G.R. No.

166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004
and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as
the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court
of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed
and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and
6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking
Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other
hand, denied the respective motions for reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and
individual, resident or non-resident of the Philippines, with respect to their passive investments in
the Philippines, particularly investments in shares of stocks in domestic corporations. As a
custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other
income derived from its investor-clients’ passive investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are
managed by HSBC through instructions given through electronic messages. The said instructions
are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank
Financial Telecommunication." In purchasing shares of stock and other investment in securities,
the investor-clients would send electronic messages from abroad instructing HSBC to debit their
local or foreign currency accounts and to pay the purchase price therefor upon receipt of the
securities.7
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary
Stamp Tax (DST) from September to December 1997 and also from January to December 1998
amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as follows:
A. September to December 1997
September 1997 P 6,981,447.90

October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total ₱19,572,992.10
B. January to December 1998
January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total ₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner,
Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from
abroad on the management of funds located in the Philippines which do not involve transfer of
funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel
Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK
& STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions
involving the following transactions of residents and non-residents of the Philippines with respect
to their local or foreign currency accounts are subject to documentary stamp tax under Section 181
of the 1997 Tax Code, viz:
A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a
named recipient in the Philippines."
The foregoing transactions are carried out under instruction from abroad and [do] not involve
actual fund transfer since the funds are already in the Philippine accounts. The instructions are in
the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases,
the payment is against the delivery of investments purchased. The purchase of investments and the
payment comprise one single transaction. DST has already been paid under Section 176 for the
investment purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named recipient, who may be another
bank, a corporate entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named
recipient, who may be another bank, a corporate entity or an individual in the Philippines."
The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or
tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency accounts with a bank
in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides
that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or Philippine equivalent of such value, if expressed
in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting
to be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e.,
a bill of exchange or order for the payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however, while the payor is residing
outside the Philippines, he maintains a local and foreign currency account in the Philippines from
where he will draw the money intended to pay a named recipient. The instruction or order to pay
shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the
meantime, such electronic instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any transfer of funds from abroad or
from the place where the instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be entered as such in its books
of accounts. The actual debiting of the payor’s account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local
or foreign currency account, is not subject to DST, unless the account so maintained is a current
or checking account, in which case, the issuance of the check or bank drafts is subject to the
documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and
subject to the physical impossibility on the part of the payor to be present and prepare and sign an
instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in
cash. In this light, the withdrawal shall not be subject to documentary stamp tax. The case is
parallel to an automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s
account and thereafter upon instruction of the non-resident depositor-payor, through an electronic
message, the depository bank to debit his account and pay a named recipient shall not be subject
to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of its regular banking
transaction which is not subject to documentary stamp tax. Neither does the receipt of funds makes
the recipient subject to the documentary stamp tax. The funds are deemed to be part of the deposits
of the client once credited to his account, and which, thereafter can be disposed in the manner he
wants. The payor-client’s further instruction to debit his account and pay a named recipient in the
Philippines does not involve transfer of funds from abroad. Likewise, as stated earlier, such debit
of local or foreign currency account in the Philippines is not subject to the documentary stamp tax
under the aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made through an
electronic message by non-resident payor-client to debit his local or foreign currency account
maintained in the Philippines and to pay a certain named recipient also residing in the Philippines
is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the case,
such electronic instruction purporting to draw funds from a local account intended to be paid to a
named recipient in the Philippines is not subject to documentary stamp tax imposed under the
foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, this ruling shall be considered null
and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim
for the refund of the amount of ₱19,572,992.10 allegedly representing erroneously paid DST to
the BIR for the period covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the
amount of ₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period
covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter
to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the
two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in
CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered
to refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of
₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently substantiated with documentary evidence. The
CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the
1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident investor-client, which is to
debit his local or foreign currency account in the Philippines and pay a certain named recipient
also residing in the Philippines is not the transaction contemplated in Section 181 of the Code. In
this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank
transfer of local funds from a savings account to a checking account maintained by a depositor in
one bank. The act of debiting the account is not subject to the documentary stamp tax under Section
181. Neither is the transaction subject to the documentary stamp tax under Section 180 of the same
Code. These electronic message instructions cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such in the books of account
of the local bank, and the actual debiting of the payor’s local or foreign currency account in the
Philippines is the actual transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009
and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT
CERTIFICATE in favor of Petitioner the amount of ₱30,360,570.75 representing erroneous
payment of documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted.
Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of ₱16,436,395.83
representing erroneously paid documentary stamp tax for the months of September 1997 to
December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive
investments in the Philippines mainly involving shares of stocks in domestic corporations. These
investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should
they desire to purchase shares of stock and other investments securities in the Philippines, the
investor-clients send their instructions and advises via electronic messages from abroad to [HSBC]
in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or
foreign currency account and to pay the purchase price upon receipt of the securities (CTA
Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus
required to pay [DST] based on its acceptance of these electronic messages – which, as [HSBC]
readily admits in its petition filed before the [CTA], were essentially orders to pay the purchases
of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC]
considering that the said tax was levied against the acceptances and payments by [HSBC] of the
subject electronic messages/orders for payment. The issue of whether such electronic messages
may be equated as a written document and thus be subject to tax is beside the point. As We have
already stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange
or order for payment of money but on the acceptance or payment of the said bill or order. The
acceptance of a bill or order is the signification by the drawee of its assent to the order of the
drawer to pay a given sum of money while payment implies not only the assent to the said order
of the drawer and a recognition of the drawer’s obligation to pay such aforesaid sum, but also a
compliance with such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693
[1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital
to the valid imposition of the [DST] under Section 181 is the existence of the requirement of
acceptance or payment by the drawee (in this case, [HSBC]) of the order for payment of money
from its investor-clients and that the said order was drawn from a foreign country and payable in
the Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being imposed in the case at bar.
In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the
Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments, independently of the legal status of the transactions giving rise
thereto. In the same case, the High Court also declared – citing Du Pont vs. United States (300
U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. It is an excise upon the facilities
used in the transaction of the business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC]
pursuant to the order made by its client-investors as embodied in the cited electronic messages,
through which the herein parties’ privilege and opportunity to transact business respectively as
drawee and drawers was exercised, separate and apart from the circumstances and conditions
related to such acceptance and subsequent payment of the sum of money authorized by the
concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its
privilege under its drawee-drawer relationship with its client-investor through the execution of a
specific instrument which, in the case at bar, is the acceptance of the order for payment of money.
The acceptance of a bill or order for payment may be done in writing by the drawee in the bill or
order itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court,
supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in
writing in a separate instrument’ each time it debited the local or foreign currency accounts of its
client-investors pursuant to the latter’s instructions and advises sent by electronic messages to
[HSBC]. The [DST] therefore must be paid upon the execution of the specified instruments or
facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment of
money sent by the client-investors through electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and
legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise
of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly specialized
court which performs judicial functions, particularly for the review of tax cases. HSBC further
argues that the Commissioner of Internal Revenue had already settled the issue on the taxability
of electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR
Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997
Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for the
payment of money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise
of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with
prevailing law and long standing administrative practice, respondent is not barred from questioning
his own revenue ruling. Tax refunds like tax exemptions are strictly construed against the
taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines" and that "a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money
to order or to bearer." A bill of exchange is one of two general forms of negotiable instruments
under the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic
bank transfer of local funds from a savings account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the finding of the CTA that the electronic
messages "cannot be considered negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred" and that the said electronic messages are "mere memoranda"
of the transaction consisting of the "actual debiting of the [investor-client-payor’s] local or foreign
currency account in the Philippines" and "entered as such in the books of account of the local
bank," HSBC.16
More fundamentally, the instructions given through electronic messages that are subjected to DST
in these cases are not negotiable instruments as they do not comply with the requisites of
negotiability under Section 1 of the Negotiable Instruments Law, which provides:
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.
The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year
1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed
in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for
DST paid during the period September to December 1997 and subject of G.R. No. 166018, is
worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided:
SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of any
sum of money drawn or purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax
upon such document in the same manner as is required in this Act for the stamping of inland bills
of exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such
stamp shall have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and
upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident
thereto documentary taxes for and in respect of the transaction so had or accomplished shall be
paid as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring
the same, and at the time such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the Philippine
Islands, on each two hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency, two
centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as
amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for
the payment of money, payable at sight or on demand, or after a specific period after sight or from
a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money
drawn in a foreign country but payable in this country whether at sight or on demand or after a
specified period after sight or from a stated date, is presented for acceptance or payment, there
must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each ₱200
or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457
and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained substantially the same for
the past one hundred years.1âwphi1 The identical text and common history of Section 230 of the
1977 Tax Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST
on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or
properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily liable
for the payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5)
transferring the taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as effected through the issuance
of particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax
Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the Philippines. In other
words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn abroad but payable in the
Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment
for the bill of exchange or order for the payment of money which it has drawn abroad but payable
in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite
meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be in
writing and signed by the drawee. It must not express that the drawee will perform his promise by
any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of
exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money
and the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an
acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his
acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment.32Presentment for acceptance is the production or exhibition of the bill of exchange
to the drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law requires it.34 In the
instances where presentment for acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily liable for the
purpose of demanding and obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for
payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or
orders for the payment of money that have been drawn abroad but payable in the Philippines) that
is subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for
acceptance or presentment for payment, respectively. In other words, the acceptance or payment
of the subject bill of exchange or order for the payment of money is done when there is presentment
either for acceptance or for payment of the bill of exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these cases, the electronic messages
received by HSBC from its investor-clients abroad instructing the former to debit the latter's local
and foreign currency accounts and to pay the purchase price of shares of stock or investment in
securities do not properly qualify as either presentment for acceptance or presentment for payment.
There being neither presentment for acceptance nor presentment for payment, then there was no
acceptance or payment that could have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on
the part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn
abroad and made payable here in the Philippines. Thus, there was no acceptance as the electronic
messages did not constitute the written and signed manifestation of HSBC to a drawer's order to
pay money. As HSBC could not have been an acceptor, then it could not have made any payment
of a bill of exchange or order for the payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable for DST under Section 230 of
the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person
making, signing, issuing, accepting, or, transferring" the taxable instruments under the said
provision. Thus, HSBC erroneously paid DST on the said electronic messages for which it is
entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA
Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals
are REINSTATED.
SO ORDERED.
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
PHILIPPINE NATIONAL BANK, G.R. No. 170325
Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairp
erson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:

and NORMA RODRIGUEZ,
Respondents. September 26, 2008
x--------------------------------------------------x

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable
to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any
exception?
These questions seek answers in this petition for review on certiorari of the Amended
Decision[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional
Trial Court (RTC).[2]

The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner
Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings
and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account
No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their business,
they had a discounting[3] arrangement with the Philnabank Employees Savings and Loan
Association (PEMSLA), an association of PNBemployees. 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.

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 RTCdisposition. 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 PNBcommitted 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
[16]
Bank. 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.
SECOND DIVISION

SPOUSES G.R. No. 156903

CARLOS and
TERESITA Present:
RUSTIA,
Petitioners,
PUNO, J.,
Chairperson,
SANDOVAL-
GUTIERREZ,
- versus - CORONA,
AZCUNA, and
GARCIA, JJ.

EMERITA Promulgated:
RIVERA,
Respondent. November 24,
2006

x-----------------------------------------------------------------------------------------x

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, as amended, assailing the Decision[1] of the Court of Appeals, dated August
29, 2002, in CA-G.R. SP No. 63265.
In September 1995, Emerita Rivera, respondent, filed with the Metropolitan Trial Court (MeTC),
Branch 36, Quezon City, a complaint for sum of money against spouses Carlos and Teresita Rustia,
petitioners, and Rosemarie F. Rocha. The complaint was docketed as Civil Case No.
0206. Respondent alleged therein that petitioners obtained from her a loan of P130,000.00, payable
within thirty (30) days without need of prior demand. As security for the loan, petitioners executed
a promissory note, with Rosemarie Rocha as their co-maker. The loan bears an interest of five
percent (5%) per month. Petitioners paid the interest corresponding to the period from January
1991 to March 1994. Thereafter, despite respondents written demands, they failed to pay any
interest or the principal obligation. Respondent then prayed that judgment be rendered ordering
petitioners to pay the loan, the accrued interest thereon, and attorneys fees.
After the courts denial of their motion to dismiss the complaint, petitioners filed their answer
admitting that respondent extended to them a loan of P130,000.00. However, they denied having
agreed to pay interest thereon. While they paid respondent P6,500.00 every month, however, it
was for the settlement of the principal obligation. In fact, they overpaid P123,500.00. They prayed
that the case be dismissed and that respondent be ordered to refund to them their overpayment plus
damages, attorneys fees, and litigation expenses.
During the hearing, respondent offered in evidence petitioners promissory note and petitioner
Teresita Rustias letter addressed to respondent agreeing to pay 5% monthly interest.
Teresita denied having borrowed P130,000.00 from respondent; that respondent delivered the said
amount to petitioners as investment in the latters business; and that the monthly payment
of P6,500.00 they tendered to respondent corresponds to her share in the profits.
On June 11, 1999, the trial court rendered its Decision,[2] the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
as follows:

1. Ordering the defendants to pay, jointly and severally, the plaintiff the sum of P130,000.00
plus accrued interest of 5% per month to be reckoned from April 1994 until the same is fully
paid;

2. Ordering the defendants to pay, jointly and severally, the sum of P10,000.oo as and for
attorneys fees;

3. Ordering the defendants to pay the costs of suit.

SO ORDERED.

On appeal by petitioners, the Regional Trial Court (RTC), Branch 77, Quezon City affirmed the
MeTCs Decision in toto.
Petitioners filed a motion for reconsideration but it was denied by the RTC as it does not contain
a notice of the time and place of hearing required by Sections 4 and 5, Rule 15 of the 1997 Rules
of Civil Procedure, as amended.
Petitioners filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No.
63265, but it was denied in a Decision dated August 29, 2002. Their motion for reconsideration
was likewise denied.
Hence, the instant petition raising the following issues:

1. Whether the Court of Appeals erred in holding that the motion for reconsideration
filed with the RTC by petitioners is but a mere scrap of paper for lack of notice of hearing;

2. Whether the Court of Appeals erred when it failed to apply Article 1956 of the Civil
Code providing that no interest shall be due unless it has been expressly stipulated in writing;

On the first issue, Sections 4 and 5, Rule 15 of the 1997 Rules of Civil Procedure, as amended,
provide:
SEC. 4. Hearing of motion. Except for motions which the court may act upon without prejudicing
the rights of the adverse party, every written motion shall be set for hearing by the applicant.

Every written motion required to be heard and the notice of the hearing thereof shall be served
in such a manner as to ensure its receipt by the other party at least three (3) days before the date of
hearing, unless the court for good cause sets the hearing on shorter notice.

SEC. 5. Notice of hearing. The notice of hearing shall be addressed to all parties concerned,
and shall specify the time and date of the hearing which must not be later than ten (10) days
after the filing of the motion.

Section 4 lays the general rule that all written motions shall be set for hearing by the movant,
except the non-litigated motions or those which may be acted upon by the court without
prejudicing the rights of the adverse party. These ex parte motions include a motion for extension
of time to file pleadings,[3] motion for extension of time to file an answer,[4] and a motion for
extension of time to file a record on appeal.[5] In Manila Surety and Fidelity Co., Inc. v. Bath
Construction and Company,[6] we ruled that a notice of time and place of hearing is mandatory
for motions for new trial or motion for reconsideration, as in this case. We have reiterated this
doctrine in Magno v. Ortiz,[7] Calero v. Yaptichay,[8] Vda. de Azarias v. Maddela,[9] Phil.
Advertising Counselors, Inc. v. Revilla,[10] Sacdalan v. Bautista,[11] New Japan Motors, Inc. v.
Perucho,[12] Firme v. Reyes, et al.,[13] and others. More recently, in National Commercial Bank of
Saudi Arabia v. Court of Appeals,[14] we reaffirmed the rule that the requirement of notice under
Sections 4 and 5, Rule 15 is mandatory and the lack thereof is fatal to a motion for reconsideration.
We thus hold that the Court of Appeals did not err when it affirmed the RTC ruling that petitioners
motion for reconsideration is but a mere scrap of paper because it does not comply with Sections
4 and 5, Rule 15.
Anent the second issue, contrary to petitioners contention, the trial court found that petitioner
Teresita Rustia sent respondent a letter begging the latters indulgence regarding her difficulty and
that of her husband in paying the 5% monthly interest on their P130,000.00 loan. This finding by
the trial court was upheld by the RTC and the Court of Appeals. Indeed, such letter proves that
petitioners agreed to pay interest. It is basic that findings of fact by the trial court, when affirmed
by the Court of Appeals, are binding and conclusive upon this Court.[15] Verily, the Court of
Appeals did not err when it sustained the lower courts finding that respondent is entitled to the
payment of interests on the subject loan.
WHEREFORE, we DENY the petition. The challenged Decision of
the Court of Appeals dated August 29, 2002 in CA-G.R. SP No. 63265 is AFFIRMED IN
TOTO. Costs against petitioners.

SO ORDERED.
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and
CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of
Appeals dated January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate
of Indebtedness (CBCI) No. D891,2 with a face value of P500,000.00, from the Philippine
Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB),
under a Repurchase Agreement3 dated February 4, 1981, and a Detached Assignment4dated April
27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action
was originally filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel
the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders
Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a
"Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000)
and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed
by the transferor intended to complete the assignment through the registration of the transfer in the
name of PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . .,
whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series,
Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously
acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase
CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED
NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April
27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the
Petitioner to enable the latter to have its title completed and registered in the books of the
respondent. And by means of said Detachment, Philfinance transferred and assigned all, its rights
and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably
authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of
its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached
Assignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent,
and requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate
in the name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over the same and despite repeated demands in
writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with
the petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been
registered) by the registered owner hereof, in person or by his attorney duly authorized in writing,
and similarly noted hereon, and upon payment of a nominal transfer fee which may be required, a
new Certificate shall be issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon
the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in
its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central
Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for
Interpleader6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation
(Filriters), the registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of respondent
as an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust
fund doctrine and to the prejudice of policyholders and to all who have present or future claim
against policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of
Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters,
and without any clearance or authorization from the Insurance Commissioner, executed a detached
assignment purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-
President-Treasury of Filriters (both of whom were holding the same positions in Philfinance),
without any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters,
its policy holders and all who have present or future claims against its policies, executed similar
detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without
the knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board,
as requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void
from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum
prohibitum, for anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is
immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency
deficiency of Filriters (and has in fact helped in placing Filriters under conservatorship), an
inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not
payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered
owner as the absolute owner and that the value of the registered certificates shall be payable only
to the registered owner; a sufficient notice to plaintiff that the assignments do not give them the
registered owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the
registered certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not
a regular transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by
the Insurance Code and its assignment or transfer is expressly prohibited by law. There was no
attempt to get any clearance or authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course
of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all
or substantially all" of the assets of Filriters, which requires the affirmative action of the
stockholders (Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found
the assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the
same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect.
The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void
and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and
to pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance
Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance
Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals
likewise failed. The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a
deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No.
D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance
the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy
back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying
to appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No.
D891 in its name before the Security and Servicing Department of the Central Bank (CB). Central
Bank, however, refused to effect the transfer and registration in view of an adverse claim filed by
defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central
Bank in the Regional Trial Court of Manila. The suit, however, was subsequently treated by the
lower court as a case of interpleader when CB prayed in its amended answer that Filriters be
impleaded as a respondent and the court adjudge which of them is entitled to the ownership of
CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and
having acquired the said certificate from Philfinance as a holder in due course, its possession of
the same is thus free fro any defect of title of prior parties and from any defense available to prior
parties among themselves, and it may thus, enforce payment of the instrument for the full amount
thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since
the instrument clearly stated that it was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of negotiability which serve as an
expression of consent that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having
made without consideration, and did not conform to Central Bank Circular No. 769, series of 1980,
better known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness",
which provided that any "assignment of registered certificates shall not be valid unless made . . .
by the registered owner thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance
merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing
operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind
Filriters and violated as the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical corporate officers, thus demanding the application
of the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the
CBCI from registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance
of CBCI, as actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the
transfer of the CBCI from Filriters to Philfinance was null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of
negotiability within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer,
of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED
THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a
fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation,
the registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered
owner, whose name is inscribed thereon. It lacks the words of negotiability which should have
served as an expression of consent that the instrument may be transferred by negotiation.15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission
that the same is a negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone
relating to the protection of holders in due course, and the freedom of negotiability is the
foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d,
32). This freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay
a sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained. While the writing may be read
in the light of surrounding circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with
existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective
since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated
that the transfer was for "value received", there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation.
Thus, for lack of any consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under which the note was issued. Published in the
Official Gazette on November 19, 1980, Section 3 thereof provides that any assignment of
registered certificates shall not be valid unless made . . . by the registered owner thereof in person
or by his representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind
Filriters and violated at the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate
fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused
registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate
officers, if the principle of piercing the veil of corporate entity were to be applied in this case, then
TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a
payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has,
that it never received any payment for that CBCI sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to Philfinance should be construed
as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an
equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere
alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished
one corporation from a seemingly separate one, were it not for the existing corporate fiction. But
to do this, the court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It
is the protection of the interests of innocent third persons dealing with the corporate entity which
the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners
insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which
could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with
a juridical personality separate from its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate
personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it
acquired the subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should
have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title
over the same or its authority to assign the certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership
of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at
any office of the Bank or any agency duly authorized by the Bank, and such registration is noted
hereon. After such registration no transfer thereof shall be valid unless made at said office (where
the Certificates has been registered) by the registered owner hereof, in person, or by his attorney,
duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee
which may be required, a new Certificate shall be issued to the transferee of the registered owner
thereof. The bank or any agency duly authorized by the Bank may deem and treat the bearer of
this Certificate, or if this Certificate is registered as herein authorized, the person in whose name
the same is registered as the absolute owner of this Certificate, for the purpose of receiving
payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall
be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to
require Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a
non-owner was disposing of the registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the
Rules and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V
of which provides that:
Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not
be valid unless made at the office where the same have been issued and registered or at the
Securities Servicing Department, Central Bank of the Philippines, and by the registered owner
thereof, in person or by his representative, duly authorized in writing. For this purpose, the
transferee may be designated as the representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is
only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular,
which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O.
Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for and
in favor of Filriters, did not have the necessary written authorization from the Board of Directors
of Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and
therefore void and inexistent, as there was no consideration for the same. This is fatal to the
petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the
Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can do anything except what
he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital
reserves, which are required by law 24 to be maintained at a mandated level. This was pointed out
by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before the court
on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face
value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance Commission
sometime in early 1981 and this CBCI No. 891 was among the CBCI's that were found to be
missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891
before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal
reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under Section 213
of the Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance
Commission requires this reserve to be invested preferably in government securities or government
binds. This is how this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law.
Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot
bind the said corporation, not without the approval of its Board of Directors, and the maintenance
of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over
the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29,
1990 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court
of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs.
Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant",
which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved
Fermin Canlas from liability under the promissory notes and reduced the award for damages and
attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly
Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas
to pay, jointly and severally, the plaintiff bank the following sums with interest thereon at 16% per
annum from the dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29,
1981 until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest
from November 27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which
interest from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31
with interest from January 29, 1981; under the promissory note (Exhibit "G"), the sum of
P12,703.70 with interest from November 27, 1980; under the promissory note (Exhibit "H"), the
sum of P281,875.91 with interest from January 29, 1981; and under the promissory note (Exhibit
"I"), the sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly
named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly
and severally, the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from
January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is
ordered to pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from
November 27, 1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of
P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the sum of
P331,870.97 with interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of
P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to 3% per annum
of the respective principal sums from the dates above stated as penalty charge until fully paid, plus
one percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court
(now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in
his capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be
held personally liable for such authorized corporate acts that he performed. It is now the contention
of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory
notes with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable
with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent
Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant
Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as
Exhibits A to I inclusive, each of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the
ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of
___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi
and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity"
typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this
note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally
across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment
Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private
respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate
name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered
among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty
charges. The complainant was originally brought against Worldwide Garment Manufacturing,
Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and
substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing
Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the
scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an
Amended Answer wherein he, denied having issued the promissory notes in question since
according to him, he was not an officer of Pinch Manufacturing Corporation, but instead of
Worldwide Garment Manufacturing, Inc., and that when he issued said promissory notes in behalf
of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries not
appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private
respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch
Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes
bearing his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable
Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory
notes are makers and are liable as such.3 By signing the notes, the maker promises to pay to the
order of the payee or any holder 4according to the tenor thereof.5 Based on the above provisions of
law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the
promissory notes. As such, he cannot escape liability arising therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.6 An instrument which begins" with "I"
,We" , or "Either of us" promise to, pay, when signed by two or more persons, makes them
solidarily liable. 7 The fact that the singular pronoun is used indicates that the promise is individual
as to each other; meaning that each of the co-signers is deemed to have made an independent
singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and
certain, without reason for ambiguity, by the presence of the phrase "joint and several" as
describing the unconditional promise to pay to the order of Republic Planters Bank. A joint and
several note is one in which the makers bind themselves both jointly and individually to the payee
so that all may be sued together for its enforcement, or the creditor may select one or more as the
object of the suit. 8 A joint and several obligation in common law corresponds to a civil law
solidary obligation; that is, one of several debtors bound in such wise that each is liable for the
entire amount, and not merely for his proportionate share. 9 By making a joint and several promise
to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the
solidary liability of a debtor and the payee may choose to enforce the notes against him alone or
jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures
of the makers in the notes will affect the liability of the makers, We do not find it necessary to
resolve and decide, because it is immaterial and will not affect to the liability of private respondent
Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said
phrase, private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and
his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's
Articles of Incorporation effecting a change of corporate name, in this case from Worldwide
Garment manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of
the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. It is the same corporation with a different name, and its character is in
no respect changed.10
A change in the corporate name does not make a new corporation, and whether effected by special
act or under a general law, has no affect on the identity of the corporation, or on its property, rights,
or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred.12
As a general rule, officers or directors under the old corporate name bear no personal liability for
acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as
such officers acted in their capacity as agent of the old corporation and the change of name meant
only the continuation of the old juridical entity, the corporation bearing the same name is still
bound by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law,
the liability of a person signing as an agent is specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal , or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is
acting in a representative capacity or the name of the third party for whom he might have acted as
agent, the agent is personally liable to take holder of the instrument and cannot be permitted to
prove that he was merely acting as agent of another and parol or extrinsic evidence is not
admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered to him in blank
for his signature, we rule otherwise. A careful examination of the notes in question shows that they
are the stereotype printed form of promissory notes generally used by commercial banking
institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete
because there are blank spaces to be filled up on material particulars such as payee's name, amount
of the loan, rate of interest, date of issue and the maturity date. The terms and conditions of the
loan are printed on the note for the borrower-debtor 's perusal. An incomplete instrument which
has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable
Instruments Law which provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular,
the person in possesion thereof has a prima facie authority to complete it by filling up the blanks
therein. ... In order, however, that any such instrument when completed may be enforced against
any person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent
Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant
(Canlas) signed in blank the promissory notes". We chose to believe the bank's testimony that the
notes were filled up before they were given to private respondent Fermin Canlas and defendant
Shozo Yamaguchi for their signatures as joint and several promissors. For signing the notes above
their typewritten names, they bound themselves as unconditional makers. We take judicial notice
of the customary procedure of commercial banks of requiring their clientele to sign promissory
notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms
of the loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein
printed and to sign as makers or co-makers. When the notes were given to private respondent
Fermin Canlas for his signature, the notes were complete in the sense that the spaces for the
material particular had been filled up by the bank as per agreement. The notes were not incomplete
instruments; neither were they given to private respondent Fermin Canlas in blank as he claims.
Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the
interest rate on the promissory notes from 16% to 12% per annum does not squarely apply to the
instant petition. In the abovecited case, the rate of 12% was applied to forebearances of money,
goods or credit and court judgemets thereon, only in the absence of any stipulation between the
parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum,
which interest rate the plaintiff may at any time without notice, raise within the limits allowed law.
And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No.
116, are applicable only to interests by way of compensation for the use or forebearance of money.
Article 2209 of the Civil Code, on the other hand, governs interests by way of damages.15 This
fine distinction was not taken into consideration by the appellate court, which instead made a
general statement that the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling
prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per
annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest
rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence
on the matter, the decision of the respondent: Court of Appeals absolving private respondent
Fermin Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private
respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the
following sums and at 16% interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January
29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with
interest from November 27, 1980: under the promissory note denominated as Exhibit C, the
amount of P166,466.00 with interest from January 29, 1981; under the promissory note
denominated as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until
fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 with interest
from January 29, 1981; under the promissory note marked as Exhibit F, the sum of P140,000.00
with interest from November 27, 1980 until fully paid; under the promissory note marked as
Exhibit G, the amount of P12,703.70 with interest from November 27, 1980; the promissory note
marked as Exhibit H, the sum of P281,875.91 with interest from January 29, 1981; and the
promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial
court, shall be adjudged in accordance with the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin
Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the
Court a quo. With costs against private respondent.
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.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
———————
VALUE DATE
TO Raul Sesbreño
April 6, 1981
————————
MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities
to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized
representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully
assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor
thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)1
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 note was stamped "NON
NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect
thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has
been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released
DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the
partial 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 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.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
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
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
against private respondents Delta and Pilipinas.5The trial court, in a decision dated 5 August 1987,
dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with
costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision
dated 21 March 1989, the Court of Appeals denied the appeal and held:6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails
of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
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 comprehend and may have been motivated with bad faith. Philfinance, therefore, is
solely and legally 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 the defendants in this case at bar; hence, this Court is
without jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
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.
 G.R. No. 200250, August 06, 2014
UPSI PROPERTY HOLDINGS, INC., Petitioner, v. DIESEL CONSTRUCTION CO.,
INC., Respondent.

DECISION
MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court filed by UPSI Property
Holdings, Inc. (UPSI) assails the November 11, 2011 Decision1 of the Court of Appeals (CA) in
CA-G.R. SP No. 110926, and its January 17, 2012 Resolution2 denying its petition for certiorari.

The present controversy stemmed from a complaint filed by respondent Diesel Construction Co.,
Inc. (Diesel) against UPSI before the Construction Industry Arbitration Commission (CIAC) for
collection of unpaid balance of the contract price and retention money under their construction
agreement, damages for unjustified refusal to grant extension of time, interest, and attorneys fees.

On December 4, 2001, Arbitral award3 was rendered by the CIAC in favor of Diesel, to
wit:chanRoblesvirtualLawlibrary

Summary of Awards:cralawlawlibrary

Wherefore, judgment is hereby rendered and the AWARD of monetary claims is made as
follows:cralawlawlibrary

CLAIMANT:
Description Amount Claimed Award
Unpaid Balance of Construction
Agreement P3,943,000.00 P3,661,692.60
Additional Labor Costs 1,509,756.00 0.00
Interest 690,942.23
Attorneys Fees 1,000,000.00 366,169.00
Total P7,143,698.23 P4,027,861.60

RESPONDENT:
Description Amount Claimed Award
Cost to Complete the Project P1,321,500.92 P 0.00
Liquidated Damages 4,340,000.00 0.00
Attorneys Fees 900,000.00 0.00
Total P6,561,500.92 0.00
 Net Award to Claimant: P4,027,861.60

Claimant, Diesel Construction Corporation, Inc., is hereby awarded the amount of FOUR
MILLION TWENTY-SEVEN THOUSAND EIGHT HUNDRED SIXTY-ONE PESOS AND
SIXTY CENTAVOS plus legal interest of six percent (6%) per annum on the said amount
computed from June 4, 2001 and at the rate of twelve percent (12%) per annum from the date of
finality of the decision herein until fully paid.

Respondent is further ordered to pay the full cost of arbitration in the amount of TWO HUNDRED
NINETY-EIGHT THOUSAND FOUR HUNDRED SIX PESOS AND THREE CENTAVOS and
to reimburse the Claimant of all advances made in this regard.

SO ORDERED.4chanrobleslaw

The CIAC judgment became the subject of a petition for review before the CA, which rendered a
decision, dated April 16, 2002, quoted as follows:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, the petition is GRANTED and the questioned Decision is
MODIFIED in this wise:cralawlawlibrary

a. The claim of petitioner UPSI for liquidated damages is GRANTED to the extent of PESOS:
ONE MILLION THREE HUNDRED NINE THOUSAND AND FIVE HUNDRED
(P1,309,500.00) representing forty-five (45) days of delay at P29,100 per
diem;chanroblesvirtuallawlibrary

b. We hold that respondent [Diesel] substantially complied with the Construction Contract and is
therefore entitled to one hundred percent (100%) payment of the contract price. Therefore, the
claim of respondent Diesel for an unpaid balance of PESOS: TWO MILLION FOUR HUNDRED
FORTY-ONE THOUSAND FOUR HUNDRED EIGHTY-TWO and SIXTY-FOUR centavos
(P2,441,482.64), which amount already includes the retention on the additional works or Change
Orders, is GRANTED, minus liquidated damages. In sum, petitioner UPSI is held liable to
respondent Diesel in the amount of PESOS: ONE MILLION ONE HUNDRED THIRTY-ONE
THOUSAND NINE HUNDRED EIGHTY-TWO and sixty four centavos (P1,131,982.64), with
legal interest until the same is fully paid;chanroblesvirtuallawlibrary

c. The parties are liable equally for the payment of arbitration costs;chanroblesvirtuallawlibrary

d. All claims for attorneys fees are DISMISSED; andChanRoblesVirtualawlibrary

e. Since there is still due and owing from UPSI an amount of money in favor of Diesel, respondent
FGU is DISCHARGED as surety for Diesel.

Costs de officio.
SO ORDERED.5chanrobleslaw

UPSI filed its Motion for Partial Reconsideration,6 dated May 6, 2002, while Diesel filed its
Motion for Reconsideration,7 dated May 7, 2002. The CA denied that of UPSI, but partially
granted that of Diesel. Thus:chanRoblesvirtualLawlibrary

WHEREFORE, the Motion for Reconsideration of respondent Diesel Construction Co., Inc. is
partially GRANTED. The liquidated damages are hereby reduced to P1,146,519.00 (45 days
multiplied by P25,478.20 per diem). However, in accordance with the main opinion, We hold that
petitioner is liable to respondent Diesel for the total amount of P3,661,692.64, representing the
unpaid balance of the contract price plus the ten-percent retention, from which the liquidated
damages, must, of course, be deducted. Thus, in sum, as amended, We hold that petitioner is still
liable to respondent Diesel in the amount of P2,515,173.64, with legal interest until the same is
fully paid.

The main opinion, in all other respects, STANDS.

SO ORDERED.8chanrobleslaw

Unsatisfied, Diesel and UPSI filed their separate petitions for review before the Court, docketed
as G.R. No. 154885 and G.R. No. 154937, respectively, which were later consolidated. The Court
then rendered judgment on March 24, 2008, the dispositive portion of which
reads:chanRoblesvirtualLawlibrary

WHEREFORE, Diesels petition is PARTIALLY GRANTED and UPSIs Petition

is DENIED with qualification. The assailed Decision dated April 16, 2002 and Resolution dated
August 21, 2002 of the CA are MODIFIED, as follows:cralawlawlibrary

(1)The award for liquidated damages is DELETED;

(2)The award to Diesel for the unpaid balance of the contract price of PhP
3,661,692.64 is AFFIRMED;
(3)UPSI shall pay the costs of arbitration before the CIAC in the amount
of PhP 298,406.03;
(4)Diesel is awarded attorneys fees in the amount of PhP 366,169; and
(5)UPSI is awarded damages in the amount of PhP 310,834.01, the same
to be deducted from the retention money, if there still be any, and, if
necessary, from the amount referred to in item (2) immediately
above.

In summary, the aggregate award to Diesel shall be PhP 3,717,027.64. From this amount shall be
deducted the award of actual damages of PhP 310,834.01 to UPSI which shall pay the costs of
arbitration in the amount of PhP 298,406.03.

FGU is released from liability for the performance bond that it issued in favor of Diesel.
No costs.

SO ORDERED.9chanrobleslaw

UPSI moved for a reconsideration10 and Diesel filed its Motion for Leave to File and Admit
Attached Comment and/or Opposition (to UPSI Property Holdings, Inc.s Motion for
Reconsideration) with Motion for Clarification.11 In its Resolution,12 dated August 20, 2008, the
Court denied with finality the motion filed by UPSI and granted that of Diesels.

On October 8, 2008, the March 24, 2008 Decision of the Court became final and executory.

Eventually, Diesel filed the Motion for Issuance of Writ of Execution with the CIAC.

On February 17, 2009, despite numerous pleadings filed by UPSI opposing the execution of the
Courts decision, the CIAC granted13 the execution sought by Diesel. Still unsatisfied, UPSI
questioned by certiorari the execution granted by the CIAC before the CA, docketed as CA-G.R.
SP No. 108423. On July 9, 2009, the CA denied14 the UPSI petition and later its motion for
reconsideration.

Meanwhile, pending the resolution of the petition for certiorari in CA-G.R. SP No. 108423, Diesel
sought the amendment of the writ of execution before the CIAC so that the payment of legal
interest be included in the writ as well as in the reimbursement of half of the arbitration costs.
Despite the opposition by UPSI, CIAC partially granted Diesels motion in its Order,15 dated July
29, 2009, which considered the interest being claimed by Diesel. But as far as the reimbursement
of half of the arbitration costs was concerned, the CIAC denied it. UPSI questioned the CIAC
order via a petition for certiorari with the CA, docketed as CA-G.R. SP 110926, arguing that the
CIAC gravely abused its discretion when it substantially modified the writ of execution by holding
that Diesel was entitled to legal interest. The CA, however, denied the petition in its ruling
that:chanRoblesvirtualLawlibrary

Hence, the issue of legal interest was never raised, nor quibbled about by the petitioner, making it
final and binding regardless of what the principal award may turn out to be.

An incisive scrutiny of the portion of the Supreme Courts Decision stating that, [The] award to
Diesel for the unpaid balance of the contract price of Php3,661,692.64 is AFFIRMED. only goes
to show that such amount represents the balance of the contract price plus the ten-percent retention,
from which the liquidated damages must be deducted; the difference or the net amount of which
bears legal interest until fully paid as awarded by this Court. Hence, the confirmation by the
Supreme Court that the final award should indeed be P3,661,692.64 addressed the question as to
what should be the unpaid balance due to the private respondent. Logically, whatever the amount
is awarded necessarily bears the legal interest as awarded previously by this Court.

We disagree with petitioners contention that the Supreme Court deleted the legal interest by its
silence on that matter. If such was its intention, it should have also expressly declared its deletion
together with its express mandate to remove the award of liquidated damages to herein petitioner.16
The CA further explained that there was no substantial variance between the assailed judgment
and the writ of execution rendered to enforce it because the whole context of the controversy
pointed to the rightful provision of legal interest in the total execution of the final
judgment.17cralawred

UPSI subsequently filed a motion for reconsideration, but it was likewise denied.

Hence, the present petition assigning the following

ERRORS:

THE COURT OF APPEAL SERIOUSLY ERRED AND DECIDED IN A MANNER NOT

IN ACCORDANCE WITH THE LAW AND PREVAILING JURISPRUDENCE WHEN IT
RULED THAT:cralawlawlibrary

I. CIAC IS ALLEGEDLY CORRECT IN ISSUING THE ASSAILED ORDER SINCE

THE ISSUE OF LEGAL INTEREST WAS SUPPOSEDLY NEVER RAISED BY
PETITIONER BEFORE THE SUPREME COURT IN ITS EARLIER PETITION,
THEREBY CONSIDERING THE MATTER ALLEGEDLY AS ALREADY A
SETTLED ISSUE. ON THE CONTRARY, PETITIONER HAS CONSISTENTLY
PUT IN ISSUE CIACS ERRONEOUS IMPOSITION OF LEGAL INTEREST AS
EARLY AS 28 DECEMBER 2001 IN ITS PETITION FOR REVIEW FILED
BEFORE THE HONORABLE COURT OF APPEALS.

II. IT WAS ALLEGEDLY CORRECT AND PROPER THAT CIAC SUPPOSEDLY

CLARIFIED THE PROVISION ON PAYMENT OF INTEREST IN THE WRIT OF
EXECUTION IT ISSUED ALLEGEDLY PURSUANT TO THE CONTEXT OF
THE FINAL JUDGMENT RENDERED BY THE SUPREME COURT. ON THE
CONTRARY, CIAC PURPOSELY CHANGED THE PROVISIONS OF THE
SUPREME COURTS DECISION TO FAVOR RESPONDENT DIESEL.18

The crucial issue for resolution revolves around the propriety of the inclusion of the legal interest
in the writ of execution despite the silence of the Court in the dispositive portion of its judgment
which has become final and executory.

Before ruling on the propriety of the assailed CA decision, the issue of forum shopping has been
brought to the attention of the Court as Diesel pointed out in its Comment,19 as well as in its
Memorandum,20that UPSI likewise sought the exclusion of legal interest in another separate
petition for certiorari before the CA, docketed as CA-G.R. SP No. 122827 while CA-G.R. SP No.
110926 was still pending before it. For said reason, Diesel prays that the subject petition be
summarily dismissed with prejudice pursuant to Section 5, Rule 7 of the Rules of Court.
UPSI refutes the above allegation and avers that it has been in good faith as it even disclosed that
CA-G.R. SP No. 122827 was still pending before the CA when it filed this petition, as evidenced
by the Verification and Certification of Non-Forum Shopping.21cralawred

Forum shopping exists when, as a result of an adverse decision in one forum, or in anticipation
thereof, a party seeks a favorable opinion in another forum through means other than appeal
or certiorari. There is forum shopping when the elements of litis pendencia are present or where
a final judgment in one case will amount to res judicata in another. They are as follows: (a) identity
of parties, or at least such parties that represent the same interests in both actions, (b) identity of
rights or causes of action, and (c) identity of relief sought.22cralawred

If at all, it would be the second petition filed before the CA which should be dismissed being an
offshoot of the first petition which, based on the records, was what happened as the CA rendered
its judgment23in CA-G.R. SP No. 122827 dismissing it for being violative of the rule against forum
shopping. Thus, there is no legal impediment of any kind that would bar full resolution of the
present controversy.

Did the CA correctly uphold the CIAC in concluding that the legal interest was deemed included
in the amounts awarded by the Court in G.R. Nos. 154885 and 154937?

The Court rules in the affirmative.

It is true that a decision that has attained finality becomes immutable and unalterable and cannot
be modified in any respect, even if the modification was meant to correct erroneous conclusions
of fact and law, and whether the modification was made by the court that rendered it or by this
Court as the highest court of the land.24 Any attempt on the part of the x x x entities charged with
the execution of a final judgment to insert, change or add matters not clearly contemplated in the
dispositive portion violates the rule on immutability of judgments."25cralawred

UPSI argues that it has consistently questioned the issue of the imposition of legal interest and,
that even assuming without admitting that the issue of legal interest was not raised, the Court was
clothed with authority to review matters even if not assigned as errors on appeal if it finds this
consideration necessary in arriving at a just decision of the case.26 The failure of Diesel to timely
move for reconsideration resulted in the finality of the March 24, 2008 Decision of the Court where
the Court was silent on the award of legal interest.

Further, UPSI claims that the Motion for Clarification filed by Diesel, which was merely noted by
the Court, was an admission on its part that the subject decision did not include the award of legal
interest. Therefore, no one, including the CA, can avoid assuming that the 24 March 2008 decision
necessarily includes the award of legal interest.27 The writ of execution must conform to the
judgment promulgated and not to the CIAC Decision nor the April 16, 2002 Decision and August
21, 2002 Resolution of the CA. In unilaterally interpreting the judgment as one which included
payment of legal interest despite the fact that nowhere in the dispositive portion of the decision
can be found any grant of legal interest, the CIAC caused a substantial variance between the final
and executory decision and the writ of execution to enforce it.28cralawred
On the other hand, Diesel counters that the legal interest imposed by the CIAC on the judgment in
its favor accrued upon finality of the said judgment. The legal interest became applicable as a
matter of law upon finality. There was no need for it to be awarded or declared in the judgment
itself.29cralawred

Moreover, Diesel avers that UPSI never raised the issue of legal interest. Not being an issue, the
propriety of the imposition of legal interest, was not the subject of the Courts decision.30cralawred

The Courts Ruling

The rule is that in case of ambiguity or uncertainty in the dispositive portion of a decision, the
body of the decision may be scanned for guidance in construing the judgment.31 After scrutiny of
the subject decision, nowhere can it be found that the Court intended to delete the award of legal
interest especially that, as Diesel argues, it was never raised. In fact, what the Court carefully
reviewed was the principal amount awarded as well as the liquidated damages because they were
specifically questioned. Recall that the CA modified the awards granted by the CIAC, but not the
legal interest. In finally resolving the controversy, the Court affirmed the amount of unpaid
balance of the contract price in favor of Diesel but expressly deleted the award of liquidated
damages. There being no issue as to the legal interest, the Court did not find it necessary anymore
to disturb the imposition of such. As correctly observed by the CA:chanRoblesvirtualLawlibrary

x x x. A panoramic view of the case from its inception in the arbitral level to this Court and then
to the Supreme Court reveals the context of the decisions rendered by the three (3) tribunals in its
totality. The Supreme Court already took into context the previous decisions of public respondent
CIAC and this Court which consistently included the payment of legal interest in their dispositive
portions. Hence, the Supreme Court merely ruled on the current issues presented by petitioner
which did not include legal interest. It is already an act of redundancy for it to repeat what had
already been adequately settled and explained by public respondent CIAC and this Court.32

Thus, contrary to UPSIs argument, there is no substantial variance between the March 24, 2008
final and executory decision of the Court and the writ of execution issued by the CIAC to enforce
it. The Courts silence as to the payment of the legal interests in the dispositive portion of the
decision is not tantamount to its deletion or reversal. The CA was correct in holding that if such
was the Courts intention, it should have also expressly declared its deletion together with its
express mandate to remove the award of liquidated damages to UPSI.33cralawred

It is likewise observed that the CIAC itself is very mindful of the rule on immutability of judgment.
The motion of Diesel to modify and/or amend the writ of execution involved not only the payment
of legal interest but also the reimbursement of arbitration costs. The CIAC, however, denied the
reimbursement, declaring that:chanRoblesvirtualLawlibrary

It will be noted that the award made by this Arbitral Tribunal for payment by the Respondent to
the Claimant of the P298,406.03 costs of arbitration had been affirmed by the Supreme Court and
that the latter decision has attained finality and immutability. Thus, even if there had been any
error on the matter (on which this Arbitral Tribunal does not concede), it is much too late in the
day to make the corresponding adjustments thereon.34chanrobleslaw
Corollarily, had the inclusion of the legal interest in the writ been violative of the rule on
immutability of judgment, the CIAC would not have granted it.

Consequently, the Court, in Nacar vs. Gallery Frames,35 instructs:chanRoblesvirtualLawlibrary

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:cralawlawlibrary

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

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

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

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

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

When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.

Following the foregoing ruling by the Court, the legal interest remains at 6% and 12% per annum,
as the case may be, since the judgment subject of the execution became final on March 24, 2008.
Interests accruing after July 1, 2013, however, shall be at the rate of 6% per annum.
As a final note, it is herein reiterated that the manner of the execution of a final judgment is not a
matter of "choice." As to how a judgment should be satisfied does not revolve upon the pleasure
or discretion of a party unless the judgment itself expressly provides for such discretion. Foremost
rule in execution of judgments is that "a writ of execution must conform strictly to every essential
particular of the judgment promulgated, and may not vary the terms of the judgment it seeks to
enforce, nor may it go beyond the terms of the judgment sought to be executed." As a corollary
rule, the Court has clarified that "a judgment is not confined to what appears on the face of the
decision, but extends as well to those necessarily included therein or necessary
thereto."36cralawred

WHEREFORE, the petition is DENIED.

SO ORDERED.
G.R. No. 184458 January 14, 2015
RODRIGO RIVERA, Petitioner,
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
x-----------------------x
G.R. No. 184472
SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners,
vs.
RODRIGO RIVERA, Respondent.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with
modification the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch
17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil
Case No. 163661,3 a case for collection of a sum of money due a promissory note. While all three
(3) lower courts upheld the validity and authenticity of the promissory note as duly signed by the
obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the
trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to
twelve percent (12%) per annumcomputed from the date of judicial or extrajudicial demand, and
(2) reinstatement of the award of attorney’s fees also in a reduced amount of ₱50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and
questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472,
Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s
reduction of the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other since 1973: Rivera and
Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C.
CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine
Currency (₱120,000.00) on December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid
for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to
twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no
case shall be less than ₱5,000.00 and to pay in addition the cost of suit and other incidental
litigation expense.
Any action which may arise in connection with this note shall be brought in the proper Court of
the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment stipulated in the promissory note,
Rivera, as partial payment for the loan, issued and delivered to the SpousesChua, as payee, a check
numbered 012467, dated 30 December 1998, drawn against Rivera’s current account with the
Philippine Commercial International Bank (PCIB) in the amount of ₱25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera,
likewise drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated,
but blank as to payee and amount. Ostensibly, as per understanding by the parties, PCIB Check
No. 013224 was issued in the amount of ₱133,454.00 with "cash" as payee. Purportedly, both
checks were simply partial payment for Rivera’s loan in the principal amount of ₱120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason "account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the
principal of ₱120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May
1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on
11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil
Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the
subject Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the
loans were always covered by a security; (3) at the time of the filing of the complaint, he still had
an existing indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in
default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21
December 1998, should have been issued in the amount of only 1,300.00, representing the amount
he received from the Spouses Chua’s saleslady; (5) contrary to the supposed agreement, the
Spouses Chua presented the check for payment in the amount of ₱133,454.00; and (6) there was
no demand for payment of the amount of ₱120,000.00 prior to the encashment of PCIB Check No.
0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness
thereunder.
The MeTC summarized the testimonies of both parties’ respective witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of
the testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos).
xxx
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document
examiner (1989); NBI Senior Document Examiner (1994 to the date he testified); registered
criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination
conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by
the US Embassy in Manila; attended a seminar on Effective Methodology in Teaching and
Instructional design conducted by the NBI Academy; seminar lecturer on Questioned Documents,
Signature Verification and/or Detection; had examined more than a hundred thousand questioned
documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing
in the Promissory Note and compared the signature thereon with the specimen signatures of
[Rivera] appearing on several documents. After a thorough study, examination, and comparison
of the signature on the questioned document (Promissory Note) and the specimen signatures on
the documents submitted to him, he concluded that the questioned signature appearing in the
Promissory Note and the specimen signatures of [Rivera] appearing on the other documents
submitted were written by one and the same person. In connection with his findings, Magbojos
prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following
conclusion: "The questioned and the standard specimen signatures RODGRIGO RIVERA were
written by one and the same person."
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he
obtained a loan from [respondent] Salvador and executed a real estate mortgage over a parcel of
land in favor of [respondent Salvador] as collateral; aside from this loan, in October, 1998 he
borrowed ₱25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 December
1998; he expressly denied execution of the Promissory Note dated 24 February 1995 and alleged
that the signature appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB
Check No. 0132224 was partial payment for the Promissory Note was not true, the truth being that
he delivered the check to [respondent Salvador] with the space for amount left blank as he and
[respondent] Salvador had agreed that the latter was to fill it in with the amount of ₱1,300.00 which
amount he owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called
him and told him that he had written ₱133,454.00 instead of ₱1,300.00; x x x. To rebut the
testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the
signature appearing on the Promissory Note was not his signature and that he did not execute the
Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus stipulated
interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of 12%
percent per annum from 11 June 1999, as actual and compensatory damages; 20% of the whole
amount due as attorney’s fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but
deleted the award of attorney’s fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the
Decision dated October 21, 2002 is hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.
Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the
Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and
reinstated the award of attorney’s fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per annum and
the award of attorney’s fees is reinstated atthe reduced amount of ₱50,000.00 Costs against
[Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the
Spouses Chua in G.R. No. 184472, respectively raising the following issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING
THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY
NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF
THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING
ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND
IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL
FROM THE DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS
LEGAL ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE
INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT
THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID
STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE,
UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition,
via a Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the
appellate court specifically concerning the correct rate of interest on Rivera’s indebtedness under
the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the
entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship
withthe Spouses Chua who were money lenders, he has been able to maintain a loan account with
them. However, each of these loan transactions was respectively "secured by checks or sufficient
collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof
(sic) from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e.,
after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to depart from
the lower courts’ uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory note was forged,
only that the signature is not his and varies from his usual signature. He likewise makes a confusing
defense of having previously obtained loans from the Spouses Chua who were money lenders and
who had allowed him a period of "almost four (4) years" before demanding payment of the loan
under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of the National
Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory note. On that
score, the appellate court aptly disabled Rivera’s contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note
is a forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and
convincing evidence. Mere variance of signatures cannot be considered as conclusive proof that
the same was forged. Save for the denial of Rivera that the signature on the note was not his, there
is nothing in the records to support his claim of forgery. And while it is true that resort to experts
is not mandatory or indispensable to the examination of alleged forged documents, the opinions of
handwriting experts are nevertheless helpful in the court’s determination of a document’s
authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the promissory note
and the testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures
offered in evidence would lead to the conclusion that the signatures were made by one and the
same person.
It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means "evidence which is of greater weight, or more
convincing than that which is offered in opposition to it."
Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a
prima faciecase in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his
allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14 Well-
entrenched in jurisprudence is the rule that factual findings of the trial court, especially when
affirmed by the appellate court, are accorded the highest degree of respect and are considered
conclusive between the parties.15 A review of such findings by this Court is not warranted except
upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court
are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference
from its factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave
abuse of discretion in the appreciation of facts; (4) when the findings of the appellate court go
beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered,
will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the
findings of fact are conclusions without mention of the specific evidence on which they are based,
are premised on the absence of evidence, or are contradicted by evidence on record.16 None of
these exceptions obtains in this instance. There is no reason to depart from the separate factual
findings of the three (3) lower courts on the validity of Rivera’s signature reflected in the
Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer
to the plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the
whole case or only to certain issues in the case.17
In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or
indispensable to the examination or the comparison of handwriting, the trial courts in this case, on
its own, using the handwriting expert testimony only as an aid, found the disputed document
valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following: categorical statement
of [respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s])
house; the conclusion of NBI Senior Documents Examiner that the questioned signature
(appearing on the Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were
written by one and the same person"; actual view at the hearing of the enlarged photographs of the
questioned signature and the standard specimen signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a
money lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he
was already in default and has not been paying any interest for a loan incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing friendship of the parties as
"kumpadres," Rivera was allowed another loan, albeit this time secured by a real estate mortgage,
which will cover Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the
Spouses Chua’s two (2) and successive loan accommodations to Rivera: one, secured by a real
estate mortgage and the other, secured by only a Promissory Note.
Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a
substantial amount of time before the Spouses Chua demanded payment of the obligation due
under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a
discordant defense to assail the authenticity and validity of the Promissory Note. Although the
burden of proof rested on the Spouses Chua having instituted the civil case and after they
established a prima facie case against Rivera, the burden of evidence shifted to the latter to
establish his defense.21 Consequently, Rivera failed to discharge the burden of evidence, refute the
existence of the Promissory Note duly signed by him and subsequently, that he did not fail to pay
his obligation thereunder. On the whole, there was no question left on where the respective
evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues
that even assuming the validity of the Promissory Note, demand was still necessary in order to
charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate court
to apply Section 70 of the Negotiable Instruments Law (NIL).22
We agree that the subject promissory note is not a negotiable instrument and the provisions of the
NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the following
elements to be a negotiable instrument:
(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.
On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION
184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is
an unconditional promise in writing made by one person to another, signed by the maker, engaging
to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses
Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees. However, even
if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the coverage of
Section 70 of the NIL which provides that presentment for payment is not necessary to charge the
person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that
he issued.
The Promissory Note is unequivocal about the date when the obligation falls due and becomes
demandable—31 December 1995. As of 1 January 1996, Rivera had already incurred in delay
when he failed to pay the amount of ₱120,000.00 due to the Spouses Chua on 31 December 1995
under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute the debtor in default: (1) when
there is an express stipulation to that effect; (2) where the law so provides; (3) when the period is
the controlling motive or the principal inducement for the creation of the obligation; and (4) where
demand would be useless. In the first two paragraphs, it is not sufficient that the law or obligation
fixes a date for performance; it must further state expressly that after the period lapses, default will
commence.
We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One
Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent
to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is
fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of
default" until the entire obligation is fully paid for. The parties evidently agreed that the maturity
of the obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest.
The Promissory Note expressly provided that after 31 December 1995, default commences and the
stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31 December
1995, the due date of the obligation. On that date, Rivera became liable for the stipulated interest
which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995,
demand was not necessary before Rivera could be held liable for the principal amount of
₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses
Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are guilty of delay, in the
performance of their obligations is laid down on Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity
for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent
per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of
money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December
1995; and (3) the Promissory Note provides for an indemnity for damages upon default of Rivera
which is the payment of a 5%monthly interest from the date of default.
We do not consider the stipulation on payment of interest in this case as a penal clause although
Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal amount of
₱120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there isno stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud
in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.
The penal clause is generally undertaken to insure performance and works as either, or both,
punishment and reparation. It is an exception to the general rules on recovery of losses and
damages. As an exception to the general rule, a penal clause must be specifically set forth in the
obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a
penal clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera
defaulted in the payment of the amount of ₱120,000.00. The measure of damages for the Rivera’s
delay is limited to the interest stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of
5% a month or 60% per annum. On this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe
31 December 1995. Given this circumstance, demand by the creditor isno longer necessary in order
that delay may exist since the contract itself already expressly so declares. The mere failure of
[Spouses Chua] to immediately demand or collect payment of the value of the note does not
exonerate [Rivera] from his liability therefrom. Verily, the trial court committed no reversible error
when it imposed interest from 1 January 1996 on the ratiocination that [Spouses Chua] were
relieved from making demand under Article 1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to
legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest
rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when
necessary. Since the interest rate agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed
from the date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal
interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472
denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the
ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s
indebtedness under the Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472
is res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals correctly
reduced the interest rate stipulated in the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur:
(1) the former judgment or order must be final; (2) the judgment or order must be on the merits;
(3) the decision must have been rendered by a court having jurisdiction over the subject matter and
the parties; and (4) there must be, between the first and the second action, identity of parties, of
subject matter and of causes of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject
matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of
Appeals’ disposition on the propriety of the reduction of the interest rate was raised by the Spouses
Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior
judgment."
At the time interest accrued from 1 January 1996, the date of default under the Promissory Note,
the then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular
No. 416 in cases involving the loan or for bearance of money.29 Thus, the legal interest accruing
from the Promissory Note is 12% per annum from the date of default on 1 January 1996. However,
the 12% per annumrate of legal interest is only applicable until 30 June 2013, before the advent
and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing
the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP
Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal
interest from 1 January 1996, the date when Rivera defaulted, to date when this Decision becomes
final and executor is divided into two periods reflecting two rates of legal interest: (1) 12% per
annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date
when this Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date
when this Decision becomes final and executory, such is likewise divided into two periods: (1)
12% per annum from 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per
annum from 1 July 2013 to date when this Decision becomes final and executor.31 We base this
imposition of interest on interest due earning legal interest on Article 2212 of the Civil Code which
provides that "interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses
Chua could already be determined with reasonable certainty given the wording of the Promissory
Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or for bearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extra judicial demand under and subject to the provisions
ofArticle 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum.1âwphi1 No interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a for bearance of
credit. And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory
Note, weagree with the reduction thereof but not the ratiocination of the appellate court that the
attorney’s fees are in the nature of liquidated damages or penalty. The interest imposed in the
Promissory Note already answers as liquidated damages for Rivera’s default in paying his
obligation. We award attorney’s fees, albeit in a reduced amount, in recognition that the Spouses
Chua were compelled to litigate and incurred expenses to protect their interests.34 Thus, the award
of ₱50,000.00 as attorney’s fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera
to the Spouses Chua:
Face value Stipulated Interest due Attorney’ Total
of the Interest A & B earning legal s fees Amount
Promissory interest A & B
Note
February 24, A. January 1, A. June 11, 1999 Wholesal
1995 to 1996 to (date of judicial e Amount
December June 30, 2013 demand) to June
31, 1995 30, 2013
B. July 1 2013 to B. July 1, 2013
date when this to date when this
Decision Decision
becomes final becomes final
and executory and executory
₱120,000.00 A. 12 % per A. 12% per ₱50,000. Total
annumon the annumon the 00 amount
principal amount total amount of of
of ₱120,000.00 column 2 Columns
B. 6% per B. 6% per 1-4
annumon the annumon the
principal amount total amount of
of ₱120,000.00 column 235

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal
interest at the rate of 6% per annum computed from its finality until full payment thereof, the
interim period being deemed to be a forbearance of credit.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals
in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents
Spouse Salvador and Violeta Chua the following:
(1) the principal amount of ₱120,000.00;
(2) legal interest of 12% per annumof the principal amount of ₱120,000.00 reckoned from 1
January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1 July 2013 to date
when this Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial
demand, to 30 June 2013, as interest due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when
this Decision becomes final and executor, asinterest due earning legal interest;
(6) Attorney’s fees in the amount of ₱50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision
until full payment thereof.
Costs against petitioner Rodrigo Rivera.
SO ORDERED.