G.R. No.

128606

December 4, 2000

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.
SANDIGANBAYAN (3RD DIVISION), JOSE L. AFRICA, UNIMOLCO, ROBERTO
BENEDICTO, ANDRES AFRICA and SMART COMMUNICATIONS, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Resolutions 1 of the Sandiganbayan dated
December 6, 19962 and March 17, 19973 in Civil Case No. 0009, entitled "Republic of
the Philippines, Plaintiff versus Jose L. Africa, et al., Defendants," which upheld the
sale by Universal Molasses Corporation (UNIMOLCO) of its shares of stock in Eastern
Telecommunications Philippines, Inc. (ETPI), to Smart Communications. Petitioner
contends that the sale violated its preemptive right as stockholder of ETPI, which is
guaranteed in the Articles of Incorporation.
ETPI was one of the corporations sequestered by the Presidential Commission on
Good Government (PCGG). Among its stockholders were Roberto S. Benedicto and
UNIMOLCO.
Sometime in 1990, PCGG and Benedicto entered into a compromise agreement
whereby Benedicto ceded to the government 204,000 shares of stock in ETPI,
representing his fifty-one percent (51%) equity therein. The other forty-nine percent
(49%), consisting of 196,000 shares of stock, were released from sequestration and
adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the
government agreed to withdraw the cases filed against Benedicto and free him from
further criminal prosecution.
In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President
and Chairman of the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000
shares of stock therein.
Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a
Resolution, dated May 7, 1996, authorizing the entry in the Stock and Transfer Book
of ETPI of the transfer of ownership of 204,000 shares of stock to petitioner, to be
taken out of the shareholdings of UNIMOLCO. On June 5, 1996, Benedicto filed a
"Manifestation and Motion" with the Sandiganbayan, praying that the Resolution
dated May 7, 1996 be modified such that the entry of the 204,000 shares of stock of
petitioner in ETPI be taken out of the shareholdings of UNIMOLCO and/or Roberto S.
Benedicto.
On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of
ETPI from selling shares of stock therein without the written conformity of the
PCGG.4

Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a

Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to
Smart.5 Prior to the sale, Smart was not a stockholder of ETPI.
Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a "Motion to Cite
Defendant Benedicto and the Parties to the Sale of UNIMOLCO Shares in ETPI in
Contempt of Court and to Rescind and/or Annul Said Sale." Petitioner alleged that
the sale of the 196,000 shares of stock of UNIMOLCO to Smart was in defiance of the
May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000
shares of the government shall come from the shareholdings of UNIMOLCO, and it
interfered with the proceedings thereon. In support of its prayer for the rescission
and annulment of the sale, petitioner argued that the same violated its right of first
refusal to purchase shares of stock in ETPI.
The right of first refusal is contained in Article 10 of the Articles of Incorporation of
ETPI, which states:
ARTICLE TENTH: In the event any stockholder (hereinafter referred to as the
"Offeror") desires to dispose, transfer, sell or assign any shares of stock of the
Corporation (hereinafter referred to as the "Offered Stock"), except in the case of
any disposal, transfer, sale or assignment between or among the incorporators or to
corporation controlled by the incorporators, the Offeror shall give a right of first
refusal to the Corporation and, thereafter in the event that the Corporation shall
refuse or fail to accept all of the Offered Stock to all then stockholders of record of
the Corporation (except the Offeror) to purchase the Offered Stock pro rata, at a
price and upon terms and conditions specified by the Offeror based upon a
firm, bona fide, written cash offer from a bona fide purchaser.
The Corporation shall be entitled to exercise its right of first refusal with respect to
all, but not less than all, of the Offered Stock for a period (hereinafter referred to as
the "First Period") of thirty (30) days, from the receipt by it of a written offer to sell
from the Offeror.
If the Corporation shall fail or refuse within the First Period to accept the offer for all
of the Offered Stock, then on or before the end of such First Period, the Secretary of
the Corporation shall transmit by registered mail and by telegram or cable a copy of
such offer to each stockholder of record (other than the Offeror) at his/its address
appearing on the books of the Corporation and shall also notify each stockholder of
the expiry date of such offer (such expiry date being thirty (30) days after the end of
the First Period). All then stockholders of record of the Corporation, other than the
Offeror, shall be entitled for a period (hereinafter referred to as the Second Period)
ending thirty (30) days after the First Period to exercise their rights of first refusal
with respect to all or any portion of the Offered Stock for which they have a right of
first refusal and may in addition offer to purchase any shares thereof not subscribed
for by the other stockholders pursuant to rights of first refusal. Such shares shall be
allocated among stockholders offering to purchase such shares, pro rata, up to the
limits, if any, specified by such purchasing stockholders. Each such purchasing
stockholder shall transmit to the Corporation with his/its acceptance cash, or a

certified check or checks drawn on a Philippine bank or banks, in an amount

sufficient to meet the terms of the offer corresponding to such number of shares of
Offered Stock specified in his/its acceptance.

1997, the motion for leave to intervene was granted and the Comment-inIntervention was admitted.11
The petition is without merit.

In its Resolution dated December 6, 1996, the Sandiganbayan denied petitioners

motion for contempt and to rescind or annul the sale of the 196,000 ETPI shares of
stock to Smart.6 Petitioner filed a motion for reconsideration but the same was
denied in a Resolution dated March 17, 1997.7
Hence, this petition for review raising the following grounds:
I. THE SANDIGANBAYAN ERRED IN NOT RECOGNIZING PETITIONER PCGGS
EXERCISE OF ITS RIGHT OF FIRST REFUSAL AS STOCKHOLDER, TO
PURCHASE THE 196,000 ETPI SHARES REGISTERED IN THE NAME OF
UNIMOLCO.
II. THE SANDIGANBAYAN ERRED IN APPROVING/RATIFYING THE SALE OF THE
196,000 SHARES BY PRIVATE RESPONDENTS UNIMOLCO, BENEDICTO AND
AFRICA IN FAVOR OF SMART.
Petitioner argues that it received the notice of UNIMOLCOs offer to sell its shares of
stock only on August 30, 1996. The written notice, issued by Atty. Bayani K. Tan, ETPI
Corporate Secretary, gave the stockholders, including petitioner, until September
26, 1996 within which to exercise their preemptive right. On September 24, 1996,
petitioner sent a letter to the Corporate Secretary stating that the government is
exercising its right of first refusal and offering payment thereof in the form of
compensation or set-off against the assets of respondent Benedicto still due to the
Philippine government under the Compromise Agreement.
Respondents UNIMOLCO, Benedicto and Andres L. Africa filed their
Comment,8 arguing that petitioners offer of payment by way of set-off was invalid,
inasmuch as the Articles of Incorporation of ETPI specifically provided that tender of
payment should be in cash, certified check or checks drawn on a Philippine bank.
Respondent SMART filed its Comment,9 likewise arguing that petitioners proposal to
off-set the purchase price for the shares of stock with assets of Benedicto did not
constitute a valid tender of payment. Moreover, petitioner cannot use assets
recovered as ill-gotten wealth for the purchase of the shares of stock because under
Section 63 of Republic Act No. 6657, any amounts derived therefrom shall be
appropriated to fund the Comprehensive Agrarian Reform Program.
On October 2, 1997, Victor Africa filed a Motion for Leave to Intervene and a
Comment-in-Intervention.10 He alleges that petitioners exercise of the right of first
refusal is preconditioned on its being a stockholder of ETPI. However, intervenor has
a pending motion before the Sandiganbayan precisely questioning petitioners right
to become a transferee of ETPI shares and to enjoin the registration of petitioner as
a legitimate stockholder in the Stock and Transfer Book of ETPI. On December 10,

The records of the case clearly show that the written notice by UNIMOLCO, the
Offeror, of its intention to sell its 196,000 shares of stock was duly received on April
24, 1996 by the President and Chairman of the Board of ETPI. The Sandiganbayan
correctly held that this was valid service of the written offer to the corporation,
applying by analogy the Rules of Court provisions on service of summons. Petitioner
does not dispute that the written notice to the President and Chairman of the Board
of ETPI was service to the corporation. It merely argues that after receipt of the
offer, ETPI did not act in accordance with the procedure laid down in the Articles of
Incorporation. Thus, in its petition for review, petitioner states:
The April 24, 1996 offer sent to ETPI Chairman and President Melquiades Gutierrez
did not become valid and effective as it was not able to completely comply with the
requirements of Article 10 of the ETPI Articles of Incorporation. Indeed, after
receipt by ETPI of the April 24, 1996 offer, ETPI never acted on it. Assuming
that ETPI, as a corporation did not exercise its right of first refusal within the first
thirty day period pursuant to Article 10, it did not send notices to then stockholders
of record of ETPI about the offered sale and their privilege to exercise their rights of
first refusal. In other words, the ETPI stockholders were denied of its formal notice
from ETPI about the said offer to sell the 196,000 share of stock. 12
Hence, the First Period of thirty days contemplated in the Articles of Incorporation
commenced to run on April 24, 1996, giving the corporation until May 24, 1996
within which to exercise its right of first refusal. ETPIs inaction simply means that it
did not desire to purchase the shares of stock. The stockholders right of first refusal,
thus, accrued upon the expiration of the First Period and within the succeeding thirty
days, known as the Second Period. The Sandiganbayan held that the First Period and
the Second Period are "continuous in character because the Second Period ends, in
the very words of Article 10 of the ETPI Articles, thirty (30) days after the First
Period, and the expiry date being thirty (30) days after the end of the First
Period."13 The Second Period, therefore, covered the period from May 24, 1996 to
June 23, 1996.
Petitioner maintains that under the Articles of Incorporation, the Corporate Secretary
of ETPI should have given the stockholders written notice of the offer to sell on or
before the expiration of the First Period. However, Resolution No. 96-142, adopted by
PCGG on June 21, 1996, states among others:
WHEREAS, on 4 June 1996, the PCGG received copy of a letter of 29 May 1996 from
Atty. Juan de Ocampo, alleging that he is the Corporate Secretary of ETPI, copy of
which is hereto attached, stating that under Article Tenth of the ETPI articles of
Incorporation, all stockholders of record have the right of first refusal to purchase
pro rata to their holdings in ETPI to expire 20 days (supposed to be 30) from expiry
date of ETPIs right of first refusal which was allegedly 24 May 1996, giving the

Government up to 18 June 1996 to exercise the right of first refusal to purchase up

to 22,148 shares of stock.14

(3) That the two debts be due;

(4) That they be liquidated and demandable, and

From the above, it clearly appears that, by petitioners own admission and contrary
to its belated protestation, the procedure outlined in the Articles of Incorporation
relating to the right of first refusal was observed. But petitioner takes exception to
Atty. De Ocampos authority to act as Corporate Secretary of ETPI. In this
connection, the Sandiganbayan held:
xxx. The question of who are the legitimate directors and officers of ETPI has been
elevated to the Supreme Court but has not yet been finally resolved. This should
not, however, detract from the fact that PCGG has actually been informed of the
intended sale.15
We agree with the Sandiganbayan. The purpose of the notice requirement in Article
10 of the ETPI Articles of Incorporation is to give the stockholders knowledge of the
intended sale of shares of stock of the corporation, in order that they may exercise
their preemptive right. Where it is shown that a stockholder had actual knowledge of
the intended sale within the period prescribed to exercise the right, the notice
requirement had been sufficiently met. In the case at bar, PCGG had actual
knowledge of UNIMOLCOs offer to sell its shares of stock. In fact, it issued
Resolution No. 96-142 enjoining the sale of the said shares of stock to Smart.
Petitioner, thus, cannot feign lack of notice.16
Parenthetically, PCGG had no more authority to enjoin the sale of UNIMOLCOs
196,000 shares of stock, as it endeavored to do in Resolution No. 96-142. As
correctly found by the Sandiganbayan, since the 196,000 shares of stock had
already been adjudicated by final judgment to Benedicto and UNIMOLCO, PCGG
could no longer exercise power and authority over the same.17
Therefore, we sustain the Sandiganbayans ruling that petitioners right of first
refusal was not seasonably exercised.18
Even on the assumption that petitioner exercised its right of first refusal on time, it
nonetheless failed to follow the requirement in the Articles of Incorporation that
payment must be tendered in "cash or certified checks or checks drawn on a
Philippine bank or banks". The set-off or compensation it proposed does not fall
under any of the recognized modes of payment in the Articles. In order that
compensation may be proper, Article 1279 of the Civil Code requires:
(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 consist in a sum of money, or if the things are
consumable, they be of the same kind, and also of the same quality if the
later has been stated;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the debtor.
Petitioner sought the offsetting of the price of the shares of stock with assets of
respondent Benedicto, whom it claimed was indebted to it for certain lands and
dividends due to it under their Compromise Agreement. Benedicto was only a
stockholder of UNIMOLCO, the Offeror. While he may be the majority stockholder,
UNIMOLCO cannot be said to be liable for Benedictos supposed obligations to
petitioner. To be sure, Benedicto and UNIMOLCO are separate and distinct persons.
On the basis of this alone, there can be no valid set-off. Petitioner and UNIMOLCO
are not principal debtors and creditors of each other.
Petitioner counters that UNIMOLCOs corporate fiction should be pierced since it is
also owned by Benedicto. However, mere majority ownership of the stocks of a
corporation is not per se a cause for piercing the corporate veil. There was no
evidence that UNIMOLCOs corporate entity was used by respondent Benedicto to
commit fraud or to do wrong on petitioner; neither was it shown that the corporate
entity was merely a farce and that it was used as an alter ego, business conduit or
instrumentality of a person or another entity or that piercing the corporation fiction
is necessary to achieve justice or equity. 19 Only in these instances may the fiction be
pierced and disregarded.20 Being the party that invoked it, petitioner has the burden
of substantiating by clear and convincing evidence that UNIMOLCOs corporate veil
must be pierced.
Besides, petitioners claims on the lands and dividends allegedly due it from
respondent Benedictos other business holdings are not enforceable in court. Only
liquidated debts are enforceable in court, there being no apparent defenses inherent
in them.21 "For compensation to take place, a distinction must be made between a
debt and a mere claim. A debt is a claim which has been formally passed upon by
the highest authority to which it can in law be submitted and has been declared to
be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a
debt and must pass through the process prescribed by law before it develops into
what is properly called a debt." 22 There being no two debts for which either party
may be said as principally bound to each other, again, there can be no set-off.
In the final analysis, the resolution of this case hinges on questions of fact.1wphi1 It
is axiomatic that factual findings of theSandiganbayan are conclusive on the
Supreme Court.23 None of the exceptions to this rule24 is present in this case.
WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan dated
December 6, 1996 and March 17, 1997 in Civil Case No. 0009 are AFFIRMED.
SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

concerning sale of merchandise to Dole Philippines, Inc.; and [b] Silahis' claim that it
is entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B'
which was found defective by its client, Borden International, Davao City, and to
have the corresponding amount cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of
Silahis for the claim of de Leon but at the same time ordered that it be partially
offset by Silahis' counterclaim as contained in the debit memo for unrealized profit
and commission. Judge Bienvenido C. Ejercito of said court held:

G. R. No. L-74027 December 7, 1989

SILAHIS MARKETING CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business
under the name and style of "MARK INDUSTRIAL SALES", respondents.
Jaime V. Villanueva for petitioner.
Tinga, Fuentes, Tagle & Malate for private respondent.
FERNAN, C.J.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari
a reversal of the decision of the then Intermediate Appellate Court (IAC) in AC-G.R.
CV No. 67162 entitled "De Leon, etc. v. Silahis Marketing Corporation", disallowing
petitioner's counterclaim for commission to partially offset the claim against it of
private respondent Gregorio de Leon for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November and
December, 1975, Gregorio de Leon (De Leon for short) doing business under the
name and style of Mark Industrial Sales sold and delivered to Silahis Marketing
Corporation (Silahis for short) various items of merchandise covered by several
invoices in the aggregate amount of P 22,213.75 payable within thirty (30) days
from date of the covering invoices. Allegedly due to Silahis' failure to pay its account
upon maturity despite repeated demands, de Leon filed before the then Court of
First Instance of Manila a complaint for the collection of the said accounts including
accrued interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00
plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were
concerned but presented as affirmative defenses; [al a debit memo for P 22,200.00
as unrealized profit for a supposed commission that Silahis should have received
from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly
to Dole Philippines, Incorporated by the latter sometime in August 1975 without
coursing the same through the former allegedly in violation of the usual practice

There is no question that the defendant received from the plaintiff

the items contained in Exhs. 'A' to 'F'. The only question is whether
or not the defendant is entitled to set off against the claim of the
plaintiff the amount contained in the debit memo of the
defendant, Exh. '1', and whether or not the defendant is entitled to
return the steel wire mesh which was returned to them by Borden
Philippines, as shown by Exhs. '6-A' and '6-B'. The Court believes
that the defendant is properly chargeable for the amounts of the
unpaid invoices set forth in the complaint. However, the Court also
believes that the plaintiff is also properly chargeable for the debit
memo of P 22,200.00, Exh. '1'. This is because it was proven by
the defendant from the testimonies of Isaias Fernando, Jr. and Jose
Joel Tamon that contrary to the agreement between plaintiff and
defendant that the latter was to serve the account of Dole
Philippines in Davao, the plaintiff made a direct sale of sprockets
for P 111,000.00 which therreby deprives the defendant of its
corresponding commission for P 22,200.00 which the defendant
would have otherwise made if the plaintiff had followed its
previous arrangement with the defendant. However, as to the
counterclaim of the defendant for a cancellation of the amount of
P 6,000.00 for defective stainless screen wire purchased and
intended for Borden International, Davao City, the Court believes
that it is much too late now to present said claim because the
purchase was made and delivered as early as December 22,1975
and the proposed return to the defendant by Borden was made on
April 1, 1976 only. The Court is not ready to award damages to any
of the parties. After deducting the amount of P 22,200.00, which is
the unpaid commission of the defendant from the principal total
amount of the unpaid invoices of the plaintiff of P 22,213.75, the
unpaid balance in favor of the plaintiff is P 13.75. The claim for
interest and attorney's fees of the plaintiff may be offset against
the interest and attorney's fees of the defendant.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendant ordering the defendant to pay to the
plaintiff the amount of P 13.75, with interest at 12% per annum
from the date of the filing of the action on July 1, 1976 until fully
paid, without pronouncement as to costs.

SO ORDERED. 2
De Leon appealed from the said decision insofar as it directed partial compensation
and its failure to award interest on his principal claim as well as attomey's fees in his
favor. In a decision dated March 1 7, 1986, 3 respondent Intermediate Appellate
Court 4 set aside the decision of the lower court and dismissed herein petitioner's
(therein defendant- appellee's) counterclaim for lack of factual or legal basis. The
appellate court found that there was no agreement, verbal or otherwise, nor was
there any contractual obligation between De Leon and Silahis prohibiting any direct
sales to Dole Philippines, Inc. by de Leon; nor was there anything in the debit memo
obligating de Leon to pay a commission to Silahis for the sale of P 111,000.00 worth
of sprockets to Dole Philippines although in the past, the former did supply certain
items to the latter for delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not
private respondent is liable to the petitioner for the commission or margin for the
direct sale which the former concluded and consummated with Dole Philippines,
Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo
upon which petitioner's counterclaim rests and found nothing contained therein to
show that private respondent obligated himself to set-off or compensate petitioner's
outstanding accounts with the alleged unrealized commission from the assailed sale
of sprockets in the amount of P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their
own right, are creditors and debtors to each other. Article 1279 of the Civil Code
provides that: "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 consist 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 be 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.

subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance

prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on
record from which it can be inferred that there was any agreement between the
petitioner and private respondent prohibiting the latter from selling directly to Dole
Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was
a contract binding between the parties considering that the same, as correctly found
by the appellate court, was not signed by private respondent nor was there any
mention therein of any commitment by the latter to pay any commission to the
former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P
111,000.00. Indeed, such document can be taken as self-serving with no probative
value absent a showing or at the very least an inference, that the party sought to be
bound assented to its contents or showed conformity thereto.
In fact the letter written by private respondent's lawyer dated March 5,1975 7 in
reply to petitioner's letter dated February 19, 1976 transmitting its Debit Memo No.
1695 8 further strengthens private respondent's stand that it never agreed to give
petitioner any commission on the direct sale to Dole Philippines, Inc. by its company
because said letter denied any utilization of petitioners personnel and facilities at its
Davao Branch in the transaction with Dole Philippines, Inc. which would otherwise
lend a basis for petitioner's monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent
appellate court is hereby AFFIRMED.
SO ORDERED.

When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or
knowledge of the creditors and debtors. 5 Article 1279 requires, among others, that
in order that legal compensation shall take place, "the two debts be due" and "they
be liquidated and demandable." Compensation is not proper where the claim of the
person asserting the set-off against the other is not clear nor liquidated;
compensation cannot extend to unliquidated, disputed claim existing from breach of
contract. 6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private
respondent in the amount of P 22,213.75 as contained in its answer. But whether
private respondent is liable to pay the petitioner a 20% margin or commission on the

.R. No. 172020

December 6, 2010

TRADERS ROYAL BANK, Petitioner,

vs.
NORBERTO CASTAARES and MILAGROS CASTAARES, Respondents.
DECISION
VILLARAMA, JR., J.:
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, is the Decision1 dated January 11, 2006 of the Court of
Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint Decision 2 dated
August 26, 1998 of the Regional Trial Court (RTC) of Cebu City, Branch 13 in Civil
Case Nos. R-22608 and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castaares are engaged in the business
of exporting shell crafts and other handicrafts. Between 1977 and 1978, respondents
obtained from petitioner Traders Royal Bank various loans and credit
accommodations. Respondents executed two real estate mortgages (REMs) dated
April 18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T37536, T-37535, T-37192 and T-37191). As evidenced by Promissory Note No. BD-77113 dated May 10, 1977, petitioner released only the amount of P35,000.00
although the mortgage deeds indicated the principal amounts as P86,000.00
and P60,000.00.3
Respondents were further granted additional funds on various dates under
promissory notes4 they executed in favor of the petitioner:

telegraphic transfer from AMROBANK, Amsterdam by one Richard Wagner. The

aforesaid entries in the passbook of respondents and the $4,220.00 telegraphic
transfer were the subject of respondents letter-complaint5 dated September 20,
1982 addressed to the Manager of the Regional Office of the Central Bank of the
Philippines.
For failure of the respondents to pay their outstanding loans with petitioner, the
latter proceeded with the extrajudicial foreclosure of the real estate
mortgages.6 Thereafter, a Certificate of Sale7 covering all the mortgaged properties
was issued by Deputy Sheriff Wilfredo P. Borces in favor of petitioner as the lone
bidder for P117,000.00 during the auction sale conducted on November 24, 1981.
Said certificate of sale was registered with the Office of the Register of Deeds on
February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency
judgment, claiming that after applying the proceeds of foreclosure sale to the total
unpaid obligations of respondents (P200,397.78), respondents were still indebted to
petitioner for the sum of P83,397.68.8 Respondents filed their Answer With
Counterclaim on December 27, 1982.9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of
the sums of P2,584.27 debited from their savings account passbook and the
equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85
representing the damage suffered by the respondents from letters of credit left unnegotiated because of petitioners refusal to pay the $4,220.00 demanded by the
respondents.10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC

Type of Loan

Date Granted
Amount

Packing Credit

May 10, 1977

P19,000.00

Packing Credit

May 18, 1977

P25,000.00

Packing Credit

June 23, 1977

P12,500.00

Packing Credit

August 19, 1977

P 2,900.00

Packing Credit

April 4, 1978

P18,000.00

Packing Credit

April 19, 1978

P23,000.00

On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents
current account to their savings account, which was erroneously posted
as P1,500.00 but later corrected to reflect the figure P1,150.00 in the savings
account passbook. By the second quarter of 1978, the loans began to mature and
the letters of credit against which the packing advances were granted started to
expire. Meanwhile, on December 7, 1979, petitioner, without notifying the
respondents, applied to the payment of respondents outstanding obligations the
sum of $4,220.00 or P30,930.49 which was remitted to the respondents thru

In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner,
as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case No.
R-22608 in favor of the plaintiff and against the defendants directing the defendants
jointly and solidarily to pay plaintiff the sum of P83,397.68 with legal rate of interest
to be computed from November 24, 1981 (the date of the auction sale) until full
payment thereof. They are likewise directed to pay plaintiff attorneys fees in the
sum of P10,000.00 plus litigation expenses in the amount of P2,500.00.
With cost against defendants.
In CEB-112, judgment is hereby rendered dismissing the complaint.
With cost against the plaintiff.
SO ORDERED.12
The trial court found that despite respondents insistence that the REM covered only
a separate loan for P86,000.00 which they believed petitioner committed to lend

them, the evidence clearly shows that said REM was constituted as security for all
the promissory notes. No separate demand was made for the amount of P86,000.00
stated in the REM, as the demand was limited to the amounts of the promissory
notes. The trial court further noted that respondents never questioned the judgment
for extrajudicial foreclosure, the certificate of sale and the deficiency in that case. 13

The CA thus held that petitioners remedy would be to file a collection case on the
unpaid promissory notes which were not secured by the REMs.

With respect to the passbook entries, the trial court stated that no objection thereto
was made by the respondents until five years later when in a letter dated August 10,
1982, respondents counsel asked petitioner to be enlightened on the matter.
Neither did respondents protest the application of the balance (P1,150.00) in the
passbook to his account with petitioner. More important, respondent Norberto
Castaares in his testimony admitted that the matter was already clarified to him by
petitioner and that the latter had the right to apply his deposit to his loan accounts.
Admittedly, his complaint has to do more with the lack of consent on his part and
the non-issuance of official receipt. However, he did not follow up his request for
official receipt as he did not want to be going back and forth to the bank. 14

As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis
for withholding and applying the said amount to respondents loan account. Said
transaction was separate and distinct from the contract of loan between petitioner
and respondents. Petitioner had no authority to convert the said telegraphic transfer
into cash since the participation of respondents was necessary to sign and indorse
the disbursement voucher and check. Moreover, petitioner was not transparent in its
actions as it did not inform the respondents of its intention to apply the proceeds of
the telegraphic transfer to their loan account and worse, it did not even present an
official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act, provides that there shall be no
restriction on the withdrawability by the depositor of his deposit or the
transferability of the same abroad except those arising from contract between the
depositor and the bank.21

CA Ruling

The Petition

With the trial courts denial of their motion for reconsideration, respondents
appealed to the CA. Finding merit in respondents arguments, the appellate court set
aside the trial courts judgment under its Decision 15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
GRANTING the appeal filed in this case and REVERSING AND SETTING ASIDE the Joint
Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region, Branch 13,
in Civil Case No. R-22608 and Civil Case No. CEB-112. With regard to Civil Case No.
R-22608, the real estate mortgage dated April 18, 1977 is hereby DECLARED as
valid in part as to the amount of P35,000.00 actually released in favor of appellants,
while the real estate mortgage dated January 26, 1978 is hereby declared as null
and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby ordered to release
the amount of US$4,220.90 to the appellants at its current rate of exchange. No
pronouncement as to costs.
SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate evidence
presented to prove that petitioner released in full to the respondents the proceeds of
the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate
Court17 and Naguiat v. Court of Appeals,18 the appellate court declared that where
there was failure of the mortgagee bank to deliver the consideration for which the
mortgage was executed, the contract of loan was invalid and consequently the
accessory contract of mortgage is likewise null and void. In this case,
only P35,000.00 out of theP86,000.00 stated in the REM dated April 18, 1977 was
released to respondents, and hence the REM was valid only to that extent. For the
same reason, the second REM was null and void since no actual loan proceeds were
released to the respondents-mortgagors. The REMs are not connected to the
subsequent promissory notes because these were signed by respondents for the
sole purpose of securing packing credits and export advances. Further citing Acme
Shoe, Rubber and Plastic Corp. v. Court of Appeals, 19 the CA stated that the rule is
that a pledge, real estate mortgage or antichresis may exceptionally secure afterincurred obligations only as long as these debts are accurately described therein. In
this case, neither of the two REMs accurately described or even mentioned the
securing of future debts or obligations.20

Petitioner raised the following grounds in the review of the CA decision:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE
MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PART TO THE EXTENT
OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED TO HAVE
BEEN ACTUALLY RELEASED TO RESPONDENTS OUT OF THE SUM OF
PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID THE
REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN THAT NO ACTUAL
LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO
BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING IN PAYMENT OF
RESPONDENTS OVERDUE ACCOUNT IN THE TELEGRAPHIC TRANSFER IN
THE AMOUNT OF U.S.$4,220.00.22
Petitioner contends that the CA overlooked the specific stipulation in the REMs that
the mortgage extends not only to the amounts specified therein but also to loans or
credits subsequently granted, which include the packing credits and export
advances obtained by the respondents. Moreover, the amounts indicated on the
REMs need not exactly be the same amounts that should be released and covered
by checks or credit memos, the same being only the maximum sum or "ceiling"
which the REM secures, as explained by petitioners witness, Ms. Blesy Nemeo. Her
testimony does not prove that the proceeds of the loans were not released in full, as
no credit memos in the specific amounts received by the respondents can be
presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion
that the promissory notes were totally unrelated to the REMs. In the Acme case, the
pronouncement was that the after-incurred obligations must, at the time they are
contracted, only be accurately described in a proper instrument as in the case of a
promissory note. The confusion was brought by the use in the CA decision of the
word "therein" which is not found in the text of the Acme ruling. Besides, it is way

too impossible that future loans can be accurately described, as the CA opined, at
the time that a deed of real estate mortgage is executed. The CAs reliance on the
case of Filipinas Marble Corporation, is likewise misplaced as it finds no application
under the facts obtaining in the present case. The misappropriation by some
individuals of the loan proceeds secured by petitioner was the consideration which
compelled this Court to rule that there was failure on the part of DBP to deliver the
consideration for which the mortgage was executed. Similarly, the case of Naguiat is
inapplicable in that there was evidence that an agent of the creditor withheld from
the debtor the checks representing the proceeds of the loan pending delivery of
additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the telegraphic
transfer in the sum of $4,220.00 against the unpaid loan account of respondents.
Citing Bank of the Philippine Islands v. Court of Appeals,23 petitioner asserts that
they are bound principally as both creditors and debtors of each other, the debts
consisting of a sum of money, both due, liquidated and demandable, and are not
claimed by a third person. Hence, the RTC did not err in holding that petitioner
validly applied the amount of P30,930.20 (peso equivalent of $4,220.00) to the loan
account of the respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit
accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS.
NORBERTO V. CASTAARES & MILAGROS M. CASTAARES and to secure the payment
of the same, the principal of all of which is hereby fixed at EIGHTY-SIX THOUSAND
PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may hereafter extend to the Mortgagor x x x, including interest and
expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary, as appears in the accounts, books and records of the
Mortgagee x x x.24 (Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket mortgage
clause" in American jurisprudence that would subsume all debts of past and future
origins. It has been held as a valid and legal undertaking, the amounts specified as
consideration in the contracts do not limit the amount for which the pledge or
mortgage stands as security, if from the four corners of the instrument, the intent to
secure future and other indebtedness can be gathered. A pledge or mortgage given
to secure future advancements is a continuing security and is not discharged by the
repayment of the amount named in the mortgage until the full amount of all
advancements shall have been paid.25
A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera.26 While a real estate mortgage may
exceptionally secure future loans or advancements, these future debts must be
sufficiently described in the mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the mortgage contract. 27

In holding that the REMs were null and void, the CA opined that the full amount of
the principal loan stated in the deed should have been released in full, sustaining
the position of the respondents that the promissory notes were not secured by the
mortgage and unrelated to it. However, a reading of the afore-quoted provision of
the REMs shows that its terms are broad enough to cover packing credits and export
advances granted by the petitioner to respondents. That the respondents
subsequently availed of letters of credit and export advances in various amounts as
reflected in the promissory notes, buttressed the claim of petitioner that the
amounts of P86,000.00 and P60,000.00 stated in the REMs merely represent the
maximum total loans which will be secured by the mortgage. This must be so as
respondents confirmed that the mortgage was constituted for the purpose of
obtaining additional capital as dictated by the needs of their export business.
Significantly, no complaint was made by the respondents as to the non-release
of P86,000.00 and P60,000.00, in full, simultaneous or immediately following the
execution of the REMs -- under a single promissory note each equivalent to the said
sums -- and no demand for the said specific amounts was ever made by the
petitioner. Even the letter-complaint sent by respondents to the Central Bank almost
a year after the extrajudicial foreclosure sale mentioned only the questioned entries
in their passbook and the $4,220.00 telegraphic transfer. Considering that
respondents deemed it a serious "banking malpractice" for petitioner not to release
in full the loan amount stated in the REMs, it can only be inferred that respondents
themselves understood that the P86,000.00 and P60,000.00 indicated in the REMs
was intended merely to fix a ceiling for the loan accommodations which will be
secured thereby and not the actual principal loan to be released at one time. Thus,
the RTC did not err in upholding the validity of the REMs and ordering the
respondents to pay the deficiency in the foreclosure sale to satisfy the remaining
mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present
controversy.lawph!1 In Filipinas Marble Corporation, we held that pending the
outcome of litigation between DBP which together with Bancom officers were
alleged by the petitioner-mortgagor to have misspent and misappropriated the $5
million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions
against foreclosures by government financial institutions, cannot be automatically
applied. Foreclosure of the mortgaged properties for the whole amount of the loan
was deemed prejudicial to the petitioner, its employees and their families since the
true amount of the loan which was applied for the benefit of the petitioner can be
determined only after a trial on the merits. 28 No such act of misappropriation by
corporate officers appointed by the mortgagee is involved in this case. Besides, the
respondents never denied receiving the amounts under the promissory notes which
were all covered by the REMs and the very obligations subject of the extrajudicial
foreclosure.
As to the ruling in Naguiat, we found therein no compelling reason to disturb the
lower courts finding that the lender did not remit and the borrower did not receive
the proceeds of the loan. Hence, we held the mortgage contract, being just an
accessory contract, as null and void for absence of consideration. 29 In this case,
however, respondents admitted they received all the amounts under the promissory
notes presented by the petitioner. The consideration in the execution of the REMs
consist of those credit accommodations to fund their export transactions.
Respondents as an afterthought raised issue on the nature of the amounts of
principal loan indicated in the REMs long after these obligations have matured and
the mortgage foreclosed due to their failure to fully settle their outstanding accounts
with petitioner. Having expressly agreed to the terms of the REMs which are phrased
to secure all such loans and advancements to be obtained from petitioner, although
the principal amount stated therein were not released at one time and under

several, not just one, subsequently issued promissory notes, respondents may not
be allowed to complain later that the amounts they received were unrelated to the
REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by the
petitioner to the loan account of respondents, we hold that the CA erred in holding
that petitioner had no authority to do so by way of compensation or set off. In this
case, the parties stipulated on the manner of such set off in case of non-payment of
the amount due under each promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at maturity, I/We
jointly and severally, agree to pay an additional amount equivalent to two per cent
(2%) per annum of the amount due and demandable as penalty and collection
charges, in the form of liquidated damages, until fully paid; and the further sum of
ten per cent (10%) thereof in full, without any deduction, as and for attorneys fees
whether actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and authorize the
TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the
payment of this note any and all funds, which may be in its hands on deposit or
otherwise belonging to anyone or all of us, and to hold as security therefor any real
or personal property, which may be in its possession or control by virtue of any other
contract.30 (Emphasis supplied.)
Agreements for compensation of debts or any obligations when the parties are
mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even
though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. 31 The
only requirements for conventional compensation are (1) that each of the parties
can fully dispose of the credit he seeks to compensate, and (2) that they agree to
the extinguishment of their mutual credits.32 Consequently, no error was committed
by the trial court in holding that petitioner validly applied, by way of compensation,
the $4,220.00 telegraphic transfer remitted by respondents foreign client through
the petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of the
Court of Appeals in CA-G.R. CV No. 67257 is REVERSED and SET ASIDE. The Joint
Decision dated August 26, 1998 of the Regional Trial Court of Cebu City, Branch 13
in Civil Case Nos. R-22608 and CEB-112 is REINSTATED and UPHELD.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo 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 ManilaFebruary 9, 1981

VALUE DATE

No pronouncement as to costs.
G.R. No. 89252 May 24, 1993
RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.

TO Raul Sesbreo
April 6, 1981

MATURITY DATE

NO. 10805

did not provide the appropriate instructions; Pilipinas never released DMC PN No.
2731, nor any other instrument in respect thereof, to petitioner.
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

Petitioner also made a written demand on 14 July 1981 3 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. 5 The 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 plaintiffappellant.

Petitioner moved for reconsideration of the above Decision, without success.

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.

Hence, this Petition for Review on Certiorari.

Delta, however, disputes petitioner's contention and argues:
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:

(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 Note 10 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 assignmentor 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 beassigned 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)

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

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.

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

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
SVPTreasurer
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 President 13
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;

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.

(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 fortynine (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.

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-vispetitioner, 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 Sesbreo.
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 Sesbreo 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 fundproviders 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
Sesbreo. 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 Sesbreo
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-visPhilfinance.
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 egosor 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.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.