G.R. No.

113236 March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-
G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay
City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for
damages.

The facts of this case, adopted by the CA and based on findings by the trial court, are as
follows:

. . . [D]efendant is a banking corporation. It operates under a certificate of authority

issued by the Central Bank of the Philippines, and among its activities, accepts
savings and time deposits. Said defendant had as one of its client-depositors the Fojas-
Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a
special savings account with the defendant, the latter authorized and allowed
withdrawals of funds therefrom through the medium of special withdrawal slips.
These are supplied by the defendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership

Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and
sell plaintiff's products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-
Arca purchased on credit Firestone products from plaintiff with a total amount of
P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six
(6) special withdrawal slips drawn upon the defendant. In turn, these were deposited
by the plaintiff with its current account with the Citibank. All of them were honored
and paid by the defendant. This singular circumstance made plaintiff believe [sic] and
relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the
defendant would be equally sufficiently funded. Relying on such confidence and
belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other
purchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I,

J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment
thereof drawn upon the defendant, to wit:

WITHDRAWAL
DATE AMOUNT
SLIP NO.
June 15, 1978 42127 P1,198,092.80
July 15, 1978 42128 940,190.00
Aug. 15, 1978 42129 880,000.00
 Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in
turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it
had done in respect of the previous special withdrawal slips. Out of these four (4)
withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was
honored and paid by the defendant in October 1978. Because of the absence for a long
period coupled with the fact that defendant honored and paid withdrawal slips No.
42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the
more strengthened that the other withdrawal slips were likewise sufficiently funded,
and that it had received full value and payment of Fojas-Arca's credit purchased then
outstanding at the time. On this basis, plaintiff was induced to continue extending to
Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibank that special
withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129
dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason
'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account
for the total sum of P2,078,092.80 representing the aggregate amount of the above-
two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary
losses it suffered is caused by and directly attributable to defendant's gross
negligence.

On September 25, 1979, counsel of plaintiff served a written demand upon the
defendant for the satisfaction of the damages suffered by it. And due to defendant's
refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint,
thereby compelling plaintiff to incur litigation expenses and attorney's fees which
amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter

alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca
only, [in] which defendant is not involved; Vehemently, it was denied by defendant
that the special withdrawal slips were honored and treated as if it were checks, the
truth being that when the special withdrawal slips were received by defendant, it only
verified whether or not the signatures therein were authentic, and whether or not the
deposit level in the passbook concurred with the savings ledger, and whether or not
the deposit is sufficient to cover the withdrawal; if plaintiff treated the special
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for
being grossly negligent in treating the withdrawal slips as check when it is clearly
stated therein that the withdrawal slips are non-negotiable; that defendant is not a
privy to any of the transactions between Fojas-Arca and plaintiff for which reason
defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first
defendant had given notice to plaintiff it is merely an extension of usual bank courtesy
to a prospective client; that defendant is only dealing with its depositor Fojas-Arca
and not the plaintiff. In summation, defendant categorically stated that plaintiff has no
cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of
Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the
counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 21765 in relation to Articles 196 and
207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on
the part of private respondent: 1) the acceptance and payment of the special withdrawal slips
without the presentation of the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal
slips the general appearance of checks; and 3) the failure of respondent bank to seasonably
warn petitioner that it would not honor two of the four special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the
appeal and affirmed the judgment of the trial court. According to the appellate court,
respondent bank notified the depositor to present the passbook whenever it received a
collection note from another bank, belying petitioner's claim that respondent bank was
negligent in not requiring a passbook under the subject transaction. The appellate court also
found that the special withdrawal slips in question were not purposely given the appearance
of checks, contrary to petitioner's assertions, and thus should not have been mistaken for
checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to
inform petitioner of the dishonor of the special withdrawal slips, for to do so would have
been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25. The CA grievously erred in holding that the [Luzon Development] Bank was free
from any fault or negligence regarding the dishonor, or in failing to give fair and
timely advice of the dishonor, of the two intermediate LDB Slips and in failing to
award damages to Firestone pursuant to Article 2176 of the New Civil Code.8

The issue for our consideration is whether or not respondent bank should be held liable for
damages suffered by petitioner, due to its allegedly belated notice of non-payment of the
subject withdrawal slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's
special savings account with respondent bank. Petitioner in turn deposited these withdrawal
slips with Citibank. The latter credited the same to petitioner's current account, then presented
the slips for payment to respondent bank. It was at this point that the bone of contention
arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos.
42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused
payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That
information came about six months from the time Fojas-Arca purchased tires from petitioner
using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips
from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause
of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-
negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of
negotiable instruments do not apply in this case.10Petitioner itself concedes this point.11 Thus,
respondent bank was under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known that withdrawal slips
were not negotiable instruments. It could not expect these slips to be treated as checks by
other entities. Payment or notice of dishonor from respondent bank could not be expected
immediately, in contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically
credited petitioner's current account with the amount of the subject withdrawal slips, then
merely waited for the same to be honored and paid by respondent bank. It presumed that the
withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of the
withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a
credit instrument lies in its freedom to circulate freely as a substitute for money.12 The
withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care,
whether such account consists only of a few hundred pesos or of millions of pesos.13 The fact
that the other withdrawal slips were honored and paid by respondent bank was no license for
Citibank to presume that subsequent slips would be honored and paid immediately. By doing
so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of
care.14

In the ordinary and usual course of banking operations, current account deposits are accepted
by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's
agent or representative, who indicates therein the current account number to which the
deposit is to be credited, the name of the depositor or current account holder, the date of the
deposit, and the amount of the deposit either in cash or in check.15

The withdrawal slips deposited with petitioner's current account with Citibank were not
checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid
mode of deposit. But having erroneously accepted them as such, Citibank — and petitioner as
account-holder — must bear the risks attendant to the acceptance of these instruments.
Petitioner and Citibank could not now shift the risk and hold private respondent liable for
their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R.
CV No. 29546 is AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

Footnotes
1
Rollo, pp. 27-34.
2
Id. at 44-48.
3
Id. at 27-30.
4
Id. at 35-43.
5
ARTICLE 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if
there is no pre-existing contractual relation between the parties, is called a quasi-delict
and is governed by the provisions of this Chapter.
6
ARTICLE 19. The local civil registrar shall require the payment of the fees
prescribed by law or regulations before the issuance of the marriage license. No other
sum shall be collected in the nature of a fee or tax of any kind for the issuance of said
license. It shall, however, be issued free of charge to indigent parties, that is, those
who have no visible means of income or whose income is insufficient for their
subsistence, a fact established by their affidavit or by their oath before the local civil
registrar.
7
ARTICLE 20. The license shall be valid in any part of the Philippines for a period of
one hundred twenty days from the date of issue, and shall be deemed automatically
cancelled at the expiration of said period if the contracting parties have not made use
of it. The expiry date shall be stamped in bold characters on the face of every license
issued.
8
Rollo, p. 13.
9
Id. at 19; Petition, paragraph 34, subparagraph B.
10
NEGOTIABLE INSTRUMENTS LAW — ACT NO. 2031

SECTION 89. To whom notice of dishonor must be given. — Except as

otherwise provided, when a negotiable instrument has been dishonored by
non-acceptance or non-payment, notice of dishonor must be given to the
drawer and to each indorser, and any drawer or indorser to whom such notice
is not given is discharge.

SECTION 103. Where parties reside in same place. — Where the person
giving and the person to receive notice reside in the same place, notice must
be given within the following times:

(a) If given at the place of business of the person to receive notice, it must be
given before the close of business hours the day following;

(b) If given at his residence, it must be given before the usual hours of rest on
the day following;

(c) If sent by mail, it must be deposited in the post-office in time to reach him
in usual course on the day following.
 SECTION 104. Where parties reside in different places. — Where the person
giving and the person to receive notice reside in different places, the notice
must be given within the following times:

(a) If sent by mail, it must be deposited in the post-office in time to go by mail

the day following the day of dishonor, or if there be no mail at a convenient
hour on that day, by the next mail thereafter;

(b) If given otherwise than through the post-office, then within the time that
notice would have been received in due course of mail if it had been deposited
in the post-office within the time specified in the last subdivision.
11
Supra, note 9.
12
Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997).
13
Philippine National Bank vs. Court of Appeals, 315 SCRA 309, 314-315 (1999).
14
Philippine Bank of Commerce vs. Court of Appeals, 269 SCRA 695, 708-709
(1997).
15
Id. at 699.

G.R. No. 123031 October 12, 1999

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, VICENTE ALEGRE, respondents.

QUISUMBING, J.:

This petition for review on certiorari assails respondent appellate court's Decision, 1 dated
December 8, 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional
Trial Court of Makati, Branch 132. The dispositive portion of the trial court's decision reads:
 WHEREFORE, judgment is hereby rendered ordering defendant [herein
petitioner] to pay plaintiff [herein private respondent]:

(1) the principal sum of P514,390.94 with legal interest thereon

computed from August 6, 1991 until fully paid; and

(2) the costs of suit.

SO ORDERED. 2

Based on the records, the following are the pertinent facts of the case:

Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in

money market operations.

On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred
thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May
27, 1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos and
sixty-seven centavos (P516,238.67) covered private respondent's placement plus interest at
twenty and a half (20.5%) percent for thirty-two (32) days.

On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five
hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos
(P514,390.94) in favor of the private respondent as proceeds of his matured investment plus
interest. The CHECK was drawn from petitioner's current account number 0011-0803-59,
maintained with the Bank of the Philippine Islands (BPI), main branch at Makati
City.1âwphi1.nêt

On June 17, 1991, private respondent's wife deposited the CHECK with Rizal Commercial
Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the
annotation, that the "Check (is) Subject of an Investigation." BPI took custody of the CHECK
pending an investigation of several counterfeit checks drawn against CIFC's aforestated
checking account. BPI used the check to trace the perpetrators of the forgery.

Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on
several occasions, that he be paid in cash. CIFC refused the request, and instead instructed
private respondent to wait for its ongoing bank reconciliation with BPI. Thereafter, private
respondent, through counsel, made a formal demand for the payment of his money market
placement. In turn, CIFC promised to replace the CHECK but required an impossible
condition that the original must first be surrendered.

On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a sum of
money against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch
132.

On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a
separate civil action 4 for collection of a sum of money with the RTC-Makati, Branch 147.
The collection suit alleged that BPI unlawfully deducted from CIFC's checking account,
counterfeit checks amounting to one million, seven hundred twenty-four thousand, three
hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The action included the
prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI.

Meanwhile, in response to Alegre's complaint with RTC-Makati, Branch 132, CIFC filed a
motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by
CIFC to enforce a right, for contribution and indemnity, with respect to Alegre's claim. CIFC
asserted that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently
funded.

On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to dismiss the
third-party complaint on the ground of pendency of another action with RTC-Makati, Branch
147. Acting on the motion, the trial court dismissed the third-party complaint on November 4,
1992, after finding that the third party complaint filed by CIFC against BPI is similar to its
ancillary claim against the bank, filed with RTC-Makati Branch 147.

Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22,
1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the
CHECK, retained the original copy and forwarded only a certified true copy to RCBC. When
Arieta was recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and
deducted the said amount from the account of CIFC, but the proceeds, as well as the CHECK
remained in BPI's custody. The bank's move was in accordance with the Compromise
Agreement 5 it entered with CIFC to end the litigation in RTC-Makati, Branch 147. The
compromise agreement, which was submitted for the approval of the said court, provided
that:

1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount

of P1,724,364.58 plus P20,000 litigation expenses as full and
final settlement of all of plaintiff's claims as contained in the
Amended Complaint dated September 10, 1992. The
aforementioned amount shall be credited to plaintiff's current
account No. 0011-0803-59 maintained at defendant's Main
Branch upon execution of this Compromise Agreement.

2. Thereupon, defendant shall debit the sum of P514,390.94

from the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to
Vicente Alegre.

3. In case plaintiff is adjudged liable to Vicente Alegre in Civil

Case No. 92-515 arising from the alleged dishonor of BPI
Check No. 513397, plaintiff cannot go after the defendant:
otherwise stated, the defendant shall not be liable to the
plaintiff. Plaintiff [CIFC] may however set-up the defense of
payment/discharge stipulated in par. 2 above. 6

On July 27, 1993, BPI filed a separate collection suit 7 against Vicente Alegre with the RTC-
Makati, Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A.
Pena and Lita A. Anda and forged several checks of BPI's client, CIFC. The total amount of
counterfeit checks was P1,724,364.58. BPI prevented the encashment of some checks
amounting to two hundred ninety five thousand, seven hundred seventy-five pesos and seven
centavos (P295,775.07). BPI admitted that the CHECK, payable to Vicente Alegre for
P514,390.94, was deducted from BPI's claim, hence, the balance of the loss incurred by BPI
was nine hundred fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos
(P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The records are
silent on the outcome of this case.

On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente
Alegre.

CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the
decision of the trial court.

Hence this appeal, 8 in which petitioner interposes the following assignments of errors:

1. The Honorable Court of Appeals erred in affirming the

finding of the Honorable Trial Court holding that petitioner was
not discharged from the liability of paying the value of the
subject check to private respondent after BPI has debited the
value thereof against petitioner's current account.

2. The Honorable Court of Appeals erred in applying the

provisions of paragraph 2 of Article 1249 of the Civil Code in
the instant case. The applicable law being the Negotiable
Instruments Law.

3. The Honorable Court of Appeals erred in affirming the

Honorable Trial Court's findings that the petitioner was guilty
of negligence and delay in the performance of its obligation to
the private respondent.

4. The Honorable Court of Appeals erred in affirming the

Honorable Trial Court's decision ordering petitioner to pay
legal interest and the cost of suit.

5. The Honorable Court of Appeals erred in affirming the

Honorable Trial Court's dismissal of petitioner's third-party
complaint against BPI.

These issues may be synthesized into three:

1. WHETHER OR NOT ARTICLE 1249 OF THE NEW

CIVIL CODE APPLIES IN THE PRESENT CASE;

2. WHETHER OR NOT "BPI CHECK NO. 513397" WAS

VALIDLY DISCHARGED; and

3. WHETHER OR NOT THE DISMISSAL OF THE THIRD

PARTY COMPLAINT OF PETITIONER AGAINST BPI BY
REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law
(NIL) are the pertinent laws to govern its money market transaction with private respondent,
and not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses that it had already
been discharged from the liability of paying the value of the CHECK due to the following
circumstances:

1) There was "ACCEPTANCE" of the subject check by BPI,

the drawee bank, as defined under the Negotiable Instruments
Law, and therefore, BPI, the drawee bank, became primarily
liable for the payment of the check, and consequently, the
drawer, herein petitioner, was discharged from its liability
thereon;

2) Moreover, BPI, the drawee bank, has not validly

DISHONORED the subject check; and,

3) The act of BPI, the drawee bank of debiting/deducting the

value of the check from petitioner's account amounted to and/or
constituted a discharge of the drawer's (petitioner's) liability
under the instrument/subject check. 9

Petitioner cites Section 137 of the Negotiable Instruments Law, which states:

Liability of drawee retaining or destroying bill — Where a drawee to

whom a bill is delivered for acceptance destroys the same, or refuses
within twenty-four hours after such delivery or such other period as the
holder may allow, to return the bill accepted or non-accepted to the
Holder, he will be deemed to have accepted the same.

Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for
the payment of the CHECK. Consequently, when BPI offset the value of CHECK against the
losses from the forged checks allegedly committed by the private respondent, the check was
deemed paid.

Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the "payment of debts." It provides that:

The payment of debts in money shall be made in the currency

stipulated, and if it is not possible to deliver such currency, then in the
currency, which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange

or other mercantile documents shall produce the effect of payment only
when they have been cashed, or when through the fault of the creditor
they have been impaired.

In the meantime, the action derived from the original obligation shall
be held in abeyance.
Considering the nature of a money market transaction, the above-quoted provision should be
applied in the present controversy. As held in Perez vs. Court of Appeals, 10 a "money market
is a market dealing in standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not deal directly with each other but through a middle man
or dealer in open market. In a money market transaction, the investor is a lender who loans
his money to a borrower through a middleman or dealer. 11

In the case at bar, the money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of
requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as
June 17, 1991, the same was dishonored by non-acceptance, with BPI's annotation: "Check
(is) subject of an investigation." These facts were testified to by BPI's manager. Under these
circumstances, and after the notice of dishonor, 12 the holder has an immediate right of
recourse against the drawer, 13 and consequently could immediately file an action for the
recovery of the value of the check.

In a loan transaction, the obligation to pay a sum certain in money may be paid in money,
which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore
cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs. Court of
Appeals, 14 this Court held:

Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment
(citation omitted). A check, whether a manager's check or ordinary check, is
not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3.) 15

Turning now to the second issue, when the bank deducted the amount of the CHECK from
CIFC's current account, this did not ipso facto operate as a discharge or payment of the
instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was
not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it
incurred from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of
the value of the check was agreed upon by CIFC and BPI. The parties intended to amicably
settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a
compromise agreement, which reads:

xxx xxx xxx

2. Thereupon, defendant shall debit the sum of P514,390.94

from the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to
Vicente Alegre.

3. In case plaintiff is adjudged liable to Vicente Alegre in Civil

Case No. 92-515 arising from the alleged dishonor of BPI
Check No. 513397, plaintiff cannot go after the defendant;
otherwise stated, the defendant shall not be liable to the
 plaintiff. Plaintiff however (sic) set-up the defense of
payment/discharge stipulated in par. 2
above. 16

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a

litigation or put an end to one already commenced. 17 It is an agreement between two or more
persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual
consent in the manner which they agree on, and which everyone of them prefers in the hope
of gaining, balanced by the danger of losing. 18 The compromise agreement could not bind a
party who did not sign the compromise agreement nor avail of its benefits. 19 Thus, the
stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a
party thereto. His money could not be the subject of an agreement between CIFC and BPI.
Although Alegre's money was in custody of the bank, the bank's possession of it was not in
the concept of an owner. BPI cannot validly appropriate the money as its own. The codal
admonition on this issue is clear:

Art. 1317 —

No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.

A Contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party. 20

BPI's confiscation of Alegre's money constitutes garnishment without the parties going
through a valid proceeding in court. Garnishment is an attachment by means of which the
plaintiff seeks to subject to his claim the property of the defendant in the hands of a third
person or money owed to such third person or a garnishee to the defendant. 21 The
garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the court who
had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not
yet tendered a valid payment of its obligation to the private respondent. Tender of payment
involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the obligee for the former's obligation and demanding that the latter accept the
same. 22 Tender of payment cannot be presumed by a mere inference from surrounding
circumstances.

With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action,
the following requisites must concur: (a) identity of parties or at least such as to represent the
same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief
being founded on the same acts; and (c) the identity in the two cases should be such that the
judgment which may be rendered in one would, regardless of which party is successful,
amount to res judicata in the other. 23

The trial court's ruling as adopted by the respondent court states, thus:

A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu

International Finance Corporation vs. Bank of the Philippine Islands now
 pending before Branch 147 of this Court and the Third Party Complaint in the
instant case would readily show that the parties are not only identical but also
the cause of action being asserted, which is the recovery of the value of BPI
Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third
Party Complaint the rights asserted and relief prayed for, the reliefs being
founded on the facts, are identical.

xxx xxx xxx

WHEREFORE, the motion to dismiss is granted and consequently, the Third

Party Complaint is hereby ordered dismissed on ground of lis pendens. 24

We agree with the observation of the respondent court that, as between the third party claim
filed by the petitioner against BPI in Civil Case No. 92-515 and petitioner's ancillary claim
against the bank in Civil Case No. 92-1940, there is identity of parties as well as identity of
rights asserted, and that any judgment that may be rendered in one case will amount to res
judicata in another.

The compromise agreement between CIFC and BPI, categorically provided that "In case
plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant
(BPI); otherwise stated, the defendant shall not be liable to the plaintiff." 25Clearly, this
stipulation expressed that CIFC had already abandoned any further claim against BPI with
respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a party in
the case at bar, would amount to res judicata and would violate terms of the compromise
agreement between CIFC and BPI. The general rule is that a compromise has upon the parties
the effect and authority of res judicata, with respect to the matter definitely stated therein, or
which by implication from its terms should be deemed to have been included therein. 26 This
holds true even if the agreement has not been judicially approved. 27

WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals
in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.1âwphi1.nêt

SO ORDERED.

G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner,

vs.
A.U. VALENCIA and CO. INC., FELIX PEÑARROYO, SPS. ARSENIO B. REYES &
AMANDA SANTOS, and DELFIN JAO, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron
C. Papa seeks to reverse and set aside 1) the Decision dated 27 January 1992 of the Court of
Appeals which affirmed with modification the decision of the trial court; and 2) the
Resolution dated 22 April 1992 of the same court, which denied petitioner's motion for
reconsideration of the above decision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter
referred to as respondent Valencia, for brevity) and Felix Peñarroyo (hereinafter called
respondent Peñarroyo), filed with the Regional Trial Court of Pasig, Branch 151, a complaint
for specific performance against herein petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one Angela M. Butte.

The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-
fact of Angela M. Butte, sold to respondent Peñarroyo, through respondent Valencia, a parcel
of land, consisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La
Loma, Quezon City, and covered by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said property, together with several
other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the
Associated Banking Corporation (now Associated Citizens Bank); that after the alleged sale,
but before the title to the subject property had been released, Angela M. Butte passed away;
that despite representations made by herein respondents to the bank to release the title to the
property sold to respondent Peñarroyo, the bank refused to release it unless and until all the
mortgaged properties of the late Angela M. Butte were also redeemed; that in order to protect
his rights and interests over the property, respondent Peñarroyo caused the annotation on the
title of an adverse claim as evidenced by Entry No. P.E.-6118/T-28993, inscribed on 18
January 1997.

The complaint further alleged that it was only upon the release of the title to the property,
sometime in April 1977, that respondents Valencia and Peñarroyo discovered that the
mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as
special administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then,
herein petitioner had been collecting monthly rentals in the amount of P800.00 from the
tenants of the property, knowing that said property had already been sold to private
respondents on 15 June 1973; that despite repeated demands from said respondents, petitioner
refused and failed to deliver the title to the property. Thereupon, respondents Valencia and
Peñarroyo filed a complaint for specific performance, praying that petitioner be ordered to
deliver to respondent Peñarroyo the title to the subject property (TCT 28993); to turn over to
the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of
P800.00 until the property is delivered to respondent Peñarroyo; to pay respondents the sum
of P20,000.00 as attorney's fees; and to pay the costs of the suit.

In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking
Corporation (now Associated Citizens Bank). He contended, however, that the complaint did
not state a cause of action; that the real property in interest was the Testate Estate of Angela
M. Butte, which should have been joined as a party defendant; that the case amounted to a
claim against the Estate of Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged in
the complaint, the property had been assigned to Tomas L. Parpana, as special administrator
of the Estate of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise,
claimed that he could not recall in detail the transaction which allegedly occurred in 1973;
that he did not have TCT No. 28993 in his possession; that he could not be held personally
liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally,
petitioner asseverated that as a result of the filing of the case, he was compelled to hire the
services of counsel for a fee of P20,000.00 for which respondents should be held liable.

Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case.
Making common cause with respondents Valencia and Peñarroyo, respondent Jao alleged that
the subject lot which had been sold to respondent Peñarroyo through respondent Valencia
was in turn sold to him on 20 August 1973 for the sum of P71,500.00, upon his paying
earnest money in the amount of P5,000.00. He, therefore, prayed that judgment be rendered
in favor of respondents, the latter in turn be ordered to execute in his favor the appropriate
deed of conveyance covering the property in question and to turn over to him the rentals
which aforesaid respondents sought to collect from petitioner Myron V. Papa.

Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to
the property to respondents Valencia and Peñarroyo, who in turn failed to deliver the said title
to him, he suffered mental anguish and serious anxiety for which he sought payment of moral
damages; and, additionally, the payment of attorney's fees and costs.

For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a
third-party complaint against herein private respondents, spouses Arsenio B. Reyes and
Amanda Santos (respondent Reyes spouses, for short). He averred, among other's that the late
Angela M. Butte was the owner of the subject property; that due to non-payment of real
estate tax said property was sold at public auction the City Treasurer of Quezon City to the
respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00; that the one-year
period of redemption had expired; that respondents Valencia and Peñarroyo had sued
petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery of the title
to the property; that the same aforenamed respondents had acknowledged that the price paid
by them was insufficient, and that they were willing to add a reasonable amount or a
minimum of P55,000.00 to the price upon delivery of the property, considering that the same
was estimated to be worth P143,000.00; that petitioner was willing to reimburse respondents
Reyes spouses whatever amount they might have paid for taxes and other charges, since the
subject property was still registered in the name of the late Angela M. Butte; that it was
inequitable to allow respondent Reyes spouses to acquire property estimated to be worth
P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered
canceling the tax sale to respondent Reyes spouses; restoring the subject property to him
upon payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus
legal interest; and, ordering respondents Valencia and Peñarroyo to pay him at least
P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the
property.

Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's
right to redeem the property.

At the trial, only respondent Peñarroyo testified. All the other parties only submitted
documentary proof.

On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:

WHEREUPON, judgment is hereby rendered as follows:

 1) Allowing defendant to redeem from third-party defendants and ordering the
latter to allow the former to redeem the property in question, by paying the
sum of P14,000.00 plus legal interest of 12% thereon from January 21, 1980;

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff

Felix Peñarroyo covering the property in question and to deliver peaceful
possession and enjoyment of the said property to the said plaintiff, free from
any liens and encumbrances;

Should this not be possible, for any reason not attributable to defendant, said
defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of P45,000.00
plus legal interest of 12% from June 15, 1973;

3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a

deed of absolute sale over the same property, upon the latter's payment to the
former of the balance of the purchase price of P71,500.00;

Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay

intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and

4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as

attorney's fees and litigation expenses.

SO ORDERED.1

Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging
among others that the sale was never "consummated" as he did not encash the check (in the
amount of P40,000.00) given by respondents Valencia and Peñarroyo in payment of the full
purchase price of the subject lot. He maintained that what said respondent had actually paid
was only the amount of P5,000.00 (in cash) as earnest money.

Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was
dismissed because of failure to file their appellant's brief.

On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification
the trial court's decision, thus:

WHEREFORE, the second paragraph of the dispositive portion of the

appealed decision is MODIFIED, by ordering the defendant-appellant to
deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owner's duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a certificate of title in the
name of Felix Peñarroyo. In all other respects, the decision appealed from is
AFFIRMED. Costs against defendant-appellant Myron C. Papa.

SO ORDERED.2
In affirming the trial court's decision, respondent court held that contrary to petitioner's claim
that he did not encash the aforesaid check, and therefore, the sale was not consummated,
there was no evidence at all that petitioner did not, in fact, encash said check. On the other
hand, respondent Peñarroyo testified in court that petitioner Papa had received the amount of
P45,000.00 and issued receipts therefor. According to respondent court, the presumption is
that the check was encashed, especially since the payment by check was not denied by
defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he "can no
longer recall the transaction which is supposed to have happened 10 years ago."3

On petitioner's claim that he cannot be held personally liable as he had acted merely as
attorney-in-fact of the owner, Angela M. Butte, respondent court held that such contention is
without merit. This action was not brought against him in his personal capacity, but in his
capacity as the administrator of the Testate Estate of Angela M. Butte.4

On petitioner's contention that the estate of Angela M. Butte should have been joined in the
action as the real party in interest, respondent court held that pursuant to Rule 3, Section 3 of
the Rules of Court, the estate of Angela M. Butte does not have to be joined in the action.
Likewise, the estate of Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7
of the same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party to the
Deed of Absolute Sale, and it is basic law that contracts bind only those who are parties
thereto.5

Respondent court observed that the conditions under which the mortgage rights of the bank
were assigned are not clear. In any case, any obligation which the estate of Angela M. Butte
might have to the estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia
and Peñarroyo are not bound by any such obligation.

Petitioner filed a motion for reconsideration of the above decision, which motion was denied
by respondent Court of Appeals.

Hence, this petition wherein petitioner raises the following issues:

I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS

THAT THE SALE IN QUESTION WAS CONSUMMATED IS
GROUNDED ON SPECULATION OR CONJECTURE, AND IS
CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.

II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE

TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR
NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN
FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A
PARTY IN THIS CASE.

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON
PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE.6

Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the
subject property had been consummated. He contends that such a conclusion is based on the
erroneous presumption that the check (in the amount of P40,000.00) had been cashed, citing
Art. 1249 of the Civil Code, which provides, in part, that payment by checks shall produce
the effect of payment only when they have been cashed or when through the fault of the
creditor they have been impaired.7 Petitioner insists that he never cashed said check; and,
such being the case, its delivery never produced the effect of payment. Petitioner, while
admitting that he had issued receipts for the payments, asserts that said receipts, particularly
the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not prove payment.
He avers that there must be a showing that said check had been encashed. If, according to
petitioner, the check had been encashed, respondent Peñarroyo should have presented PCIB
Check No. 761025 duly stamped received by the payee, or at least its microfilm copy.

Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of
respondents Valencia and Peñarroyo, as evidenced by a letter addressed to him in which said
respondents wrote, in part:

. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir
of Mrs. Angela M. Butte to pay you the aforementioned amount of P75,000.00
for the release and cancellation of subject property's mortgage. The money is
with me and if it is alright with you, I would like to tender the payment as
soon as possible. . . .8

We find no merit in petitioner's arguments.

It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron
C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty
Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of
the subject lot. Petitioner himself admits having received said amounts,9 and having issued
receipts therefor.10 Petitioner's assertion that he never encashed the aforesaid check is not
substantiated and is at odds with his statement in his answer that "he can no longer recall the
transaction which is supposed to have happened 10 years ago." After more than ten (10) years
from the payment in party by cash and in part by check, the presumption is that the check had
been encashed. As already stated, he even waived the presentation of oral evidence.

Granting that petitioner had never encashed the check, his failure to do so for more than ten
(10) years undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check
implies an undertaking of due diligence in presenting it for payment, and if he from whom it
is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.11 It has, likewise, been held that if
no presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury12 unless presentment is otherwise excused. This is in harmony with Article 1249 of the
Civil Code under which payment by way of check or other negotiable instrument is
conditioned on its being cashed, except when through the fault of the creditor, the instrument
is impaired. The payee of a check would be a creditor under this provision and if its no-
payment is caused by his negligence, payment will be deemed effected and the obligation for
which the check was given as conditional payment will be discharged.13
Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract
of sale by delivering the payment of the purchase price, said respondents, therefore, had the
right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in question.

With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has
found that the conditions under which said mortgage rights of the bank were assigned are not
clear. Indeed, a perusal of the original records of the case would show that there is nothing
there that could shed light on the transactions leading to the said assignment of rights; nor is
there any evidence on record of the conditions under which said mortgage rights were
assigned. What is certain is that despite the said assignment of mortgage rights, the title to the
subject property has remained in the name of the late Angela M. Butte.14This much is
admitted by petitioner himself in his answer to respondent's complaint as well as in the third-
party complaint that petitioner filed against respondent-spouses Arsenio B. Reyes and
Amanda Santos.15Assuming arquendo that the mortgage rights of the Associated Citizens
Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned
mortgage rights validly exists and constitute a lien on the property, the estate may file the
appropriate action to enforce such lien. The cause of action for specific performance which
respondents Valencia and Peñarroyo have against petitioner is different from the cause of
action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has
on the property by reason of its being an alleged assignee of the bank's rights of mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule
3 of the Rules of Court, an executor or administrator may sue or be sued without joining the
party for whose benefit the action is presented or defended, thus:

Sec. 3. Representative parties. — A trustee of an express trust, a guardian,

executor or administrator, or a party authorized by statute, may sue or be sued
without joining the party for whose benefit the action is presented or defended;
but the court may, at any stage of the proceedings, order such beneficiary to be
made a party. An agent acting in his own name and for the benefit of an
undisclosed principal may sue or be sued without joining the principal except
when the contract involves things belonging to the principal.16

Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final
determination of the action can be had. Whatever prior and subsisting mortgage rights the
estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the change
in ownership thereof.

WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of
Appeals, dated 27 January 1992 is AFFIRMED.
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
 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. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

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

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

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

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

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

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

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

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

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute.
Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of
Loss, as required by defendant bank's procedure, if he desired replacement of
said lost CTDs (TSN, February 9, 1987, pp. 48-50).
 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said
affidavit of loss, 280 replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).

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

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex

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

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563)

from herein plaintiff formally informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.

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

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

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

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

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

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

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

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

The instant petition is bereft of merit.

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

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

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

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

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

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

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

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the
space provided supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further provides that the
amount deposited shall be "repayable to said depositor" on the period indicated.
Therefore, the text of the instrument(s) themselves manifest with clarity that they
are payable, not to whoever purports to be the "bearer" but only to the specified
person indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who made the deposit
and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6

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

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

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

money;

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

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

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

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

xxx xxx xxx

Atty. Calida:

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

witness:

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

Atty. Calida:

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

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

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

certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

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

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

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

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

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission
is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the other party who relied upon them. 15 In the law of
evidence, whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he cannot,
in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16

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

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:
 . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote
therefrom:

The character of the transaction between the parties is to be

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

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

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

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

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

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

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

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

Art. 1625. An assignment of credit, right or action shall produce no effect as

against third persons, unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the assignment involves real
property.

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

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

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

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

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

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

4. Whether or not plaintiff could compel defendant to preterminate the CTDs

before the maturity date provided therein.

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

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

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

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

To accept petitioner's suggestion that respondent bank's supposed negligence may be

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

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

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

xxx xxx xxx

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

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

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

SO ORDERED.
G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

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

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

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

CRUZ, J.:

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

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

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

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

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

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

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.

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

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

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

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

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

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

SO ORDERED.

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

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

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

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

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

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

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in
this case are not negotiable instruments.
The petition has no merit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

conform to the following requirements:

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

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

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

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

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

indicated therein with reasonable certainty.

xxx xxx xxx

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

unconditional within the meaning of this Act though coupled with —

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

particular account to be debited with the amount; or

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

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

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

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

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

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

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

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The
amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must
bear the consequences of its own negligence. But the balance of P586,589.00 should be debited
to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from
his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also
credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let
alone the fact that it has already been informed of the dishonor of the treasury warrants.

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

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

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

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

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

Marcial Esposo for plaintiff-appellant.

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

DIZON, J.:

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

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

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

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

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

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

In connection with the events set forth above, Montinola was charged with theft in the Court of
First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground
of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila
praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

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

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

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

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

WHEREFORE, judgment is hereby rendered, ordering the defendants to

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

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

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

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

It is to be noted in this connection that some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the
letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its depositors. Among others, the
condition is imposed that "in cases of adverse claim, the money order or money orders involved
will be returned to you (the bank) and the, corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you
if such step is deemed necessary." The conditions thus imposed in order to enable the bank to
continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank
of America. The latter is therefore bound by them. That it is so is clearly referred from the fact
that, upon receiving advice that the amount represented by the money order in question had
been deducted from its clearing account with the Manila Post Office, it did not file any protest
against such action.

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

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

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed
with costs.
G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

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 Decision1 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 discounting3 arrangement with the Philnabank
Employees Savings and Loan Association (PEMSLA), an association of
PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia
Avenue Branch. The association maintained current and savings accounts
with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez

would rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would
replace the postdated checks with their own checks issued in the name of
the members.
It was PEMSLA’s 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 PNB’s 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. PNB’s 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) Attorney’s fees in the amount of P150,000.00 considering

that this case does not involve very complicated issues; and for
the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal
ground that the disputed checks should be considered as payable to bearer
and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC
disposition. The CA concluded that the checks were obviously meant by
the spouses to be really paid to PEMSLA. The court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses

Rodriguez) that their cause of action arose from the alleged breach of
contract by the defendant-appellant (PNB) when it paid the value of the
checks to PEMSLA despite the checks being payable to order. Rather, we
are more convinced by the strong and credible evidence for the defendant-
appellant with regard to the plaintiffs-appellees’ and PEMSLA’s business
arrangement – that the value of the rediscounted checks of the plaintiffs-
appellees would be deposited in PEMSLA’s account for payment of the
loans it has approved in exchange for PEMSLA’s 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 PEMSLA’s
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 PEMSLA’s 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 PEMSLA’s insufficiency of funds,
PEMSLA approached the plaintiffs-appellees for the latter to issue
rediscounted checks in favor of said applicant members. Based on the
investigation of the defendant-appellant, meanwhile, this arrangement
allowed the plaintiffs-appellees to make a profit by issuing rediscounted
checks, while the officers of PEMSLA and other members would be able to
claim their loans, despite the fact that they were disqualified for one reason
or another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not applied at
all. x x x.8 (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not
require indorsement for negotiation; and that spouses Rodriguez and
PEMSLA conspired with each other to accomplish this money-making
scheme. The payees in the checks were "fictitious payees" because they
were not the intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia,
that the checks on their faces were unquestionably payable to order; and
that PNB committed a breach of contract when it paid the value of the
checks to PEMSLA without indorsement from the payees. They also
argued that their cause of action is not only against PEMSLA but also
against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the
last paragraph and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-

appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6%

per annum from 14 May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed decision
rendered in Civil Case No. 99-10892, as set forth in the immediately next
preceding paragraph hereof, and SETTING ASIDE Our original decision
promulgated in this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the
appellate court, PNB failed to present sufficient proof to defeat the claim of
the spouses Rodriguez that they really intended the checks to be received
by the specified payees. Thus, PNB is liable for the value of the checks
which it paid to PEMSLA without indorsements from the named payees.
The award for damages was deemed appropriate in view of the failure of
PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained
respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable
to order or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed
checks, they did not intend for the named payees to receive the proceeds.
Thus, they are bearer instruments that could be validly negotiated by mere
delivery. Further, testimonial and documentary evidence presented during
trial amply proved that spouses Rodriguez and the officers of PEMSLA
conspired with each other to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous

judgment attaining finality to the prejudice of innocent parties. A court
discovering an erroneous judgment before it becomes final may, motu
proprio or upon motion of the parties, correct its judgment with the singular
objective of achieving justice for the litigants.10

However, a word of caution to lower courts, the CA in Cebu in this

particular case, is in order. The Court does not sanction careless
disposition of cases by courts of justice. The highest degree of diligence
must go into the study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely scrutinized and
analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors
in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true

recipient of the proceeds, the check is considered as a bearer instrument.
A check is "a bill of exchange drawn on a bank payable on demand."11 It is
either an order or a bearer instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where

it is drawn payable to the order of a specified person or to him or his order.
It may be drawn payable to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or

otherwise indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing

person, and such fact is known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of
any person; or

(e) Where the only or last indorsement is an indorsement in

blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner
of negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A
bearer instrument, on the other hand, does not require an indorsement to
be validly negotiated. It is negotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. – An instrument is negotiated when

it is transferred from one person to another in such manner as to constitute
the transferee the holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the indorsement of the
holder completed by delivery.

A check that is payable to a specified payee is an order instrument.

However, under Section 9(c) of the NIL, a check payable to a specified
payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus, checks issued to "Prinsipe
Abante" or "Si Malakas at si Maganda," who are well-known characters in
Philippine mythology, are bearer instruments because the named payees
are fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used

in the NIL. It is for this reason that We look elsewhere for guidance. Court
rulings in the United States are a logical starting point since our law on
negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.13

A review of US jurisprudence yields that an actual, existing, and living

payee may also be "fictitious" if the maker of the check did not intend for
the payee to in fact receive the proceeds of the check. This usually occurs
when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity.14 Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended recipient of the
proceeds of the check, the payee is considered a "fictitious" payee and the
check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and

the drawer bears the loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be negotiated by
delivery. The underlying theory is that one cannot expect a fictitious payee
to negotiate the check by placing his indorsement thereon. And since the
maker knew this limitation, he must have intended for the instrument to be
negotiated by mere delivery. Thus, in case of controversy, the drawer of the
check will bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the check to
always deny the validity of the indorsement. This despite the fact that the
fictitious payee was purposely named without any intention that the payee
should receive the proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty

Insurance Bank.16 In the said case, the corporation Mueller & Martin was
defrauded by George L. Martin, one of its authorized signatories. Martin
drew seven checks payable to the German Savings Fund Company
Building Association (GSFCBA) amounting to $2,972.50 against the
account of the corporation without authority from the latter. Martin was also
an officer of the GSFCBA but did not have signing authority. At the back of
the checks, Martin placed the rubber stamp of the GSFCBA and signed his
own name as indorsement. He then successfully drew the funds from
Liberty Insurance Bank for his own personal profit. When the corporation
filed an action against the bank to recover the amount of the checks, the
claim was denied.

The US Supreme Court held in Mueller that when the person making the
check so payable did not intend for the specified payee to have any part in
the transactions, the payee is considered as a fictitious payee. The check is
then considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as
drawee, was authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel

Related Services Company, Inc.18 upheld the fictitious-payee rule. The rule
protects the depositary bank and assigns the loss to the drawer of the
check who was in a better position to prevent the loss in the first place. Due
care is not even required from the drawee or depositary bank in accepting
and paying the checks. The effect is that a showing of negligence on the
part of the depositary bank will not defeat the protection that is derived from
this rule.

However, there is a commercial bad faith exception to the fictitious-payee

rule. A showing of commercial bad faith on the part of the drawee bank, or
any transferee of the check for that matter, will work to strip it of this
defense. The exception will cause it to bear the loss. Commercial bad faith
is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme. Said the US Supreme Court in Getty:

Consequently, a transferee’s 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 x19 (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 bank’s 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 customer’s 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 drawer’s instructions, i.e., to the named payee in the
check. It should charge to the drawer’s 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 drawer’s account.24

In the case at bar, respondents-spouses were the bank’s 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.alf-ITC

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

PNB’s 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

PNB’s 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 PNB’s 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 PNB’s 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 PNB’s 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.

SO ORDERED.
G.R. No. L-2516 September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for
respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First
Instance of Manila. The Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November
16, 1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000,
payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the
latter handed in act. On November 18, 1946, the next business day, the check was presented by
Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds,
the balance of the deposit of Ang Tek Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that "on November
16, 1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked
him to exchange Exhibit A — which he (appellant) then brought with him — with cash alleging
that he needed badly the sum of P4,000 represented by the check, but could not withdraw it from
the bank, it being then already closed; that in view of this request and relying upon appellant's
assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to
borrow money from each other, even before the war, and appellant owns a hotel and restaurant
known as the North Bay Hotel, said complainant delivered to him, on the same date, the sum of
P4,000 in cash; that despite repeated efforts to notify him that the check had been dishonored by
the bank, appellant could not be located any-where, until he was summoned in the City Fiscal's
Office in view of the complaint for estafa filed in connection therewith; and that appellant has not
paid as yet the amount of the check, or any part thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for
decision is whether under the facts found, estafa had been accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling
committed "By post dating a check, or issuing such check in payment of an obligation the
offender knowing that at the time he had no funds in the bank, or the funds deposited by him in
the bank were not sufficient to cover the amount of the check, and without informing the payee of
such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable. In this
connection, it must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is
committed by issuing either a postdated check or an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to "cash" and had not been
endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the
proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the
appellant, he did so with full knowledge that it would be dishonored upon presentment. In
that sense, the appellant could not be said to have acted fraudulently because the
 complainant, in so accepting the check as it was drawn, must be considered, by every
rational consideration, to have done so fully aware of the risk he was running thereby."
(Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have undoubtedly occurred
wherein the Bank required the indorsement of the drawer before honoring a check payable to
"cash." But cases there are too, where no such requirement had been made . It depends upon
the circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash"
is a check payable to bearer, and the bank may pay it to the person presenting it for payment
without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank
of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass
Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See
also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.

Where a check is made payable to the order of "cash", the word cash "does not purport
to be the name of any person", and hence the instrument is payable to bearer. The
drawee bank need not obtain any indorsement of the check, but may pay it to the person
presenting it without any indorsement. . . . (Zollmann, Banks and Banking, Permanent
Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to
demand identification and /or assurance against possible complications, — for instance, (a)
forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount
payable, etc. The bank may therefore require, for its protection, that the indorsement of the
drawer — or of some other person known to it — be obtained. But where the Bank is satisfied of
the identity and /or the economic standing of the bearer who tenders the check for collection, it
will pay the instrument without further question; and it would incur no liability to the drawer in thus
acting.

A check payable to bearer is authority for payment to holder. Where a check is in the
ordinary form, and is payable to bearer, so that no indorsement is required, a bank, to
which it is presented for payment, need not have the holder identified, and is not
negligent in falling to do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol.
5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for payment need
not necessarily have the holder identified and ordinarily may not be charged with
negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable
cause for suspecting any irregularity, it will be protected in paying a bearer check, "no
matter what facts unknown to it may have occurred prior to the presentment." 1 Morse,
Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further inquiry, it
is entirely reasonable for the bank to insist that holder give satisfactory proof of his
identity. . . . (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally
unconnected with its dishonor. The Court of Appeals declared that it was returned
unsatisfied because the drawer had insufficient funds— not because the drawer's indorsement
was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the
appellant, the writ of certiorari is denied and the decision of the Court of Appeals is hereby
affirmed, with costs.
G.R. No. 161756 December 16, 2005

VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO C.

ILANO, Petitioners,
vs.
HON. DOLORES L. ESPAÑOL, in her capacity as Executive Judge, RTC of Imus, Cavite,
Br. 90, and, AMELIA ALONZO, EDITH CALILAP, DANILO CAMACLANG, ESTELA
CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN REYES, JANE BACAREL,
CHERRY CAMACLANG, FLORA CABRERA, ESTELITA LEGASPI, CARMENCITA
GONZALES, NEMIA CASTRO, GLORIA DOMINGUEZ, ANNILYN C. SABALE and several
JOHN DOES, Respondents.

DECISION

CARPIO MORALES, J.:

The Court of Appeals having affirmed the dismissal by Branch 20 of the Regional Trial Court
(RTC) of Cavite at Imus, for lack of cause of action, Civil Case No. 2079-00, the complaint filed
by herein petitioner Victoria J. Ilano for Revocation/Cancellation of Promissory Notes and Bills
of Exchange (Checks) with Damages and Prayer for Preliminary Injunction or Temporary
Restraining Order (TRO),1 against herein respondents 15 named defendants (and several John
Does), a recital of the pertinent allegations in the complaint, quoted verbatim as follows, is in
order:

xxx

3. That defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She has been with
them for several years already, and through the years, defendant ALONZO was able to gain the
trust and confidence of [petitioner] and her family;

4. That due to these trust and confidence reposed upon defendant ALONZO by [petitioner], there
were occasions when defendant ALONZO was entrusted with [petitioner’s] METROBANK Check
Book containing either signed or unsigned blank checks, especially in those times when
[petitioner] left for the United States for medical check-up;

5. Sometime during the second week of December 1999, or thereabouts, defendant ALONZO by
means of deceit and abuse of confidence succeeded in procuring Promissory Notes and
signed blank checks from [petitioner] who was then recuperating from illness;

6. That as stated, aside from the said blank checks, defendant ALONZO likewise succeeded
in inducing[petitioner] to sign the Promissory Notes antedated June 8, 1999 in the amount
of PESOS: ONE MILLION FOUR HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED
SEVENTY TWO (Php 1,428,272.00) payable to defendants EDITH CALILAP and DANILO
CALILAP, and another Promissory Noted dated March 1999 in the amount of PESOS: ONE
MILLION (Php 1,000,000.00) payable to the same defendants EDITH CALILAP and DANILO
CALILAP, copies of said Promissory Notes are hereto attached as Annexes "A" and "A-1" hereof;

7. That another Promissory Note antedated October 1, 1999 thru the machination of
defendant ALONZO, was signed by [petitioner] in the amount of PESOS: THREE MILLION
FORTY SIX THOUSAND FOUR HUNDRED ONE (Php 3,046,401.00) excluding interest, in favor
of her co-defendants ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN
REYES, JANE BACAREL and CHERRY CAMACLANG, a copy of said Promissory Note is
hereto attached as Annex "B" hereof;

8. That the Promissory Notes and blank checks were procured thru fraud and deceit. The
consent of the [petitioner] in the issuance of the two (2) aforementioned Promissory Notes
was vitiated. Furthermore, the same were issued for want of consideration, hence, the same
should be cancelled, revoked or declared null and void;

9. That as clearly shown heretofore, defendant ALONZO in collusion with her co-defendants,
ESTELA CAMACLANG, ALLAN CAMACLANG and ESTELITA LEGASPI likewise was able to
induce plaintiff to sign several undated blank checks, among which are:

· Metrobank Check No. 0111544

· Metrobank Check No. 0111545

· Metrobank Check No. 0111546

· Metrobank Check No. 0111547

· Metrobank Check No. 0111515

all in the total amount of Php 3,031,600.00, copies of said checks are hereto attached as
Annexes "C", "C-1", "C-2", "C-3" and "C-4", respectively;

10. That aside from the checks mentioned heretofore, defendant ALONZO, confederated and
conspired with the following co-defendants, FLORA CABRERA, NEMIA CASTRO, EDITH
CALILAP, DANILO CALILAP, GLORIA DOMINGUEZ, CARMENCITA GONZALES and ANNILYN
C. SABALE and took advantage of the signature of [petitioner] in said blank checks which
were later on completed by them indicated opposite their respective names and the respective
amount thereof, as follows:

NAME AMOUNT METROBANK

Check No.
Flora Cabrera Php 337,584.58 0111460
Flora Cabrera 98,000.00 0111514
Nemia Castro 100,000.00 0111542
Nemia Castro 150,000.00 0084078
Edith Calilap/Danilo Calilap 490,000.00 0111513
Edith Calilap/Danilo Calilap 790,272.00 0111512
Edith Calilap/Danilo Calilap 1,220,000.00 0111462
Gloria Dominguez/ 1,046,040.00 0111543

Carmencita Gonzales
Annilyn C. Sable 150,000.00 0085134
Annilyn C. Sable 250,000.00 0085149
Annilyn C. Sable 186,000.00 0085112

Copy attached as Annexes "D", "D-1", "D-2", "D-3", "D-4", "D-5", "D-6", "D-7", "D-8", "D-9" and
"D-10", respectively;

Furthermore, defendant ALONZO colluded and conspired with defendant NEMIA CASTO in
procuring the signature of [petitioner] in documents denominated as "Malayang Salaysay"
dated July 22, 1999 in the amount of PESOS: ONE HUNDRED FIFTY THOUSAND (Php
150,000.00) and another "Malayang Salaysay" dated November 22, 1999 in the amount of
PESOS: ONE HUNDRED THOUSAND (Php 100,000.00) Annexes "D-11" and "D-12" hereof;
11. That said defendants took undue advantage of the signature of [petitioner] in the said
blank checks and furthermore forged and or falsified the signature of [petitioner] in other
unsigned checks and as it was made to appear that said [petitioner] is under the
obligation to pay them several amounts of money, when in truth and in fact, said
[petitioner] does not owe any of said defendant any single amount;

12. That the issuance of the aforementioned checks or Promissory Notes or the
aforementioned "Malayang Salaysay" to herein defendants were tainted with fraud and
deceit, and defendants conspired with one another to defraud herein [petitioner] as the
aforementioned documents were issued for want of consideration;

13. That the aforesaid defendants conspiring and confederating together and helping one
another committed acts of falsification and defraudation which they should be held
accountable under law;

14. The foregoing acts, and transactions, perpetrated by herein defendants in all bad faith
and malice, with malevolence and selfish intent are causing anxiety, tension, sleepless
nights, wounded feelings, and embarrassment to [petitioner] entitling her to moral damages
of at least in the amount of PESOS: FIVE HUNDRED THOUSAND (Php 500,000.00);

15. That to avoid repetition of similar acts and as a correction for the public good, the defendants
should be held liable to [petitioner] for exemplary damages in the sum of not less than the
amount of PESOS: TWO HUNDRED THOUSAND (Php 200,000.00);

16. That to protect the rights and interest of the [petitioner] in the illegal actuations of the
defendants, she was forced to engage the services of counsel for which she was obliged to pay
the sum of PESOS: ONE HUNDRED THOUSAND (Php 100,000.00) by way of Attorney’s fees
plus the amount of PESOS: THREE THOUSAND (Php 3,000.00) per appearance in court;

x x x (Emphasis and underscoring supplied)

The named defendants-herein respondents filed their respective Answers invoking, among other
grounds for dismissal, lack of cause of action, for while the checks subject of the complaint had
been issued on account and for value, some had been dishonored due to "ACCOUNT CLOSED;"
and the allegations in the complaint are bare and general.

By Order2 dated October 12, 2000, the trial court dismissed petitioner’s complaint for failure "to
allege the ultimate facts"-bases of petitioners claim that her right was violated and that she
suffered damages thereby.

On appeal to the Court of Appeals, petitioner contended that the trial court:

A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND LAW ON WHICH
THE APPEALED ORDER WAS BASED, THEREBY RENDERING SAID ORDER NULL AND
VOID.

B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO ALLEGE ULTIMATE FACTS

ON WHICH [PETITIONER] RELIES ON HER CLAIM THEREBY DISMISSING THE CASE FOR
LACK OF CAUSE OF ACTION.

C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION TO DISMISS THAT CONTAINED A

FAULTY NOTICE OF HEARING AS THE SAME IS MERELY ADDRESSED TO THE BRANCH
CLERK OF COURT.3
In its Decision4 of March 21, 2003 affirming the dismissal order of the trial court, the appellate
court held that the elements of a cause of action are absent in the case:

xxx

Such allegations in the complaint are only general averments of fraud, deceit and bad faith.
There were no allegations of facts showing that the acts complained of were done in the manner
alleged. The complaint did not clearly ascribe the extent of the liability of each of
[respondents]. Neither did it state any right or cause of action on the part of [petitioner] to show
that she is indeed entitled to the relief prayed for. In the first place, the record shows that subject
checks which she sought to cancel or revoke had already been dishonored and stamped
"ACCOUNT CLOSED." In fact, there were already criminal charges for violation of Batas
Pambansa Blg. 22 filed against [petitioner] previous to the filing of the civil case for
revocation/cancellation. Such being the case, there was actually nothing more to cancel or
revoke. The subject checks could no longer be negotiated. Thus, [petitioner’s] allegation that the
[respondents] were secretly negotiating with third persons for their delivery and/or assignment, is
untenable.

In the second place, we find nothing on the face of the complaint to show that [petitioner] denied
the genuineness or authenticity of her signature on the subject promissory notes and the
allegedly signed blank checks. She merely alleged abuse of trust and confidence on the part of
[Alonzo]. Even assuming arguendo that such allegations were true, then [petitioner] cannot be
held totally blameless for her predicament as it was by her own negligence that subject
instruments/signed blank checks fell into the hands of third persons. Contrary to [petitioner’s]
allegations, the promissory notes show that some of the [respondents] were actually creditors of
[petitioner] and who were issued the subject checks as securities for the loan/obligation incurred.
Having taken the instrument in good faith and for value, the [respondents] are therefore
considered holders thereof in due course and entitled to payment.

x x x (Underscoring supplied)

Hence, the present petition for review on certiorari, petitioner faulting the appellate court:

1. . . . in sustaining the dismissal of the complaint upon the ground of failure to state a cause of
action when there are other several causes of action which ventilate such causes of action in the
complaint;

2. . . . in finding that a requirement that a Decision which should express therein clearly and
distinctly the facts and the law on which it is based does not include cases which had not
reached pre-trial or trial stage;

3. . . . in not finding that a notice of hearing which was addressed to the Clerk of Court is totally
defective and that subsequent action of the court did not cure the flaw.5

In issue then is whether petitioner’s complaint failed to state a cause of action.

A cause of action has three elements: (1) the legal right of the plaintiff, (2) the correlative
obligation of the defendant, and (3) the act or omission of the defendant in violation of said legal
right. In determining the presence of these elements, inquiry is confined to the four corners of the
complaint6 including its annexes, they being parts thereof.7 If these elements are absent, the
complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of
action.8

As reflected in the above-quoted allegations in petitioner’s complaint, petitioner is seeking twin

reliefs, one for revocation/cancellation of promissory notes and checks, and the other for
damages.
Thus, petitioner alleged, among other things, that respondents, through "deceit," "abuse of
confidence" "machination," "fraud," "falsification," "forgery," "defraudation," and "bad faith," and
"with malice, malevolence and selfish intent," succeeded in inducing her to sign antedated
promissory notes and some blank checks, and "[by taking] undue advantage" of her signature on
some other blank checks, succeeded in procuring them, even if there was no consideration for all
of these instruments on account of which she suffered "anxiety, tension, sleepless nights,
wounded feelings and embarrassment."

While some of the allegations may lack particulars, and are in the form of conclusions of law, the
elements of a cause of action are present. For even if some are not stated with particularity,
petitioner alleged 1) her legal right not to be bound by the instruments which were bereft of
consideration and to which her consent was vitiated; 2) the correlative obligation on the part of
the defendants-respondents to respect said right; and 3) the act of the defendants-respondents
in procuring her signature on the instruments through "deceit," "abuse of confidence"
"machination," "fraud," "falsification," "forgery," "defraudation," and "bad faith," and "with malice,
malevolence and selfish intent."

Where the allegations of a complaint are vague, indefinite, or in the form of conclusions, its
dismissal is not proper for the defendant may ask for more particulars.9

With respect to the checks subject of the complaint, it is gathered that, except for Check No.
0084078,10 they were drawn all against petitioner’s Metrobank Account No. 00703-955536-7.

Annex "D-8"11 of the complaint, a photocopy of Check No. 0085134, shows that it was dishonored
on January 12, 2000 due to "ACCOUNT CLOSED." When petitioner then filed her complaint
on March 28, 2000, all the checks subject hereof which were drawn against the same closed
account were already rendered valueless or non-negotiable, hence, petitioner had, with respect
to them, no cause of action.

With respect to above-said Check No. 0084078, however, which was drawn against another
account of petitioner, albeit the date of issue bears only the year − 1999, its validity and
negotiable character at the time the complaint was filed on March 28, 2000 was not affected. For
Section 6 of the Negotiable Instruments Law provides:

Section 6. Omission; seal; particular money. – The validity and negotiable character of an
instrument are not affected by the fact that –

(a) It is not dated; or

(b) Does not specify the value given, or that any value had been given therefor; or

(c) Does not specify the place where it is drawn or the place where it is payable; or

(d) Bears a seal; or

(e) Designates a particular kind of current money in which payment is to be made.

x x x (Emphasis supplied)

However, even if the holder of Check No. 0084078 would have filled up the month and day of
issue thereon to be "December" and "31," respectively, it would have, as it did, become stale six
(6) months or 180 days thereafter, following current banking practice.12
It is, however, with respect to the questioned promissory notes that the present petition assumes
merit. For, petitioner’s allegations in the complaint relative thereto, even if lacking particularity,
does not as priorly stated call for the dismissal of the complaint.

WHEREFORE, the petition is PARTLY GRANTED.

The March 21, 2003 decision of the appellate court affirming the October 12, 2000 Order of the
trial court, Branch 20 of the RTC of Imus, Cavite, is AFFIRMED with MODIFICATION in light of
the foregoing discussions.

The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its docket and take
further proceedings thereon only insofar as the complaint seeks the revocation/cancellation of
the subject promissory notes and damages.

Let the records of the case be then REMANDED to the trial court.

SO ORDERED.
G.R. No. 148864 August 21, 2003

SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, Petitioners,

vs.
MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMEC'S** REALTY AND
DEVELOPMENT CORP. and the REGISTER OF DEEDS OF BULACAN, Respondents.

DECISION

PUNO, J.:

Petitioners, Spouses Evangelista ("Petitioners"), are before this Court on a Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, assailing the decision of the Court of
Appeals dismissing their petition.

Petitioners filed a complaint1 for annulment of titles against respondents, Mercator Finance
Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of
Deeds of Bulacan. Petitioners claimed being the registered owners of five (5) parcels of
land2 contained in the Real Estate Mortgage3 executed by them and Embassy Farms, Inc.
("Embassy Farms"). They alleged that they executed the Real Estate Mortgage in favor of
Mercator Financing Corporation ("Mercator") only as officers of Embassy Farms. They did not
receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy
Farms. Thus, they contended that the mortgage was without any consideration as to them since
they did not personally obtain any loan or credit accommodations. There being no principal
obligation on which the mortgage rests, the real estate mortgage is void.4With the void mortgage,
they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale to it as
the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the
subsequent sale of the same parcels of land to respondent Lydia P. Salazar ("Salazar"), and the
transfer of the titles to her name, and lastly, the sale and transfer of the properties to respondent
Lamecs Realty & Development Corporation ("Lamecs").

Mercator admitted that petitioners were the owners of the subject parcels of land. It, however,
contended that "on February 16, 1982, plaintiffs executed a Mortgage in favor of defendant
Mercator Finance Corporation ‘for and in consideration of certain loans, and/or other forms of
credit accommodations obtained from the Mortgagee (defendant Mercator Finance Corporation)
amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE &
78/100 (P844,625.78) PESOS, Philippine Currency and to secure the payment of the same and
those others that the MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’"5 It
contended that since petitioners and Embassy Farms signed the promissory note6 as co-makers,
aside from the Continuing Suretyship Agreement7 subsequently executed to guarantee the
indebtedness of Embassy Farms, and the succeeding promissory notes8 restructuring the loan,
then petitioners are jointly and severally liable with Embassy Farms. Due to their failure to pay
the obligation, the foreclosure and subsequent sale of the mortgaged properties are valid.

Respondents Salazar and Lamecs asserted that they are innocent purchasers for value and in
good faith, relying on the validity of the title of Mercator. Lamecs admitted the prior ownership of
petitioners of the subject parcels of land, but alleged that they are the present registered owner.
Both respondents likewise assailed the long silence and inaction by petitioners as it was only
after a lapse of almost ten (10) years from the foreclosure of the property and the subsequent
sales that they made their claim. Thus, Salazar and Lamecs averred that petitioners are in
estoppel and guilty of laches.9

During pre-trial, the parties agreed on the following issues:

a. Whether or not the Real Estate Mortgage executed by the plaintiffs in favor of
defendant Mercator Finance Corp. is null and void;
 b. Whether or not the extra-judicial foreclosure proceedings undertaken on subject
parcels of land to satisfy the indebtedness of Embassy Farms, Inc. is (sic) null and void;

c. Whether or not the sale made by defendant Mercator Finance Corp. in favor of Lydia
Salazar and that executed by the latter in favor of defendant Lamecs Realty and
Development Corp. are null and void;

d. Whether or not the parties are entitled to damages.10

After pre-trial, Mercator moved for summary judgment on the ground that except as to the
amount of damages, there is no factual issue to be litigated. Mercator argued that petitioners had
admitted in their pre-trial brief the existence of the promissory note, the continuing suretyship
agreement and the subsequent promissory notes restructuring the loan, hence, there is no
genuine issue regarding their liability. The mortgage, foreclosure proceedings and the
subsequent sales are valid and the complaint must be dismissed.11

Petitioners opposed the motion for summary judgment claiming that because their personal
liability to Mercator is at issue, there is a need for a full-blown trial.12

The RTC granted the motion for summary judgment and dismissed the complaint. It held:

A reading of the promissory notes show (sic) that the liability of the signatories thereto are
solidary in view of the phrase "jointly and severally." On the promissory note appears (sic) the
signatures of Eduardo B. Evangelista, Epifania C. Evangelista and another signature of Eduardo
B. Evangelista below the words Embassy Farms, Inc. It is crystal clear then that the plaintiffs-
spouses signed the promissory note not only as officers of Embassy Farms, Inc. but in their
personal capacity as well(.) Plaintiffs(,) by affixing their signatures thereon in a dual capacity
have bound themselves as solidary debtor(s) with Embassy Farms, Inc. to pay defendant
Mercator Finance Corporation the amount of indebtedness. That the principal contract of loan is
void for lack of consideration, in the light of the foregoing is untenable.13

Petitioners’ motion for reconsideration was denied for lack of merit.14 Thus, petitioners went up to
the Court of Appeals, but again were unsuccessful. The appellate court held:

The appellants’ insistence that the loans secured by the mortgage they executed were not
personally theirs but those of Embassy Farms, Inc. is clearly self-serving and misplaced. The fact
that they signed the subject promissory notes in the(ir) personal capacities and as officers of the
said debtor corporation is manifest on the very face of the said documents of indebtedness (pp.
118, 128-131, Orig. Rec.). Even assuming arguendo that they did not, the appellants lose sight of
the fact that third persons who are not parties to a loan may secure the latter by pledging or
mortgaging their own property (Lustan vs. Court of Appeals, 266 SCRA 663, 675). x x x. In
constituting a mortgage over their own property in order to secure the purported corporate debt
of Embassy Farms, Inc., the appellants undeniably assumed the personality of persons
interested in the fulfillment of the principal obligation who, to save the subject realities from
foreclosure and with a view towards being subrogated to the rights of the creditor, were free to
discharge the same by payment (Articles 1302 [3] and 1303, Civil Code of the
Philippines).15 (emphases in the original)

The appellate court also observed that "if the appellants really felt aggrieved by the foreclosure of
the subject mortgage and the subsequent sales of the realties to other parties, why then did they
commence the suit only on August 12, 1997 (when the certificate of sale was issued on January
12, 1987, and the certificates of title in the name of Mercator on September 27, 1988)?"
Petitioners’ "procrastination for about nine (9) years is difficult to understand. On so flimsy a
ground as lack of consideration, (w)e may even venture to say that the complaint was not worth
the time of the courts."16
A motion for reconsideration by petitioners was likewise denied for lack of merit.17 Thus, this
petition where they allege that:

The court a quo erred and acted with grave abuse of discretion amounting to lack or excess of
jurisdiction in affirming in toto the May 4, 1998 order of the trial court granting respondent’s
motion for summary judgment despite the existence of genuine issues as to material facts and its
non-entitlement to a judgment as a matter of law, thereby deciding the case in a way probably
not in accord with applicable decisions of this Honorable Court.18

we affirm.

Summary judgment "is a procedural technique aimed at weeding out sham claims or defenses at
an early stage of the litigation."19 The crucial question in a motion for summary judgment is
whether the issues raised in the pleadings are genuine or fictitious, as shown by affidavits,
depositions or admissions accompanying the motion. A genuine issue means "an issue of fact
which calls for the presentation of evidence, as distinguished from an issue which is fictitious or
contrived so as not to constitute a genuine issue for trial."20 To forestall summary judgment, it is
essential for the non-moving party to confirm the existence of genuine issues where he has
substantial, plausible and fairly arguable defense, i.e., issues of fact calling for the presentation
of evidence upon which a reasonable finding of fact could return a verdict for the non-moving
party. The proper inquiry would therefore be whether the affirmative defenses offered by
petitioners constitute genuine issue of fact requiring a full-blown trial.21

In the case at bar, there are no genuine issues raised by petitioners. Petitioners do not deny that
they obtained a loan from Mercator. They merely claim that they got the loan as officers of
Embassy Farms without intending to personally bind themselves or their property. However, a
simple perusal of the promissory note and the continuing suretyship agreement shows otherwise.
These documentary evidence prove that petitioners are solidary obligors with Embassy Farms.

The promissory note22 states:

For value received, I/We jointly and severally promise to pay to the order of MERCATOR
FINANCE CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR
THOUSAND SIX HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine
currency, x x x, in installments as follows:

September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87

November 16, 1982 - P154,267.87

December 16, 1982 - P154,267.87

January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

xxx xxx xxx

The note was signed at the bottom by petitioners Eduardo B. Evangelista and Epifania C.
Evangelista, and Embassy Farms, Inc. with the signature of Eduardo B. Evangelista below it.

The Continuing Suretyship Agreement23 also proves the solidary obligation of petitioners, viz:
(Embassy Farms, Inc.)
Principal

(Eduardo B. Evangelista)
Surety

(Epifania C. Evangelista)
Surety

(Mercator Finance Corporation)

Creditor

To: MERCATOR FINANCE COPORATION

(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA and

EPIFANIA C. EVANGELISTA (hereinafter called Surety), jointly and severally
unconditionally guarantees (sic) to MERCATOR FINANCE COPORATION
(hereinafter called Creditor), the full, faithful and prompt payment and discharge
of any and all indebtedness of EMBASSY FARMS, INC. (hereinafter called
Principal) to the Creditor.

xxx xxx xxx

(3) The obligations hereunder are joint and several and independent of the
obligations of the Principal. A separate action or actions may be brought and
prosecuted against the Surety whether or not the action is also brought and
prosecuted against the Principal and whether or not the Principal be joined in any
such action or actions.

xxx xxx xxx

The agreement was signed by petitioners on February 16, 1982. The promissory
notes24 subsequently executed by petitioners and Embassy Farms, restructuring their loan,
likewise prove that petitioners are solidarily liable with Embassy Farms.

Petitioners further allege that there is an ambiguity in the wording of the promissory note and
claim that since it was Mercator who provided the form, then the ambiguity should be resolved
against it.

Courts can interpret a contract only if there is doubt in its letter.25 But, an examination of the
promissory note shows no such ambiguity. Besides, assuming arguendo that there is an
ambiguity, Section 17 of the Negotiable Instruments Law states, viz:

SECTION 17. Construction where instrument is ambiguous. – Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction apply:

xxx xxx xxx

(g) Where an instrument containing the word "I promise to pay" is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.

Petitioners also insist that the promissory note does not convey their true intent in executing the
document. The defense is unavailing. Even if petitioners intended to sign the note merely as
1âw phi 1

officers of Embassy Farms, still this does not erase the fact that they subsequently executed a
continuing suretyship agreement. A surety is one who is solidarily liable with the
principal.26 Petitioners cannot claim that they did not personally receive any consideration for the
contract for well-entrenched is the rule that the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the principal alone
being sufficient. A surety is bound by the same consideration that makes the contract effective
between the principal parties thereto.27 Having executed the suretyship agreement, there can be
no dispute on the personal liability of petitioners.

Lastly, the parol evidence rule does not apply in this case.28 We held in Tarnate v. Court of
Appeals,29 that where the parties admitted the existence of the loans and the mortgage deeds and
the fact of default on the due repayments but raised the contention that they were misled by
respondent bank to believe that the loans were long-term accommodations, then the parties
could not be allowed to introduce evidence of conditions allegedly agreed upon by them other
than those stipulated in the loan documents because when they reduced their agreement in
writing, it is presumed that they have made the writing the only repository and memorial of truth,
and whatever is not found in the writing must be understood to have been waived and
abandoned.

IN VIEW WHEREOF, the petition is dismissed. Treble costs against the petitioners.

SO ORDERED.
G.R. No. 128927 September 14, 1999

REMEDIOS NOTA SAPIERA, petitioner,

vs.
COURT OF APPEALS and RAMON SUA, respondents.

BELLOSILLO, J.:

REMEDIOS NOTA SAPIERA appeals to us through this petition for review the Decision of the
Court of Appeals 1which acquitted her of the crime of estafa but held her liable nonetheless for the
value of the checks she indorsed in favor of private respondent Ramon Sua. 1âw phi 1.nêt

On several occasions petitioner Remedios Nota Sapiera, a sari-sari store owner, purchased from
Monrico Mart certain grocery items, mostly cigarettes, and paid for them with checks issued by
one Arturo de Guzman: (a) PCIB Check No. 157059 dated 26 February 1987 for P140,000.00;
(b) PCIB Check No. 157073 dated 26 February 1987 for P28,000.00; (c) PCIB Check No.
157057 dated 27 February 1987 for P42,150.00; and, d) Metrobank Check No. DAG-045104758
PA dated 2 March 1987 for P125,000.00. These checks were signed at the back by petitioner.
When presented for payment the checks were dishonored because the drawer's account was
already closed. Private respondent Ramon Sua informed Arturo de Guzman and petitioner about
the dishonor but both failed to pay the value of the checks. Hence, four (4) charges of estafa
were filed against petitioner with the Regional Trial Court of Dagupan City, docketed as Crim.
Cases Nos. D-8728, D-8729, D-8730 and D-8731. Arturo de Guzman was charged with two (2)
counts of violation of B.P. Blg. 22, docketed as Crim. Cases Nos. D-8733 and D-8734. These
cases against petitioner and de Guzman were consolidated and tried jointly.

On 27 December 1989 the court a quo 2 acquitted petitioner of all the charges of estafa but did not
rule on whether she could be held civilly liable for the checks she indorsed to private respondent. The
trial court found Arturo de Guzman guilty of Violation of B.P. Blg. 22 on two (2) counts and sentenced
him to suffer imprisonment of six (6) months and one (1) day in each of the cases, and to pay private
respondent P167,150.00 as civil indemnity.

Private respondent filed a notice of appeal with the trial court with regard to the civil aspect but
the court refused to give due course to the appeal on the ground that the acquittal of petitioner
was absolute. Private respondent then filed a petition for mandamus with the Court of Appeals,
docketed as CA-GR SP No. 24626, praying that the court a quo be ordered to give due course to
the appeal on the civil aspect of the decision. The Court of Appeals granted the petition and ruled
that private respondent could appeal with respect to the civil aspect the judgment of acquittal by
the trial court.

On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376 rendered the assailed
Decision insofar as it sustained the appeal of private respondent on the civil aspect and ordering
petitioner to pay private respondent P335,000.00 representing the aggregate face value of the
four (4) checks indorsed by petitioner plus legal interest from the notice of dishonor.

Petitioner filed a motion for reconsideration of the Decision. On 19 March 1997 the Court of
Appeals issued a Resolution noting the admission of both parties that private respondent had
already collected the amount of P125,000.00 from Arturo de Guzman with regard to his civil
liability in Crim. Cases Nos. 8733 and 8734. The appellate court noted that private respondent
was the same offended party in the criminal cases against petitioner and against de Guzman.
Criminal Cases Nos. 8733 and 8734 against De Guzman, and Crim. Cases Nos. 8730 and 8729
against petitioner, involved the same checks, to wit: PCIB Checks Nos. 157057 for P42,150.00
and Metrobank Check No. DAG-045104758 PA for P125,000.00.
Thus, the Court of Appeals ruled that private respondent could not recover twice on the same
checks. Since he had collected P125,000.00 as civil indemnity in Crim. Cases Nos. 8733 and
8734, this amount should be deducted from the sum total of the civil indemnity due him arising
from the estafa cases against petitioner. The appellate court then corrected its previous award,
which was erroneously placed, at P335,000,00, to P335,150,00 as the sum total of the amounts
of the four (4) checks involved. Deducting the amount of P125,000.00 already collected by
private respondent, petitioner was adjudged to pay P210,150.00 as civil liability to private
respondent. Hence, this petition alleging that respondent Court of Appeals erred in holding
petitioner civilly liable to private respondent because her acquittal by the trial court from charges
of estafa in Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731 was absolute, the trial court
having declared in its decision that the fact from which the civil liability might have arisen did not
exist.

We cannot sustain petitioner. The issue is whether respondent Court of Appeals committed
reversible error in requiring petitioner to pay civil indemnity to private respondent after the trial
court had acquitted of her of the criminal charges. Section 2, par. (b), of Rule 111 of the Rules of
Court, as amended, specifically provides: "Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceed from a declaration in a final judgment that the
fact from which the civil might arise did not exist."

The judgment of acquittal extinguishes the liability of the accused for damages only when it
includes a declaration that the fact from which the civil liability might arise did not exist. Thus, the
civil liability is not extinguished by acquittal where: (a) the acquittal is based on reasonable doubt;
(b) where the court expressly declares that the liability of the accused is not criminal but only civil
in nature; and, (c) where the civil liability is not derived from or based on the criminal act of which
the accused is acquitted. 3 Thus, under Art. 29 of the Civil Code —

When the accused in a criminal prosecution is acquitted on the ground that his
guilt has not been proved beyond reasonable doubt, a civil action for damages for
the same act or omission may be instituted. Such action requires only a
preponderance of evidence. Upon motion of the defendant, the court may require
the plaintiff to file a bond to answer for damages in case the complaint should be
found to be malicious.

In a criminal case where the judgment of acquittal is based upon reasonable

doubt, the court shall so declare. In the absence of any declaration to that effect,
it may be inferred from the text of the decision whether or not acquittal is due to
that ground.

An examination of the decision in the criminal cases reveals these findings of the trial court —

Evidence for the prosecution tends to show that on various occasions, Remedios
Nota Sapiera purchased from Monrico Mart grocery items (mostly cigarettes)
which purchases were paid with checks issued by Arturo de Guzman: that those
purchases and payments with checks were as follows:

(a) Sales Invoice No. 20104 dated February 26, 1987 in the
amount of P28,000.00, that said items purchased were paid with
PCIBank Check No. 157073 dated February 26, 1987;

(b) Sales Invoice No. 20108 dated February 26, 1987 in the
amount of P140,000.00; that said items purchased were paid with
PCIBank No. 157059 dated February 26, 1987;
 (c) Sales Invoice No. 20120 dated February 27, 1987 in the
amount of P42,150.00; that said items were paid with PCIBank
Check No. 157057 dated February 27, 1987;

(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987
in the amount of P120,103.75; said items were paid with
Metrobank Check No. 045104758 dated March 2, 1987 in the
amount of P125,000.00.

That all these checks were deposited with the Consolidated Bank and Trust
Company, Dagupan Branch, for collection from the drawee bank;

That when presented for payment by the collecting bank to the drawee bank, said
checks were dishonored due to account closed, as evidenced by check return
slips; . . . . .

From the evidence, the Court finds that accused Remedios Nota Sapiera is the
owner of a sari-sari store inside the public market; that she sells can(ned) goods,
candies and assorted grocery items; that she knows accused Arturo De Guzman,
a customer since February 1987; that de Guzman purchases from her grocery
items including cigarettes; that she knows Ramon Sua; that she has business
dealings with him for 5 years; that her purchase orders were in clean sheets of
paper; that she never pays in check; that Ramon Sua asked her to sign subject
checks as identification of the signature of Arturo de Guzman; that she pays in
cash; sometimes delayed by several days; that she signed the four (4) checks on
the reverse side; that she did not know the subject invoices; that de Guzman
made the purchases and he issued the checks; that the goods were delivered to
de Guzman; that she was not informed of dishonored checks; and that counsel
for Ramon Sua informed de Guzman and told him to pay . . . .

In the case of accused Remedios Nota Sapiera, the prosecution failed to prove
conspiracy.

Based on the above findings of the trial court, the exoneration of petitioner of the charges of
estafa was based on the failure of the prosecution to present sufficient evidence showing
conspiracy between her and the other accused Arturo de Guzman in defrauding private
respondent. However, by her own testimony, petitioner admitted having signed the four (4)
checks in question on the reverse side. The evidence of the prosecution shows that petitioner
purchased goods from the grocery store of private respondent as shown by the sales invoices
issued by private respondent; that these purchases were paid with the four (4) subject checks
issued by de Guzman; that petitioner signed the same checks on the reverse side; and when
presented for payment, the checks were dishonored by the drawee bank due to the closure of
the drawer's account; and, petitioner was informed of the dishonor. 1âwphi1.nêt

We affirm the findings of the Court of Appeals that despite the conflicting versions of the parties,
it is undisputed that the four (4) checks issued by de Guzman were signed by petitioner at the
back without any indication as to how she should be bound thereby and, therefore, she is
deemed to be an indorser thereof. The Negotiable Instruments Law clearly provides —

Sec. 17. Construction where instrument is ambiguous. — Where the language of

the instrument is ambiguous, or there are admissions therein, the following rules
of construction apply: . . . . (f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making the same intended to sign,
he is deemed an indorser. . . .
 Sec. 63. When person deemed indorser. — A person placing his signature upon
all instrument otherwise than as maker, drawer or acceptor, is deemed to be an
indorser unless he clearly indicates by appropriate words his intention to be
bound in some other capacity.

Sec. 66. Liability of general indorser. — Every indorser who indorses without
qualification, warrants to all subsequent holders in due course: (a) The matters
and things mentioned in subdivisions (a), (b) and (c) of the next preceding
section; and (b) That the instrument is, at the time of the indorsement, valid and
subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or

paid or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it.

The dismissal of the criminal cases against petitioner did not erase her civil liability since the
dismissal was due to insufficiency of evidence and not from a declaration from the court that the
fact from which the civil action might arise did not exist. 4 An accused acquitted of estafa may be
nevertheless be held civilly liable where the facts established by the evidence so warrant. The
accused should be adjudged liable for the unpaid value of the checks signed by her in favor of the
complainant. 5

The rationale behind the award of civil indemnity despite a judgment of acquittal when evidence is
sufficient to sustain the award was explained by the Code Commission in connection with Art. 29 of
the Civil Code, to wit:

The old rule that the acquittal of the accused in a criminal case also releases him
from civil liability is one of the most serious flaws in the Philippine legal system. It
has given rise to numberless instances of miscarriage of justice, where the
acquittal was due to a reasonable doubt in the mind of the court as to the guilt of
the accused. The reasoning followed is that inasmuch as the civil responsibility is
derived from the criminal offense, when the latter is not proved, civil liability
cannot be demanded.

This is one of those cases where confused thinking leads to unfortunate and
deplorable consequences. Such reasoning fails to draw a clear line of
demarcation between criminal liability and civil responsibility, and to determine
the logical result of the distinction. The two liabilities are separate and distinct
from each other. One affects the social order and the other private rights. One is
for punishment or correction of the offender while the other is for reparation of
damages suffered by file aggrieved party . . . . It is just and proper that for the
purposes of imprisonment of or fine upon the accused, the offense should be
proved beyond reasonable doubt. But the purpose of indemnifying the
complaining party, why should the offense also be proved beyond reasonable
doubt? Is not the invasion or violation of every private right to be proved only by
preponderance of evidence? Is the right of the aggrieved person any less private
because the wrongful acts is also punishable by the criminal law? 6

Finally, with regard to the computation of the civil liability of petitioner, the finding of the Court of
Appeals that petitioner is civilly liable for the aggregate value of the unpaid four (4) checks subject of
the criminal cases in the sum of P335,150.00, less the amount of P125.000.00 already collected by
private respondent pending appeal, resulting in the amount of P210,150.00 still due private
respondent, is a factual matter which is binding and conclusive upon this Court.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 22 January
1996 as amended by its Resolution dated 19 March 1997 ordering petitioner Remedios Nota
Sapiera to pay the private respondent Ramon Sua the remaining amount of P210,150.00 as civil
liability, is AFFIRMED. Costs against petitioners.
1âw phi 1.nêt

SO ORDERED.
G.R. No. 112985 April 21, 1999

PEOPLE OF THE PHILIPPINES, plaintiff-appellee

vs.
MARTIN L. ROMERO and ERNESTO C. RODRIGUEZ, accused-appellants.

PARDO, J

The case before the Court is an appeal of accused Martin L. Romero and Ernesto C. Rodriguez
from the Joint Judgment1 of the Regional Trial Court, Branch 2, Butuan City, convicting each of
them of estafa under Article 315, par. 2 (d) of the Revised Penal Code, in relation to Presidential
Decree No. 1689, for widescale swindling, and sentencing each of them to suffer the penalty of
life imprisonment and to jointly and severally pay Ernesto A. Ruiz the amount of one hundred fifty
thousand pesos (P150,000.00), with interest at the rate of twelve percent (12%) per annum,
starting September 14, 1989, until fully paid, and to pay ten thousand pesos (P10,000.00), as
moral damages.

On October 25, 1989, Butuan City acting fiscal Ernesto M. Brocoy filed with the Regional Trial
Court, Butuan City, in Information against the two (2) accused estafa,2 as follows:

That on or about September 14, 1989, at Butuan City, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused being the General
Manager and Operation Manager which solicit funds from the general public for
investment, conspiring, confederating together and mutually helping, one
another, by means of deceit and false pretense, did then and there willfully,
unlawfully and feloniously deliberately defraud one Ernesto A. Ruiz by convincing
the latter to invest his money in the amount of P150,000.00 with a promise return
of 800 % profit within 21 days and in the process caused the issuance of Butuan
City Rural [sic] Bank Check No. 158181 postdated to October 5, 1989 in the
amount of One Million Two Hundred Thousand Pesos (P1,200,000.00) Philippine
Currency, that upon presentation of said check to the drawee bank for payment
the same was dishonored and that notwithstanding repeated demands made on
said accused to pay and/or change the check to cash, they consistently failed
and refused and still fail and refuse to pay or redeem the check, to the damage
and prejudice of the complainant in the aforestated amount of P1,200,000.00.3

On the same day, the city fiscal filed with the same court another information against the two (2)
accused for violation of Batas Pambansa Bilang 22, arising from the issuance of the same
check.4

On January 11, 1990, both accused were arraigned before the Regional Trial Court, Branch
5, 5 Butuan City, where they plead not guilty to both informations.

The prosecution presented its evidence on January 10, 1991, with complainant, Ernesto A. Ruiz,
and Daphne Parrocho, the usher/collector of the corporation being managed by accused,
testifying for the prosecution.

On August 12, 1991, the defense presented its only witness, accused Martin L. Romero.

On November 13, 1992, the parties submitted a joint stipulation of facts, signed only by their
respective counsels. Thereafter, the case was submitted for decision.
On March 30, 1993, the trail court promulgated a Joint Judgment dated March 25, 1993. The trial
court acquitted the accused in Criminal Case No. 38066 based on reasonable doubt, but
convicted them in Criminal Case No. 38087and accordingly sentenced each of them, as follows:

IN VIEW OF THE FOREGOING, the Court hereby renders judgments, finding or

declaring —

(a) Accused Martin L. Romero and Ernesto C. Rodriguez innocent on reasonable

doubt in Criminal Case No. 3806, for violation of Batas Pambansa Bilang 22;

(b) Accused Martin L. Romero and Ernesto C. Rodriguez guilty beyond

reasonable doubt in Criminal Case No. 3808 for estafa under P.D. 1689 for wide
scale [sic] swindling and accordingly sentences them to suffer life imprisonment
(Section 1 P.D. 1689) and ordered jointly and severally to return to Ernesto A.
Ruiz the amount of One Hundred Fifty Thousand Pesos (P150,000.00) with
interest thereon at the rate of Twelve percent (12%) per annum starting from
September 14, 1989 until fully paid and to pay the amount Of Ten Thousand
Pesos (P10,000.00) as moral damages.

In the service of their sentence, the accused pursuant to R.A. 6127, shall be
credited for the preventive imprisonment they have undergone (PP vs. Ortencio,
38 Phil 941; PP vs. Gabriel, No. L-13750, October 30, 1959, cited in Gregorio's
"Fundamentals of Criminal Law Review", P. 178, Seventh Edition, 1985).8

On March 31, 1993, accused filed their notice of appeal, which the trial court gave due course on
April 5, 1993. On March 16, 1994, this Court ordered the, accused to file their appellants' brief.

Accused-appellants filed their brief on October 30, 1995, while the Solicitor General filed the
appellee's brief on March 8, 1996.

During the pendency of the appeal, on November 12, 1997, accused Ernesto Rodriguez
died. 9 As a consequence of his death before final judgment, his criminal and civil liability ex
delicto, were extinguished. 10

Complainant Ernesto A. Ruiz was a radio commentator of Radio DXRB, Butuan City. In August,
1989, he came to know the business of Surigao San Andres Industrial Development Corporation
(SAIDECOR), when he interviewed accused Martin Romero and Ernesto Rodriguez regarding
the corporation's investment operations in Butuan City and Agusan del Norte. Romero was the
president and general manager of SAIDECOR, while Rodriguez was the operations manager.

SAIDECOR started its operation on August 24, 1989 as a marketing business. Later, it engaged
in soliciting funds and investments from the public. The corporation guaranteed an 800% return
on investment within fifteen (15) or twenty one (21) days. Investors were given coupons
containing the capital and the return on the capital collectible on the date agreed upon. It stopped
operations in September, 1989.

On September 14, 1989, complainant Ernesto A. Ruiz went to SAIDECOR office in Butuan City
to make an investment, accompanied by his friend Jimmy Acebu, and SAIDECOR collection
agent Daphne Parrocho. After handing over the amount of one hundred fifty thousand pesos
(P150,000.00) to Ernesto Rodriguez, complainant received a postdated Butuan City Rural Bank
check instead of the usual redeemable coupon. The check indicated P1,000,200.00 as the
amount in words, but the amount in figures was for P1,200,000.00, as the return on the
investment. Compliant did not notice the discrepancy.

When the check was presented to the bank for payment on October 5, 1989, it was dishonored
for insufficiency of funds, as evidenced by the check return slip issued by the bank. 11 Both
accused could not be located and demand for payment was made only sometime in November
1989 during the preliminary investigation of this case. Accused responded that they had no
money.

Daphne Parrocho, 12 testified that on September 14, 1989, complainant, with his friend Jimmy
Acebu, approached her to invest the amount of P150,000.00 at SAIDECOR. As she has reached
her quota, and therefore, no longer authorized to receive the amount, she accompanied them to
the office of SAIDECOR at Ong Yiu District, Butuan City. Accused Ernesto Rodriguez accepted
the investment and issued the check signed by him and Martin Romero.

For their defense, accused Martin Romero13 testified that on September 14, 1989, he issued a
check in the amount of P1,2000,000.00 corresponding to the total of the P150,000.00 investment
and the 800% return thereon. He claimed that the corporation had a deposit of fourteen million
pesos (P14,000,000.00) at the time of the issuance of the check and four million pesos
(P4,000,000.00) at the time SAIDDECOR stopped operations. Romero knew these things
because he used to monitor the funds of the corporation with the bank. He was not aware that
the check he issued was dishonored because he never had the occasion to meet the
complainant again after the September 14, 1989 transaction. He only came to know about this
when the case was already filed in court sometime in the second or third week of January 1990.

In this appeal, both accused did not deny that complainant made an investment with SAIDECOR
in the amount of P150,000.00. However, they denied that deceit was employed in the
transaction. They assigned as errors: (1) their conviction under P.D. 1689 due to the
prosecution's failure to establish their guilt beyond reasonable doubt; and (2) the trial court's
failure to consider the joint stipulation of facts in their favor. 15

There is no merit in this appeal. We sustain accused-appellant's conviction.

Under paragraph 2 (d) of Article 315, as amended by R.A. 4885, 16 the elements of estafa are: (1)
a check was postdated or issued in payment of an obligation contracted at the time it was issued;
(2) lack or insufficiency of funds to cover the check; (3) damage to the payee thereof. 17 The
prosecution has satisfactorily established all these elements.

Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal equitable duty, trust, or confidence
justly reposed, resulting in damage to another, or by which an undue and unconscientious
advantage is taken of another. 18 It is a generic term embracing all multifarious means which
human ingenuity can device, and which are resorted to by one individual to secure an advantage
over another by false suggestions or by suppression of truth and includes all surprise, trick,
cunning, dissembling and any unfair way by which another is cheated. 19

Deceit is a specific of fraud. It is actual fraud, and consists in any false representation or
contrivance whereby one person overreaches and misleads another, to his hurt. Deceit excludes
the idea of mistake. 20 There is deceit when one is misled, either by guide or trickery or by other
means, to believe to be true what is really false. 21 In this case, there was deception when
accused fraudulently represented to complainant that his investment with the corporation would
have an 800% return in 15 or 21 days.

Upon receipt of the money, accused-appellant Martin Romero issued a postdated check.
Although accused-appellant contends that sufficient funds were deposited in the bank when the
check was issued, he presented no officer of the bank to substantiate the contention. The check
was dishonored when presented for payment, and the check return slip submitted in evidence
indicated that it was dishonored due to insufficiency of funds.
Even assuming for the sake of argument that the check was dishonored without any fraudulent
pretense or fraudulent act of the drawer, the latter's failure to cover the amount within three days
after notice creates a rebuttable presumption of fraud. 22

Admittedly (1) the check was dishonored for insufficiency of funds as evidenced by the check
return slip; (2) complainant notified accused of the dishonor; and (3) accused failed to make good
the check within three days. Presumption of deceit remained since accused failed to prove
otherwise. Complainant sustained damage in the amount of P150,000.00.

Accused-appellant also contends that had the trial court admitted the Admission and Stipulaion
of Facts of November 9, 1992, it would prove that SAIDECOR had sufficient funds in the bank.

Accused-appellant relies on the fact that there was a discrepancy between the amount in words
and the amount in figures in the check that was dishonored. The amount in words was
P1,000,200.00, while the amount in figures was P1,200,000.00. It is admitted that the corporation
had in the bank P1,144,760.00 on September 28, 1989, and P1,124,307.14 on April 2, 1990. The
check was presented for payment on October 5, 1989. The rule in the Negotiable Instruments
Law is that when there is ambiguity in the amount in words and the amount in figures, it would be
the amount in words that would prevail. 23

However, this rule of interpretation finds no application in the case. The agreement was perfectly
clear that at the end of twenty one (21) days, the investment of P150,000.00 would become
P1,200,000.00. Even if the trial court admitted the stipulation of facts, it would not be favorable to
accused-appellant.

The factual narration in this case established a kind of Ponzi scheme. 24 This is "an investment
swindle in which high profits are promised from fictitious sources and early investors are paid off
with funds raised from later ones." It is sometimes called a pyramid scheme because a broader
base of gullible investors must support the structure as time passes.

In the recent case of People vs. Priscilla Balasa, 25 this Court held that a transaction similar to the
case at hand is not an investment strategy but a gullibility scheme, which works only as long as
there is an ever increasing number of new investors joining the scheme. It is difficult to sustain
over a long period of time because the operator needs an ever larger pool of later investors to
continue paying the promised profits to early investors. The idea behind this type of swindle is
that the "con-man" collects his money from his second or third round of investors and then
absconds before anyone else shows up to collect. Necessarily, these schemes only last weeks,
or months at most, just like what happened in this case.

The Court notes that one of the accused-appellants, Ernesto Rodriguez, died pending appeal.
Pursuant to the doctrine established in People vs. Bayotas, 26 the death of the accused pending
appeal of his conviction extinguishes his criminal liability as well as the civil liability ex delicto.
The criminal action is extinguished inasmuch as there is no longer a defendant to stand as the
accused, the civil action instituted therein for recovery of civil liability ex delicto is ipso
facto extinguished, grounded as it is on the criminal case. Corollarily, the claim for civil liability
survives notwithstanding the death of the accused, if the same may also be predicted on a
source of obligation other than delicit. 27

Thus, the outcome of this appeal pertains only remaining accused-appellant, Martin L. Romero.
The trail court considered the swindling involved in this case as having been committed by a
syndicate 28 and sentenced the accused to life imprisonment based on the provisions of
Presidential Decree 1689, which increased the penalty for certain forms of swindling or
estafa. 29 However, the prosecution failed to clearly establish that the corporation was a
syndicate, as defined under the law. The penalty of life imprisonment cannot be imposed. What
would be applicable in the present case is the second paragraph of a Presidential Decree No.
1689, Section 1, which provides that:
 When not committed by a syndicate as above defined, the penalty imposable
shall be reclusion temporal to reclusion perpetua if the amount of the fraud
exceeds 100.000 pesos.

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

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

To enable the complainant to obtain means, diversion or amusements that will serve to alleviate
the moral sufferings undergone by him, by reason of the failure of the accused to return his
money, moral damages are imposed against accused-appellant Martin L. Romero in the amount
of twenty thousand pesos (P20,000.00), 34 To serve as an example for the public good,
exemplary damages are awarded against him in the amount of fifteen thousand pesos (P15,000.
00). 35

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

SO ORDERED.

Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ., concur.