages.
Let the records of the case be then REMANDED to the trial court.
SO ORDERED.
Chapter 3: INTERPRETATION OF INSTRUMENTS
SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, petitioners, vs.
MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMECS** REALTY AND DEVELOPMENT
CORP. and the REGISTER OF DEEDS OF BULACAN, respondents.
DECISION
PUNO, J.:
Petitioners, Spouses Evangelista (Petitioners), are before this Court on a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, assailing the decision of the Court of Appeals
dismissing their petition.
Petitioners filed a complaint[1] for annulment of titles against respondents, Mercator Finance
Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds
of Bulacan. Petitioners claimed being the registered owners of five (5) parcels of land[2] contained in the
Real Estate Mortgage[3] executed by them and Embassy Farms, Inc. (Embassy Farms). They alleged
that they executed the Real Estate Mortgage in favor of Mercator Financing Corporation (Mercator) only
as officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory
note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any
consideration as to them since they did not personally obtain any loan or credit accommodations. There
being no principal obligation on which the mortgage rests, the real estate mortgage is void.[4] With the
void mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale
to it as the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the
subsequent sale of the same parcels of land to respondent Lydia P. Salazar (Salazar), and the transfer
of the titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty
& Development Corporation (Lamecs).
Mercator admitted that petitioners were the owners of the subject parcels of land. It, however, contended
that on February 16, 1982, plaintiffs executed a Mortgage in favor of defendant Mercator Finance
Corporation for and in consideration of certain loans, and/or other forms of credit accommodations
obtained from the Mortgagee (defendant Mercator Finance Corporation) amounting to EIGHT
HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100 (P844,625.78)
PESOS, Philippine Currency and to secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.[5] It contended that since petitioners
and Embassy Farms signed the promissory note[6] as co-makers, aside from the Continuing Suretyship
Agreement[7] subsequently executed to guarantee the indebtedness of Embassy Farms, and the
succeeding promissory notes[8] restructuring the loan, then petitioners are jointly and severally liable
with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of
the mortgaged properties are valid.
Respondents Salazar and Lamecs asserted that they are innocent purchasers for value and in good
faith, relying on the validity of the title of Mercator. Lamecs admitted the prior ownership of petitioners of
the subject parcels of land, but alleged that they are the present registered owner. Both respondents
likewise assailed the long silence and inaction by petitioners as it was only after a lapse of almost ten
(10) years from the foreclosure of the property and the subsequent sales that they made their claim.
Thus, Salazar and Lamecs averred that petitioners are in estoppel and guilty of laches.[9]
During pre-trial, the parties agreed on the following issues:
a. Whether or not the Real Estate Mortgage executed by the plaintiffs in favor of defendant Mercator
Finance Corp. is null and void;
b. Whether or not the extra-judicial foreclosure proceedings undertaken on subject parcels of land to
satisfy the indebtedness of Embassy Farms, Inc. is (sic) null and void;
c. Whether or not the sale made by defendant Mercator Finance Corp. in favor of Lydia Salazar and that
executed by the latter in favor of defendant Lamecs Realty and Development Corp. are null and void;
d. Whether or not the parties are entitled to damages.[10]
After pre-trial, Mercator moved for summary judgment on the ground that except as to the amount of
damages, there is no factual issue to be litigated. Mercator argued that petitioners had admitted in their
pre-trial brief the existence of the promissory note, the continuing suretyship agreement and the
subsequent promissory notes restructuring the loan, hence, there is no genuine issue regarding their
liability. The mortgage, foreclosure proceedings and the subsequent sales are valid and the complaint
must be dismissed.[11]
Petitioners opposed the motion for summary judgment claiming that because their personal liability to
Mercator is at issue, there is a need for a full-blown trial.[12]
The RTC granted the motion for summary judgment and dismissed the complaint. It held:
A reading of the promissory notes show (sic) that the liability of the signatories thereto are solidary in
view of the phrase jointly and severally. On the promissory note appears (sic) the signatures of Eduardo
B. Evangelista, Epifania C. Evangelista and another signature of Eduardo B. Evangelista below the
words Embassy Farms, Inc. It is crystal clear then that the plaintiffs-spouses signed the promissory note
not only as officers of Embassy Farms, Inc. but in their personal capacity as well(.) Plaintiffs(,) by affixing
their signatures thereon in a dual capacity have bound themselves as solidary debtor(s) with Embassy
Farms, Inc. to pay defendant Mercator Finance Corporation the amount of indebtedness. That the
principal contract of loan is void for lack of consideration, in the light of the foregoing is untenable.[13]
Petitioners motion for reconsideration was denied for lack of merit.[14] Thus, petitioners went up to the
Court of Appeals, but again were unsuccessful. The appellate court held:
The appellants insistence that the loans secured by the mortgage they executed were not personally
theirs but those of Embassy Farms, Inc. is clearly self-serving and misplaced. The fact that they signed
the subject promissory notes in the(ir) personal capacities and as officers of the said debtor corporation
is manifest on the very face of the said documents of indebtedness (pp. 118, 128-131, Orig. Rec.). Even
assuming arguendo that they did not, the appellants lose sight of the fact that third persons who are not
parties to a loan may secure the latter by pledging or mortgaging their own property (Lustan vs. Court of
Appeals, 266 SCRA 663, 675). x x x. In constituting a mortgage over their own property in order to
secure the purported corporate debt of Embassy Farms, Inc., the appellants undeniably assumed the
personality of persons interested in the fulfillment of the principal obligation who, to save the subject
realities from foreclosure and with a view towards being subrogated to the rights of the creditor, were
free to discharge the same by payment (Articles 1302 [3] and 1303, Civil Code of the Philippines).[15]
(emphases in the original)
The appellate court also observed that if the appellants really felt aggrieved by the foreclosure of the
subject mortgage and the subsequent sales of the realties to other parties, why then did they commence
the suit only on August 12, 1997 (when the certificate of sale was issued on January 12, 1987, and the
certificates of title in the name of Mercator on September 27, 1988)? Petitioners procrastination for about
nine (9) years is difficult to understand. On so flimsy a ground as lack of consideration, (w)e may even
venture to say that the complaint was not worth the time of the courts.[16]
A motion for reconsideration by petitioners was likewise denied for lack of merit.[17] Thus, this petition
where they allege that:
THE COURT A QUO ERRED AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN AFFIRMING IN TOTO THE MAY 4, 1998 ORDER OF THE
TRIAL COURT GRANTING RESPONDENTS MOTION FOR SUMMARY JUDGMENT DESPITE THE
EXISTENCE OF GENUINE ISSUES AS TO MATERIAL FACTS AND ITS NON-ENTITLEMENT TO A
JUDGMENT AS A MATTER OF LAW, THEREBY DECIDING THE CASE IN A WAY PROBABLY NOT
IN ACCORD WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT.[18]
We affirm.
Summary judgment is a procedural technique aimed at weeding out sham claims or defenses at an early
stage of the litigation.[19] The crucial question in a motion for summary judgment is whether the issues
raised in the pleadings are genuine or fictitious, as shown by affidavits, depositions or admissions
accompanying the motion. A genuine issue means an issue of fact which calls for the presentation of
evidence, as distinguished from an issue which is fictitious or contrived so as not to constitute a genuine
issue for trial.[20] To forestall summary judgment, it is essential for the non-moving party to confirm the
existence of genuine issues where he has substantial, plausible and fairly arguable defense, i.e., issues
of fact calling for the presentation of evidence upon which a reasonable finding of fact could return a
verdict for the non-moving party. The proper inquiry would therefore be whether the affirmative defenses
offered by petitioners constitute genuine issue of fact requiring a full-blown trial.[21]
In the case at bar, there are no genuine issues raised by petitioners. Petitioners do not deny that they
obtained a loan from Mercator. They merely claim that they got the loan as officers of Embassy Farms
without intending to personally bind themselves or their property. However, a simple perusal of the
promissory note and the continuing suretyship agreement shows otherwise. These documentary
evidence prove that petitioners are solidary obligors with Embassy Farms.
The promissory note[22] states:
For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE
CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX
HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in installments
as follows:
September 16, 1982 - P154,267.87
October 16, 1982 - P154,267.87
November 16, 1982 - P154,267.87
December 16, 1982 - P154,267.87
January 16, 1983 - P154,267.87
February 16, 1983 - P154,267.87
x x x x x x x x x.
The note was signed at the bottom by petitioners Eduardo B. Evangelista and Epifania C. Evangelista,
and Embassy Farms, Inc. with the signature of Eduardo B. Evangelista below it.
The Continuing Suretyship Agreement[23] also proves the solidary obligation of petitioners, viz:
(Embassy Farms, Inc.)
Principal
(Eduardo B. Evangelista)
Surety
(Epifania C. Evangelista)
Surety
(Mercator Finance Corporation)
Creditor
To: MERCATOR FINANCE COPORATION
(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA and EPIFANIA C.
EVANGELISTA (hereinafter called Surety), jointly and severally unconditionally guarantees (sic) to
MERCATOR FINANCE COPORATION (hereinafter called Creditor), the full, faithful and prompt payment
and discharge of any and all indebtedness of EMBASSY FARMS, INC. (hereinafter called Principal) to
the Creditor.
xxxxxxxxx
(3) The obligations hereunder are joint and several and independent of the obligations of the Principal. A
separate action or actions may be brought and prosecuted against the Surety whether or not the action
is also brought and prosecuted against the Principal and whether or not the Principal be joined in any
such action or actions.
x x x x x x x x x.
The agreement was signed by petitioners on February 16, 1982. The promissory notes[24] subsequently
executed by petitioners and Embassy Farms, restructuring their loan, likewise prove that petitioners are
solidarily liable with Embassy Farms.
Petitioners further allege that there is an ambiguity in the wording of the promissory note and claim that
since it was Mercator who provided the form, then the ambiguity should be resolved against it.
Courts can interpret a contract only if there is doubt in its letter.[25] But, an examination of the
promissory note shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity,
Section 17 of the Negotiable Instruments Law states, viz:
SECTION 17. Construction where instrument is ambiguous. Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:
xxxxxxxxx
(g) Where an instrument containing the word I promise to pay is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
Petitioners also insist that the promissory note does not convey their true intent in executing the
document. The defense is unavailing. Even if petitioners intended to sign the note merely as officers of
Embassy Farms, still this does not erase the fact that they subsequently executed a continuing
suretyship agreement. A surety is one who is solidarily liable with the principal.[26] Petitioners cannot
claim that they did not personally receive any consideration for the contract for well-entrenched is the
rule that the consideration necessary to support a surety obligation need not pass directly to the surety,
a consideration moving to the principal alone being sufficient. A surety is bound by the same
consideration that makes the contract effective between the principal parties thereto.[27] Having
executed the suretyship agreement, there can be no dispute on the personal liability of petitioners.
Lastly, the parol evidence rule does not apply in this case.[28] We held in Tarnate v. Court of
Appeals,[29] that where the parties admitted the existence of the loans and the mortgage deeds and the
fact of default on the due repayments but raised the contention that they were misled by respondent
bank to believe that the loans were long-term accommodations, then the parties could not be allowed to
introduce evidence of conditions allegedly agreed upon by them other than those stipulated in the loan
documents because when they reduced their agreement in writing, it is presumed that they have made
the writing the only repository and memorial of truth, and whatever is not found in the writing must be
understood to have been waived and abandoned.
IN VIEW WHEREOF, the petition is dismissed. Treble costs against the petitioners.
SO ORDERED.
REMEDIOS NOTA SAPIERA, petitioner, vs. COURT OF APPEALS and RAMON SUA, respondents.
DECISION
BELLOSILLO, J.:
REMEDIOS NOTA SAPIERA appeals to us through this petition for review the Decision of the Court of
Appeals[1] which acquitted her of the crime of estafa but held her liable nonetheless for the value of the
checks she indorsed in favor of private respondent Ramon Sua.
On several occasions petitioner Remedios Nota Sapiera, a sari-sari store owner, purchased from
Monrico Mart certain grocery items, mostly cigarettes, and paid for them with checks issued by one
Arturo de Guzman: (a) PCIB Check No. 157059 dated 26 February 1987 for P140,000.00; (b) PCIB
Check No. 157073 dated 26 February 1987 for P28,000.00; (c) PCIB Check No. 157057 dated 27
February 1987 for P42,150.00; and, d) Metrobank Check No. DAG - 045104758 PA dated 2 March 1987
for P125,000.00. These checks were signed at the back by petitioner. When presented for payment the
checks were dishonored because the drawers account was already closed. Private respondent Ramon
Sua informed Arturo de Guzman and petitioner about the dishonor but both failed to pay the value of the
checks. Hence, four (4) charges of estafa were filed against petitioner with the Regional Trial Court of
Dagupan City, docketed as Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731. Arturo de Guzman
was charged with two (2) counts of violation of B.P. Blg. 22, docketed as Crim. Cases Nos. D-8733 and
D-8734. These cases against petitioner and de Guzman were consolidated and tried jointly.
On 27 December 1989 the court a quo[2] acquitted petitioner of all the charges of estafa but did not rule
on whether she could be held civilly liable for the checks she indorsed to private respondent. The trial
court found Arturo de Guzman guilty of Violation of B.P. Blg. 22 on two (2) counts and sentenced him to
suffer imprisonment of six (6) months and one (1) day in each of the cases, and to pay private
respondent P167,150.00 as civil indemnity.
Private respondent filed a notice of appeal with the trial court with regard to the civil aspect but the court
refused to give due course to the appeal on the ground that the acquittal of petitioner was absolute.
Private respondent then filed a petition for mandamus with the Court of Appeals, docketed as CA-GR SP
No. 24626, praying that the court a quo be ordered to give due course to the appeal on the civil aspect of
the decision. The Court of Appeals granted the petition and ruled that private respondent could appeal
with respect to the civil aspect the judgment of acquittal by the trial court.
On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376 rendered the assailed Decision
insofar as it sustained the appeal of private respondent on the civil aspect and ordering petitioner to pay
private respondent P335,000.00 representing the aggregate face value of the four (4) checks indorsed
by petitioner plus legal interest from the notice of dishonor.
Petitioner filed a motion for reconsideration of the Decision. On 19 March 1997 the Court of Appeals
issued a Resolution noting the admission of both parties that private respondent had already collected
the amount of P125,000.00 from Arturo de Guzman with regard to his civil liability in Crim. Cases Nos.
8733 and 8734. The appellate court noted that private respondent was the same offended party in the
criminal cases against petitioner and against de Guzman. Criminal Cases Nos. 8733 and 8734 against
De Guzman, and Crim. Cases Nos. 8730 and 8729 against petitioner, involved the same checks, to wit:
PCIB Checks Nos. 157057 for P42,150.00 and Metrobank Check No. DAG-045104758 PA for
P125,000.00.
Thus, the Court of Appeals ruled that private respondent could not recover twice on the same checks.
Since he had collected P125,000.00 as civil indemnity in Crim. Cases Nos. 8733 and 8734, this amount
should be deducted from the sum total of the civil indemnity due him arising from the estafa cases
against petitioner. The appellate court then corrected its previous award, which was erroneously placed
at P335,000.00, to P335,150.00 as the sum total of the amounts of the four (4) checks involved.
Deducting the amount of P125,000.00 already collected by private respondent, petitioner was adjudged
to pay P210,150.00 as civil liability to private respondent. Hence, this petition alleging that respondent
Court of Appeals erred in holding petitioner civilly liable to private respondent because her acquittal by
the trial court from charges of estafa in Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731 was
absolute, the trial court having declared in its decision that the fact from which the civil liability might
have arisen did not exist.
We cannot sustain petitioner. The issue is whether respondent Court of Appeals committed reversible
error in requiring petitioner to pay civil indemnity to private respondent after the trial court had acquitted
her of the criminal charges. Section 2, par. (b), of Rule 111 of the Rules of Court, as amended,
specifically provides: "Extinction of the penal action does not carry with it extinction of the civil, unless
the extinction proceeds from a declaration in a final judgment that the fact from which the civil might
arise did not exist.
The judgment of acquittal extinguishes the liability of the accused for damages only when it includes a
declaration that the fact from which the civil liability might arise did not exist. Thus, the civil liability is not
extinguished by acquittal where: (a) the acquittal is based on reasonable doubt; (b) where the court
expressly declares that the liability of the accused is not criminal but only civil in nature; and, (c) where
the civil liability is not derived from or based on the criminal act of which the accused is acquitted.[3]
Thus, under Art. 29 of the Civil Code -
When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved
beyond reasonable doubt, a civil action for damages for the same act or omission may be instituted.
Such action requires only a preponderance of evidence. Upon motion of the defendant, the court may
require the plaintiff to file a bond to answer for damages in case the complaint should be found to be
malicious.
In a criminal case where the judgment of acquittal is based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that effect, it may be inferred from the text of the decision
whether or not acquittal is due to that ground.
An examination of the decision in the criminal cases reveals these findings of the trial court -
Evidence for the prosecution tends to show that on various occasions, Remedios Nota Sapiera
purchased from Monrico Mart grocery items (mostly cigarettes) which purchases were paid with checks
issued by Arturo de Guzman; that those purchases and payments with checks were as follows:
(a) Sales Invoice No. 20104 dated February 26, 1987 in the amount of P28,000.00; that said items
purchased were paid with PCIBank Check No. 157073 dated February 26, 1987;
(b) Sales Invoice No. 20108 dated February 26, 1987 in the amount of P140,000.00; that said items
purchased were paid with PCIBank No. 157059 dated February 26, 1987;
(c) Sales Invoice No. 20120 dated February 27, 1987 in the amount of P42,150.00; that said items were
paid with PCIBank Check No. 157057 dated February 27, 1987;
(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987 in the amount of P120,103.75; said
items were paid with Metrobank Check No. 045104758 dated March 2, 1987 in the amount of
P125,000.00.
That all these checks were deposited with the Consolidated Bank and Trust Company, Dagupan Branch,
for collection from the drawee bank;
That when presented for payment by the collecting bank to the drawee bank, said checks were
dishonored due to account closed, as evidenced by check return slips; x x x x.
From the evidence, the Court finds that accused Remedios Nota Sapiera is the owner of a sari-sari store
inside the public market; that she sells can(ned) goods, candies and assorted grocery items; that she
knows accused Arturo De Guzman, a customer since February 1987; that de Guzman purchases from
her grocery items including cigarettes; that she knows Ramon Sua; that she has business dealings with
him for 5 years; that her purchase orders were in clean sheets of paper; that she never pays in check;
that Ramon Sua asked her to sign subject checks as identification of the signature of Arturo de Guzman;
that she pays in cash; sometimes delayed by several days; that she signed the four (4) checks on the
reverse side; that she did not know the subject invoices; that de Guzman made the purchases and he
issued the checks; that the goods were delivered to de Guzman; that she was not informed of
dishonored checks; and that counsel for Ramon Sua informed de Guzman and told him to pay x x x x
In the case of accused Remedios Nota Sapiera, the prosecution failed to prove conspiracy.
Based on the above findings of the trial court, the exoneration of petitioner of the charges of estafa was
based on the failure of the prosecution to present sufficient evidence showing conspiracy between her
and the other accused Arturo de Guzman in defrauding private respondent. However, by her own
testimony, petitioner admitted having signed the four (4) checks in question on the reverse side. The
evidence of the prosecution shows that petitioner purchased goods from the grocery store of private
respondent as shown by the sales invoices issued by private respondent; that these purchases were
paid with the four (4) subject checks issued by de Guzman; that petitioner signed the same checks on
the reverse side; and when presented for payment, the checks were dishonored by the drawee bank due
to the closure of the drawers account; and, petitioner was informed of the dishonor.
We affirm the findings of the Court of Appeals that despite the conflicting versions of the parties, it is
undisputed that the four (4) checks issued by de Guzman were signed by petitioner at the back without
any indication as to how she should be bound thereby and, therefore, she is deemed to be an indorser
thereof. The Negotiable Instruments Law clearly provides -
Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is
ambiguous, or there are admissions therein, the following rules of construction apply: x x x x (f) Where a
signature is so placed upon the instrument that it is not clear in what capacity the person making the
same intended to sign, he is deemed an indorser. x x x x
Sec. 63. When person deemed indorser. - A person placing his signature upon an instrument otherwise
than as maker, drawer or acceptor, is deemed to be an indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all
subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b) and (c)
of the next preceding section; and (b) That the instrument is, at the time of the indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid or both, as the case
may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it.
The dismissal of the criminal cases against petitioner did not erase her civil liability since the dismissal
was due to insufficiency of evidence and not from a declaration from the court that the fact from which
the civil action might arise did not exist.[4] An accused acquitted of estafa may nevertheless be held
civilly liable where the facts established by the evidence so warrant. The accused should be adjudged
liable for the unpaid value of the checks signed by her in favor of the complainant.[5]
The rationale behind the award of civil indemnity despite a judgment of acquittal when evidence is
sufficient to sustain the award was explained by the Code Commission in connection with Art. 29 of the
Civil Code, to wit:
The old rule that the acquittal of the accused in a criminal case also releases him from civil liability is one
of the most serious flaws in the Philippine legal system. It has given rise to numberless instances of
miscarriage of justice, where the acquittal was due to a reasonable doubt in the mind of the court as to
the guilt of the accused. The reasoning followed is that inasmuch as the civil responsibility is derived
from the criminal offense, when the latter is not proved, civil liability cannot be demanded.
This is one of those cases where confused thinking leads to unfortunate and deplorable consequences.
Such reasoning fails to draw a clear line of demarcation between criminal liability and civil responsibility,
and to determine the logical result of the distinction. The two liabilities are separate and distinct from
each other. One affects the social order and the other private rights. One is for punishment or correction
of the offender while the other is for reparation of damages suffered by the aggrieved party x x x x It is
just and proper that for the purposes of imprisonment of or fine upon the accused, the offense should be
proved beyond reasonable doubt. But for the purpose of indemnifying the complaining party, why should
the offense also be proved beyond reasonable doubt? Is not the invasion or violation of every private
right to be proved only by preponderance of evidence? Is the right of the aggrieved person any less
private because the wrongful act is also punishable by the criminal law?[6]
Finally, with regard to the computation of the civil liability of petitioner, the finding of the Court of Appeals
that petitioner is civilly liable for the aggregate value of the unpaid four (4) checks subject of the criminal
cases in the sum of P335,150.00, less the amount of P125,000.00 already collected by private
respondent pending appeal, resulting in the amount of P210,150.00 still due private respondent, is a
factual matter which is binding and conclusive upon this Court.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 22 January 1996 as
amended by its Resolution dated 19 March 1997 ordering petitioner Remedios Nota Sapiera to pay
private respondent Ramon Sua the remaining amount of P210,150.00 as civil liability, is AFFIRMED.
Costs against petitioners.
SO ORDERED.
PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. MARTIN L. ROMERO and ERNESTO C.
RODRIGUEZ, accused-appellants.
DECISION
PARDO, J.:
The case before the Court is an appeal of accused Martin L. Romero and Ernesto C. Rodriguez from the
Joint Judgment[1] of the Regional Trial Court, Branch 2, Butuan City, convicting each of them of estafa
under Article 315, par. 2 (d) of the Revised Penal Code, in relation to Presidential Decree No. 1689, for
widescale swindling, and sentencing each of them to suffer the penalty of life imprisonment and to jointly
and severally pay Ernesto A. Ruiz the amount of one hundred fifty thousand pesos (P150,000.00), with
interest at the rate of twelve percent (12%) per annum, starting September 14, 1989, until fully paid, and
to pay ten thousand pesos (P10,000.00), as moral damages.
On October 25, 1989, Butuan City acting fiscal Ernesto M. Brocoy filed with the Regional Trial Court,
Butuan City, an Information against the two (2) accused for estafa,[2] as follows:
That on or about September 14, 1989, at Butuan City, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused being the General Manager and Operation Manager which
solicit funds from the general public for investment, conspiring, confederating together and mutually
helping one another, by means of deceit and false pretense, did then and there willfully, unlawfully and
feloniously deliberately defraud one Ernesto A. Ruiz by convincing the latter to invest his money in the
amount of P150,000.00 with a promise return of 800% profit within 21 days and in the process caused
the issuance of Butuan City Rural Rural [sic] Bank Check No. 158181 postdated to October 5, 1989 in
the amount of One Million Two Hundred Thousand Pesos (P1,200,000.00) Philippine Currency, that
upon presentation of said check to the drawee bank for payment the same was dishonored and that
notwithstanding repeated demands made on said accused to pay and/or change the check to cash, they
consistently failed and refused and still fail and refuse to pay or redeem the check, to the damage and
prejudice of the complainant in the aforestated amount of P1,200,000.00.[3]
On the same day, the city fiscal filed with the same court another information against the two (2)
accused for violation of Batas Pambansa Bilang 22, arising from the issuance of the same check.[4]
On January 11, 1990, both accused were arraigned before the Regional Trial Court, Branch 5,[5] Butuan
City, where they pleaded not guilty to both informations.
The prosecution presented its evidence on January 10, 1991, with complainant, Ernesto A. Ruiz, and
Daphne Parrocho, the usher/collector of the corporation being managed by accused, testifying for the
prosecution.
On August 12, 1991, the defense presented its only witness, accused Martin L. Romero.
On November 13, 1992, the parties submitted a joint stipulation of facts, signed only by their respective
counsels. Thereafter, the case was submitted for decision.
On March 30, 1993, the trial court promulgated a Joint Judgment dated March 25, 1993. The trial court
acquitted the accused in Criminal Case No. 3806[6] based on reasonable doubt, but convicted them in
Criminal Case No. 3808[7] and accordingly sentenced each of them, as follows:
IN VIEW OF THE FOREGOING, the Court hereby renders judgment, finding or declaring -
(a) Accused Martin L. Romero and Ernesto C. Rodriguez innocent on reasonable doubt in Criminal Case
No. 3806, for violation of Batas Pambansa Bilang 22;
(b) Accused Martin L. Romero and Ernesto C .Rodriguez guilty beyond reasonable doubt in Criminal
Case No. 3808 for estafa under P.D. 1689 for wide scale [sic] swindling and accordingly sentences them
to suffer life imprisonment (Section 1 P.D. 1689) and ordered jointly and severally to return to Ernesto A.
Ruiz the amount of One Hundred Fifty Thousand Pesos (P150,000.00) with interest thereon at the rate
of Twelve percent (12%) per annum starting from September 14, 1989 until fully paid and to pay the
amount of Ten Thousand Pesos (P10,000.00) as moral damages.
In the service of their sentence, the accused pursuant to R.A. 6127, shall be credited for the preventive
imprisonment they have undergone (PP vs. Ortencio, 38 Phil 941; PP vs. Gabriel, No. L-13756, October
30, 1959, cited in Gregorios Fundamentals of Criminal Law Review, P. 178, Seventh Edition, 1985).[8]
On March 31, 1993, accused filed their notice of appeal, which the trial court gave due course on April 5,
1993. On March 16, 1994, this Court ordered the accused to file their appellants brief.
Accused-appellants filed their brief on October 30, 1995, while the Solicitor General filed the appellees
brief on March 8, 1996.
During the pendency of the appeal, on November 12, 1997, accused Ernesto Rodriguez died.[9] As a
consequence of his death before final judgment, his criminal and civil liability ex delicto, were
extinguished.[10]
Complainant Ernesto A. Ruiz was a radio commentator of Radio DXRB, Butuan City. In August, 1989,
he came to know the business of Surigao San Andres Industrial Development Corporation (SAIDECOR),
when he interviewed accused Martin Romero and Ernesto Rodriguez regarding the corporations
investment operations in Butuan City and Agusan del Norte. Romero was the president and general
manager of SAIDECOR, while Rodriguez was the operations manager.
SAIDECOR started its operation on August 24, 1989 as a marketing business. Later, it engaged in
soliciting funds and investments from the public. The corporation guaranteed an 800% return on
investment within fifteen (15) or twenty one (21) days. Investors were given coupons containing the
capital and the return on the capital collectible on the date agreed upon. It stopped operations in
September, 1989.
On September 14, 1989, complainant Ernesto A. Ruiz went to SAIDECOR office in Butuan City to make
an investment, accompanied by his friend Jimmy Acebu, and SAIDECOR collection agent Daphne
Parrocho. After handing over the amount of one hundred fifty thousand pesos (P150,000.00) to Ernesto
Rodriguez, complainant received a postdated Butuan City Rural Bank check instead of the usual
redeemable coupon. The check indicated P1,000,200.00 as the amount in words, but the amount in
figures was for P1,200,000.00, as the return on the investment. Complainant did not notice the
discrepancy.
When the check was presented to the bank for payment on October 5, 1989, it was dishonored for
insufficiency of funds, as evidenced by the check return slip issued by the bank.[11] Both accused could
not be located and demand for payment was made only sometime in November 1989 during the
preliminary investigation of this case. Accused responded that they had no money.
Daphne Parrocho,[12] testified that on September 14, 1989, complainant, with his friend Jimmy Acebu,
approached her to invest the amount of P150,000.00 at SAIDECOR. As she has reached her quota, and
therefore, no longer authorized to receive the amount, she accompanied them to the office of
SAIDECOR at Ong Yiu District, Butuan City. Accused Ernesto Rodriguez accepted the investment and
issued the check signed by him and Martin Romero.
For their defense, accused Martin Romero[13] testified that on September 14, 1989, he issued a check
in the amount of P1,200,000.00 corresponding to the total of the P150,000.00 investment and the 800%
return thereon. He claimed that the corporation had a deposit of fourteen million pesos (P14,000,000.00)
at the time of the issuance of the check and four million pesos (P4,000,000.00) at the time SAIDECOR
stopped operations. Romero knew these things because he used to monitor the funds of the corporation
with the bank. He was not aware that the check he issued was dishonored because he never had the
occasion to meet the complainant again after the September 14, 1989 transaction. He only came to
know about this when the case was already filed in court sometime in the second or third week of
January 1990.[14]
In this appeal, both accused did not deny that complainant made an investment with SAIDECOR in the
amount of P150,000.00. However, they denied that deceit was employed in the transaction. They
assigned as errors: (1) their conviction under P.D. 1689 due to the prosecutions failure to establish their
guilt beyond reasonable doubt; and (2) the trial courts failure to consider the joint stipulation of facts in
their favor.[15] There is no merit in this appeal. We sustain accused-appellants conviction.
Under paragraph 2 (d) of Article 315, as amended by R.A. 4885,[16] the elements of estafa are: (1) a
check was postdated or issued in payment of an obligation contracted at the time it was issued; (2) lack
or insufficiency of funds to cover the check; (3) damage to the payee thereof.[17] The prosecution has
satisfactorily established all these elements.
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust, or confidences justly
reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken
of another.[18] It is a generic term embracing all multifarious means which human ingenuity can device,
and which are resorted to by one individual to secure an advantage over another by false suggestions or
by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which
another is cheated.[19]
Deceit is a specie of fraud. It is actual fraud, and consists in any false representation or contrivance
whereby one person overreaches and misleads another, to his hurt. Deceit excludes the idea of
mistake.[20] There is deceit when one is misled, either by guide or trickery or by other means, to believe
to be true what is really false.[21] In this case, there was deception when accused fraudulently
represented to complainant that his investment with the corporation would have an 800% return in 15 or
21 days.
Upon receipt of the money, accused-appellant Martin Romero issued a postdated check. Although
accused-appellant contends that sufficient funds were deposited in the bank when the check was issued,
he presented no officer of the bank to substantiate the contention. The check was dishonored when
presented for payment, and the check return slip submitted in evidence indicated that it was dishonored
due to insufficiency of funds.
Even assuming for the sake of argument that the check was dishonored without any fraudulent pretense
or fraudulent act of the drawer, the latters failure to cover the amount within three days after notice
creates a rebuttable presumption of fraud.[22]
Admittedly (1) the check was dishonored for insufficiency of funds as evidenced by the check return slip;
(2) complainant notified accused of the dishonor; and (3) accused failed to make good the check within
three days. Presumption of deceit remained since accused failed to prove otherwise. Complainant
sustained damage in the amount of P150,000.00.
Accused-appellant also contends that had the trial court admitted the Admission and Stipulation of Facts
of November 9, 1992, it would prove that SAIDECOR had sufficient funds in the bank.
Accused-appellant relies on the fact that there was a discrepancy between the amount in words and the
amount in figures in the check that was dishonored. The amount in words was P1,000,200.00, while the
amount in figures was P1,200,000.00. It is admitted that the corporation had in the bank P1,144,760.00
on September 28,1989, and P1,124,307.14 on April 2, 1990. The check was presented for payment on
October 5, 1989. The rule in the Negotiable Instruments Law is that when there is ambiguity in the
amount in words and the amount in figures, it would be the amount in words that would prevail.[23]
However, this rule of interpretation finds no application in the case. The agreement was perfectly clear
that at the end of twenty one (21) days, the investment of P150,000.00 would become P1,200,000.00.
Even if the trial court admitted the stipulation of facts, it would not be favorable to accused-appellant.
The factual narration in this case established a kind of Ponzi scheme.[24] This is an investment swindle
in which high profits are promised from fictitious sources and early investors are paid off with funds
raised from later ones. It is sometimes called a pyramid scheme because a broader base of gullible
investors must support the structure as time passes.
In the recent case of People vs. Priscilla Balasa,[25] this Court held that a transaction similar to the case
at hand is not an investment strategy but a gullibility scheme, which works only as long as there is an
ever increasing number of new investors joining the scheme. It is difficult to sustain over a long period of
time because the operator needs an ever larger pool of later investors to continue paying the promised
profits to early investors. The idea behind this type of swindle is that the con-man collects his money
from his second or third round of investors and then absconds before anyone else shows up to collect.
Necessarily, these schemes only last weeks, or months at most, just like what happened in this case.
The Court notes that one of the accused-appellants, Ernesto Rodriguez, died pending appeal. Pursuant
to the doctrine established in People vs. Bayotas,[26] the death of the accused pending appeal of his
conviction extinguishes his criminal liability as well as the civil liability ex delicto. The criminal action is
extinguished inasmuch as there is no longer a defendant to stand as the accused, the civil action
instituted therein for recovery of civil liability ex delicto is ipso facto extinguished, grounded as it is on the
criminal case. Corollarily, the claim for civil liability survives notwithstanding the death of the accused, if
the same may also be predicated on a source of obligation other than delict.[27]
Thus, the outcome of this appeal pertains only to the remaining accused-appellant, Martin L. Romero.
The trial court considered the swindling involved in this case as having been committed by a
syndicate[28] and sentenced the accused to life imprisonment based on the provisions of Presidential
Decree 1689, which increased the penalty for certain forms of swindling or estafa.[29] However, the
prosecution failed to clearly establish that the corporation was a syndicate, as defined under the law.
The penalty of life imprisonment cannot be imposed. What would be applicable in the present case is the
second paragraph of Presidential Decree No. 1689, Section 1, which provides that:

When not committed by a syndicate as above defined, the penalty imposable shall be reclusion temporal
to reclusion perpetua if the amount of the fraud exceeds 100,000 pesos.

Article 77 of the Revised Penal Code on complex penalties provides that whenever the penalty
prescribed does not have one of the forms specially provided for in this Code, the periods shall be
distributed, applying by analogy the prescribed rules, that is, those in Articles 61 and 76.[30] Hence,
where as in this case, the penalty provided by Section 1 of Presidential Decree No. 1689 for estafa
under Articles 315 and 316 of the Code is reclusion temporal to reclusion perpetua, the minimum period
thereof is twelve (12) years and one (1) day to sixteen (16) years of reclusion temporal; the medium
period is sixteen (16) years and one (1) day to twenty (20) years of reclusion temporal; and the
maximum period is reclusion perpetua.

In the case at bar, no mitigating or aggravating circumstance has been alleged or proved. Applying the
rules in the Revised Penal Code for graduating penalties by degrees[31] to determine the proper
period,[32] the penalty for the offense of estafa under Article 315, 2(d) as amended by P.D. 1689
involving the amount of P150,000.00 is the medium of the period of the complex penalty in said Section
1, that is, sixteen (16) years and one (1) day to twenty (20) years. This penalty, being that which is to be
actually imposed in accordance with the rules therefor and not merely imposable as a general
prescription under the law, shall be the maximum range of the indeterminate sentence.[33] The minimum
thereof shall be taken, as aforesaid, from any period of the penalty next lower in degree, which is, prision
mayor.

To enable the complainant to obtain means, diversion or amusements that will serve to alleviate the
moral sufferings undergone by him, by reason of the failure of the accused to return his money, moral
damages are imposed against accused-appellant Martin L. Romero in the amount of twenty thousand
pesos (P20,000.00).[34] To serve as an example for the public good, exemplary damages are awarded
against him in the amount of fifteen thousand pesos (P15,000.00).[35]

WHEREFORE, the Court hereby AFFIRMS WITH MODIFICATION the appealed judgment. The Court
hereby sentences accused-appellant Martin Romero to suffer an indeterminate penalty of ten (10) years
and one (1) day of prision mayor, as minimum, to sixteen (16) years and one (1) day of reclusion
temporal, as maximum, to indemnify Ernesto A. Ruiz in the amount of one hundred fifty thousand pesos
(P150,000.00) with interest thereon at six (6%) per centum per annum from September 14, 1989, until
fully paid, to pay twenty thousand pesos (P20,000.00) as moral damages and fifteen thousand pesos
(P15,000.00), as exemplary damages, and the costs.

SO ORDERED.