FIRST DIVISION
and de Jesus].
[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or
by the complete incompatibility between the old and the new agreements. Petitioner herein fails to
show either requirement convincingly; hence, the summary judgment holding him liable as a joint
and solidary debtor stands.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, seeking to nullify
the November 26, 2001 Decision[2] and the June 26, 2002 Resolution[3] of the Court of Appeals (CA)
in CA-GR CV No. 60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as
it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorneys fees and cost of suit is DELETED. The portion of the
judgment that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the
case against x x x Eduardo de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas evidence against x x x Eduardo de Jesus.[4]
The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de
Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,]
[petitioner and de Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves jointly and severally to pay the loan on
or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and,
despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by
reason of the[ir] unjustified refusal, [respondent] was compelled to engage the services of counsel to
whom he agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus],
plus P2,000.00 for every appearance in court. Annexed to the complaint were the promissory note
above-mentioned and a demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability
under the promissory note because he signed it merely as an accommodation party for x x x de
Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as the
loan had been paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any
event, the issuance of the check and [respondents] acceptance thereof novated or superseded the
note.
[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcias answer was not even accompanied by a certificate of non-forum shopping. Annexed to the
reply were the face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the
sum of P120,000.00 by way of interests; that this was made when [respondents] daughter, one Nits
Llamas-Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro
Manila (where x x x de Jesus worked), the sum of P40,000.00, representing the peso equivalent of
his accumulated leave credits, another P40,000.00 as advance interest, and still another P40,000.00
as interest for the months of March and April 1997; that he had difficulty in paying the loan and had
asked [respondent] for an extension of time; that [respondent] acted in bad faith in instituting the
case, [respondent] having agreed to accept the benefits he (de Jesus) would receive for his
retirement, but [respondent] nonetheless filed the instant case while his retirement was being
processed; and that, in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys
fees, plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any
pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested
that he would no [longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against x x x de Jesus; and, as regards
[Petitioner] Garcia, the trial court directed [respondent] to file a motion for judgment on the
pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to
present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his
defense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/
[M]otion to submit the case for judgement on the pleadings, withdrawing in the process his previous
motion. Thereunder, he asserted that [petitioners and de Jesus] solidary liability under the
promissory note cannot be any clearer, and that the check issued by de Jesus did not discharge the
loan since the check bounced.[5]
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case
as follows:
WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon per month from January
23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representing
interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of
[c]ourt appearance, and;
3) Cost of this suit.[6]
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover,
he was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to
the RTC judgment, even though De Jesus had been declared in default. The case against the latter
was therefore remanded by the CA to the trial court for the ex parte reception
of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus.According to the CA, the check was issued precisely to pay for
the loan that was covered by the promissory note jointly and severally undertaken by petitioner and
De Jesus. Respondents acceptance of the check did not serve to make De Jesus the sole debtor
because,first, the obligation incurred by him and petitioner was joint and several; and, second, the
check -- which had been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.[7]
Issues
Petitioner submits the following issues for our consideration:
I Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies
in the instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for
the loan obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of P400,000.00 in
favor of Respondent Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution
by x x x de Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial
difficulties, he be given an extension of time to pay his loan obligation and that his retirement
benefits from the Philippine National Police will answer for said obligation.
II Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given weight and credence considering
that subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption of sole liability over the loan
obligation.
III Whether or not judgment on the pleadings or summary judgment was properly availed of by
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable
Court of Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-
blown trial.[8]
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether
the defense that petitioner was only an accommodation party had any basis; and 3) whether the
judgment against him -- be it a judgment on the pleadings or a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the
replacement of the promissory note by the check. Alternatively, the former argues that the original
obligation was extinguished when the latter, who was his co-obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, [9] the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations,
by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor.[10] Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from -- and may even be
made without the knowledge of -- the debtor, since it consists of a third persons assumption of the
obligation. As such, it logically requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to
the substitution and assumes the obligation; thus, the consent of these three persons are necessary.
[11]
Both modes of substitution by the debtor require the consent of the creditor.[12]
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former. It is
merely modificatory when the old obligation subsists to the extent that it remains compatible with
the amendatory agreement.[13] Whether extinctive or modificatory, novation is made either by
changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act
known as subjective or personal novation.[14] For novation to take place, the following requisites
must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.[15]
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. [16] The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. [17]
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check, or that the check would take the place of the note. There
is no incompatibility between the promissory note and the check. As the CA correctly observed, the
check had been issued precisely to answer for the obligation. On the one hand, the note evidences
the loan obligation; and on the other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners view, also constitutes novation[18] --
change the terms and conditions of the obligation. Such payment was already provided for in the
promissory note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the formersplace in the relation.
[19]
Well-settled is the rule that novation is never presumed.[20] Consequently, that which arises from
a purported change in the person of the debtor must be clear and express. [21] It is thus incumbent on
petitioner to show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the obligation, that
a third person was substituted in his place, or that the joint and solidary obligation was cancelled
and substituted by the solitary undertaking of De Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the
nature of the obligation being solidary due to the fact that the promissory note expressly declared
that the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor
may demand payment or performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the obligation. It therefore follows
that in case the creditor fails to collect from one of the solidary debtors, he may still proceed against
the other or others. x xx [22]
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor. [23] Since novation implies a waiver of the right
the creditor had before the novation, such waiver must be express. [24] It cannot be supposed, without
clear proof, that the present respondent has done away with his right to exact fulfillment from either
of the solidary debtors.[25]
More important, De Jesus was not a third person to the obligation. From the beginning, he was a
joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not change the person of the debtor,
because a joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. [26] It is up to the former to determine against
whom to enforce collection.[27] Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable[28] for the entire obligation.[29]
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND
PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10
St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof.
It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December, 1996.[30]
By its terms, the note was made payable to a specific person rather than to bearer or to order [31] -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner
cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such
intangible rights as may have been created by the assent of the parties. [32] The promissory note is
thus covered by the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument
to a holder for value even if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and the party accommodated
is, in effect, one of principal and surety -- the accommodation party being the surety. [33] It is a settled
rule that a surety is bound equally and absolutely with the principal and is deemed an
original promissor and debtor from the beginning. The liability is immediate and direct.[34]
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file
show that (1) except as to the amount of damages, there is no genuine issue regarding any material
fact; and (2) the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which
the pleadings raise only a legal, not a genuine, issue regarding any material fact. [35] Consequently,
facts are asserted in the complaint regarding which there is yet no admission, disavowal or
qualification; or specific denials or affirmative defenses are set forth in the answer, but the issues
are fictitious as shown by the pleadings, depositions or admissions. [36] A summary judgment may be
applied for by either a claimant or a defending party.[37]
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse partys pleading. The essential question is whether there are issues generated by the
pleadings.[38] A judgment on the pleadings may be sought only by a claimant, who is the party
seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the
pleadings. His Answer[40] apparently raised several issues -- that he signed the promissory note
allegedly as a mere accommodation party, and that the obligation was extinguished by either
payment or novation. However, these are not factual issues requiring trial. We quote with approval
the CAs observations:
Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid
issues. Firstly, Garcias claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was only an accommodation
party as he claimed to be. Quite the contrary, the promissory note bears the statement: It is
understood that our liability under this loan is jointly and severally [sic]. Secondly, his claim that his
co-defendant de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check.[41]
From the records, it also appears that petitioner himself moved to submit the case for judgment on
the basis of the pleadings and documents. In a written Manifestation,[42] he stated that judgment on
the pleadings may now be rendered without further evidence, considering the allegations and
admissions of the parties.[43]
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial
court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 74451 May 25, 1988
EQUITABLE BANKING CORPORATION, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL
CO., respondents.
William R. Veto for petitioner.
Pelaez, Adriano & Gregorio for respondents.
MELENCIO-HERRERA, J.:
In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the
adverse judgment against it rendered by respondent Appellate Court, 1 dated 4 October 1985, and its
majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, 2 be
annulled and set aside.
The facts pertinent to this Petition, as summarized by the Trial Court and adopted by reference by
Respondent Appellate Court, emanated from the case entitled "Edward J. Nell Co. vs. Liberato V.
Casals, Casville Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance
of Rizal (Civil Case No. 25112), and read:
From the evidence submitted by the parties, the Court finds that sometime in 1975 defendant
Liberato Casals went to plaintiff Edward J. Nell Company and told its senior sales engineer, Amado
Claustro that he was interested in buying one of the plaintiff's garrett skidders. Plaintiff was a dealer
of machineries, equipment and supplies. Defendant Casals represented himself as the majority
stockholder, president and general manager of Casville Enterprises, Inc., a firm engaged in the large
scale production, procurement and processing of logs and lumber products, which had a plywood
plant in Sta. Ana, Metro Manila.
After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs executive
vice-president, Apolonio Javier, for negotiation in connection with the manner of payment. When
Javier asked for cash payment for the skidders, defendant Casals informed him that his corporation,
defendant Casville Enterprises, Inc., had a credit line with defendant Equitable Banking
Corporation. Apparently, impressed with this assertion, Javier agreed to have the skidders paid by
way of a domestic letter of credit which defendant Casals promised to open in plaintiffs favor, in
lieu of cash payment. Accordingly, on December 22, 1975, defendant Casville, through its
president, defendant Casals, ordered from plaintiff two units of garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and dated December 22, 1975 (Exhibit
"A") contained the following terms and conditions:
Two (2) units GARRETT Skidders Model 30A complete as basically described in the bulletin
PRICE: F.O.B. dock
Manila P485,000.00/unit
For two (2) units P970,000.00
SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.
TERMS: By irrevocable domestic letter of credit to be issued in favor of THE EDWARD J. NELL
CO. or ORDER payable in thirty six (36) months and will be opened within ninety (90) days after
date of shipment. at first installment will be due one hundred eighty (180) days after date of
shipment. Interest-14% per annum (Exhibit A)
xxx xxx xxx
... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the
delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de Oro, on or
before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the information that an
irrevocable Domestic Letter of Credit would be opened in plaintiff's favor on or before June 30,
1976 under the terms and conditions agreed upon (Exhibit "B")
On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff shipped to
Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the amount of P10,640.00
because of the verbal assurance of defendant Casville that it would be covered by the letter of credit
soon to be opened.
xxx xxx xxx
On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of P300,000.00
postdated August 4, 1976, which was followed by another check of same date. Plaintiff considered
these checks either as partial payment for the skidder that was already delivered to Cagayan de Oro
or as reimbursement for the marginal deposit that plaintiff was supposed to pay.
In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that their
application for a letter of credit for the payment of the Garrett skidders had been approved by the
Equitable Banking Corporation. However, the defendants said that they would need the sum of
P300,000.00 to stand as collateral or marginal deposit in favor of Equitable Banking Corporation
and an additional amount of P100,000.00, also in favor of Equitable Banking Corporation, to clear
the title of the Estrada property belonging to defendant Casals which had been approved as security
for the trust receipts to be issued by the bank, covering the above-mentioned equipment.
Although the marginal deposit was supposed to be produced by defendant Casville Enterprises,
plaintiff agreed to advance the necessary amount in order to facilitate the transaction. Accordingly,
on August 5,1976, plaintiff issued a check in the amount of P400,000.00 (Exhibit "2") drawn against
the First National City Bank and made payable to the order of Equitable Banking Corporation and
with the following notation or memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to
be used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward J.
Nell Co." Said check together with the cash disbursement voucher (Exhibit "2-A") containing the
explanation:
Payment for marginal deposit and other expenses re opening of L/C for account of Casville Ent..
A covering letter (Exhibit "3") was also sent and when the three documents were presented to
Severino Santos, executive vice president of defendant bank, Santos did not accept them because
the terms and conditions required by the bank for the opening of the letter of credit had not yet been
agreed on.
On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to cover its
purchase from plaintiff of two Garrett skidders, under the following terms and conditions:
a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for P606,000.00; c)
P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to secure the Trust Receipts; e) We
shall chattel mortgage the equipments purchased even after payment of the first L/C as additional
security for the balance of the second L/C and f) Other conditions you deem necessary to protect the
interest of the bank."
In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was ready to
open the letters of credit upon defendant's compliance of the following terms and conditions:
c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust Receipts; e)
Chattel Mortgage on the equipment; and Ashville f) Other terms and conditions that our bank may
impose.
Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three postdated
checks. In said letter, plaintiff was informed of the requirements imposed by the defendant bank
pointing out that the "cash marginal required under paragraph (c) is 30% of Pl,091,000.00 or
P327,300.00 plus another P100,000.00 to clean up the Estrada property or a total of P427,300.00"
and that the check covering said amount should be made payable "to the Order of EQUITABLE
BANKING CORPORATION for the account of Casville Enterprises Inc." Defendant Casville also
stated that the three (3) enclosed postdated checks were intended as replacement of the checks that
were previously issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to
defendant bank for the account of defendant Casville. All the new checks were postdated November
19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and
P100,000.00 (Exhibit "H").
On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the Register of
Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal covering two pieces of
real estate properties.
Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a
representative of defendant Casville, went to see Severino Santos to find out the status of the credit
line being sought by defendant Casville. Santos assured Umali that the letters of credit would be
opened as soon as the requirements imposed by defendant bank in its letter dated August 11, 1976
had been complied with by defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of
EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and drawn
against the first National City Bank (Exhibit "E-l"). The check did not contain the notation found in
the previous check issued by the plaintiff (Exhibit "2") but the substance of said notation was
reproduced in a covering letter dated August 16,1976 that went with the check (Exhibit "E").<re||
an1w> Both the check and the covering letter were sent to defendant bank through defendant
Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals because it
believed that no one, including defendant Casals, could encash the same as it was made payable to
the defendant bank alone. Besides, defendant Casals was known to the bank as the one following up
the application for the letters of credit.
Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant bank and the bank teller accepted the same for deposit
in defendant Casville's checking account. After depositing said check, defendant Casville, acting
through defendant Casals, then withdrew all the amount deposited.
Meanwhile, upon their presentation for encashment, plaintiff discovered that the three checks
(Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by defendant
Casville as collateral were all dishonored for having been drawn against a closed account.
As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed the
mortgage executed by defendant Casville on the Estrada property which was sold in a public
auction sale to a third party.
Plaintiff allowed some time before following up the application for the letters of credit knowing that
it took time to process the same. However, when the three checks issued to it by defendant Casville
were dishonored, plaintiff became apprehensive and sent Umali on November 29, 1976, to inquire
about the status of the application for the letters of credit. When plaintiff was informed that no
letters of credit were opened by the defendant bank in its favor and then discovered that defendant
Casville had in the meanwhile withdrawn the entire amount of P427,300.00, without paying its
obligation to the bank plaintiff filed the instant action.
While the the instant case was being tried, defendants Casals and Casville assigned the garrett
skidder to plaintiff which credited in favor of defendants the amount of P450,000.00, as partial
satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they show
lack of interest in disputing plaintiff's claim by not appearing in most of the hearings, but they also
assigned to plaintiff the garrett skidder which is an action of clear recognition of their liability.
What is left for the Court to determine, therefore, is only the liability of defendant bank to plaintiff.
xxx xxx xxx
Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the
pertinent portion of which reads:
xxx xxx xxx
Defendants Casals and Casville Enterprises and Equitable Banking Corporation are ordered to pay
plaintiff, jointly and severally, the sum of P427,300.00, representing the amount of plaintiff's check
which defendant bank erroneously credited to the account of defendant Casville and which
defendants Casal and Casville misappropriated, with 12% interest thereon from April 5, 1977, until
the said sum is fully paid.
Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the sum of
P25,000.00 .
Proportionate cost against all the defendants.
SO ORDERED.
The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly, the
Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for the value of the
second check issued by NELL, Exhibit "E-l," which was made payable
to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE
ENTERPRISES INC.
and which the Bank teller credited to the account of Casville.
The Trial Court found that the amount of the second check had been erroneously credited to the
Casville account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay
NELL the value of the check in the sum of P427,300.00, with legal interest. Explained the Trial
Court:
The Court finds that the check in question was payable only to the defendant bank and to no one
else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the
check after or under the name of defendant bank, the payee was still the latter. The addition of said
words did not in any way make Casville Enterprises, Inc. the Payee of the instrument for the words
merely indicated for whose account or in connection with what account the check was issued by the
plaintiff.
Indeed, the bank teller who received it was fully aware that the check was not negotiable since he
stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and "NON-
NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING CORPORATION.
But said teller should have exercised more prudence in the handling of Id check because it was not
made out in the usual manner. The addition of the words A/C OF CASVILLE ENTERPRISES
INC." should have placed the teller on guard and he should have clarified the matter with his
superiors. Instead of doing so, however, the teller decided to rely on his own judgment and at the
risk of making a wrong decision, credited the entire amount in the name of defendant Casville
although the latter was not the payee named in the check. Such mistake was crucial and was,
without doubt, the proximate cause of plaintiffs defraudation.
xxx xxx xxx
Respondent Appellate Court upheld the above conclusions stating in addition:
1) The appellee made the subject check payable to appellant's order, for the account of Casville
Enterprises, Inc. In the light of the other facts, the directive was for the appellant bank to apply the
value of the check as payment for the letter of credit which Casville Enterprises, Inc. had previously
applied for in favor of the appellee (Exhibit D-1, p. 5). The issuance of the subject check was
precisely to meet the bank's prior requirement of payment before issuing the letter of credit
previously applied for by Casville Enterprises in favor of the appellee;
xxx xxx xxx
We disagree.
1) The subject check was equivocal and patently ambiguous. By making the check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE
ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the
Negotiable Instruments Law. 3 As worded, it could be accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed against NELL who caused the ambiguity and could have
also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-
negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the
subject check of the words "Non-negotiable for Payee's Account Only" between two (2) parallel
lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by
the Bank teller in accordance with customary bank practice, and not by NELL as the drawer of the
check, and simply meant that thereafter the same check could no longer be negotiated.
3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16
August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its
own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order
solely of "Equitable Banking Corporation." NELL changed the payee in the subject check, Exhibit
"E", however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals
request. NELL also eliminated both the cash disbursement voucher accompanying the check which
read:
Payment for marginal deposit and other expense re opening of L/C for account of Casville
Enterprises. SECOND DIVISION
and the memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to
be used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward G.R. No. 97753 August 10, 1992
Ashville J Nell Co.
Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August
1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller. CALTEX (PHILIPPINES), INC., petitioner,
(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously, vs.
had his own antagonistic interests to promote. Thus it was that Casals did not purposely present the COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
subject check to the Executive Vice-President of the Bank, who was aware of the negotiations
regarding the Letter of Credit, and who had rejected the previous check, Exhibit "2," including its
Bito, Lozada, Ortega & Castillo for petitioners.
three documents because the terms and conditions required by the Bank for the opening of the
Letter of Credit had not yet been agreed on.
(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL Nepomuceno, Hofilea & Guingona for private.
even advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of
goods, the price of which is to be covered by a letter of credit, to advance the marginal deposit for
the same.
(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine to
secure the subject check and had accepted the deposit with it of two (2) titles of real properties as REGALADO, J.:
collateral for said postdated checks. Thus, NELL was erroneously confident that its interests were
sufficiently protected. Never had it suspected that those postdated checks would be dishonored, nor
that the subject check would be utilized by Casals for a purpose other than for opening the letter of This petition for review on certiorari impugns and seeks the reversal of the decision promulgated
credit. by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications,
In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the
Enterprises to perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau, et complaint filed therein by herein petitioner against respondent bank.
al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai Banking
Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs. Equitable Banking Corporation, L-
15895, January 30,1964, 10 SCRA 8). The undisputed background of this case, as found by the court a quo and adopted by respondent
... As between two innocent persons, one of whom must suffer the consequence of a breach of trust, court, appears of record:
the one who made it possible by his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4
October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for 1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
Reconsideration, are hereby SET ASIDE. The Decision of the then Court of First Instance of Rizal, 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
Branch XI. is modified in that petitioner Equitable Banking Corporation is absolved from any and defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
all liabilities to the private respondent, Edward J. Nell Company, and the Amended Complaint Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
against petitioner bank is hereby ordered dismissed. No costs.
SO ORDERED.
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 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value
5 Mar. 82 89965 to 89986 22 88,000 of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on
9 Mar. 82 90023 to 90050 28 112,000 August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
9 Mar. 82 89991 to 90000 10 40,000 matured loan (TSN, February 9, 1987, pp. 130-131).
9 Mar. 82 90251 to 90272 22 88,000

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
Total 280 P1,120,000
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.
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).
After trial, the court a quo rendered its decision dismissing the instant complaint. 3

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's
certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
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
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required to bearer. 4
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).
The instant petition is bereft of merit.

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
A sample text of the certificates of time deposit is reproduced below to provide a better
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said
understanding of the issues involved in this recourse.
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, SECURITY BANK
set-off and "apply the said time deposits to the payment of whatever amount or amounts may be AND TRUST COMPANY
due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62). 6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went
CERTIFICATE OF DEPOSIT
to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel
Rate 16%
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).
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
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- This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
terminate the same. 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.
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 (Sgd. Illegible) (Sgd. Illegible)
deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.
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.
FIRST DIVISION
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE
CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH XCII
(92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City
promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco de Oro Savings and
Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House
Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing
House Corporation (PCHC) in the case of Equitable Banking Corporation (EBC) vs. Banco de Oro
Savings and Mortgage (BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card
Department, drew six crossed Manager's check (Exhibits "A" to "F", and herein referred to as
Checks) having an aggregate amount of Forty Five Thousand Nine Hundred and Eighty Two &
23/100 (P45,982.23) Pesos and payable to certain member establishments of Visa Card.
Subsequently, the Checks were deposited with the defendant to the credit of its depositor, a certain
Aida Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual endorsements.
All prior and/or lack of endorsement guaranteed the defendant sent the checks for clearing through
the Philippine Clearing House Corporation (PCHC). Accordingly, plaintiff paid the Checks; its
clearing account was debited for the value of the Checks and defendant's clearing account was
credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and
purporting to be that of the payees were forged and/or unauthorized or otherwise belong to persons
other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to the
defendant for the purpose of claiming reimbursement from the latter. However, defendant refused to
accept such direct presentation and to reimburse the plaintiff for the value of the Checks; hence, this
case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of
P45,982.23 with interest at the rate of 12% per annum from the date of the complaint plus attorney's
fees in the amount of P10,000.00 as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was
presented for Arbitration; and Atty. Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the plaintiff
and against the defendant ordering the PCHC to debit the clearing account of the defendant, and to
credit the clearing account of the plaintiff of the amount of P45,982.23 with interest at the rate of
12% per annum from date of the complaint and Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed
the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine Clearing
House Corporation is hereby ordered to debit the clearing account of the defendant and credit the
clearing account of plaintiff the amount of Forty Five Thousand Nine Hundred Eighty Two &
23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum from date of the complaint,
and the Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII,
wherein in due course a decision was rendered affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No.
84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the
PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this
nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House
Rules and Regulations of PCHC cover and apply only to checks that are genuinely negotiable.
Emphasis is laid on the primary purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant
exchange and facilitate service limited to check processing and sorting by way of assisting member
banks, entities in clearing checks and other clearing items as defined in existing and in future
Central Bank of the Philippines circulars, memoranda, circular letters, rules and regulations and
policies in pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the provisions
of Section 1000 shall serve as a basis for the clearing of checks, and the settlement of interbank
balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that
fits the articles of incorporation of the PCHC, the Central Bank and the Clearing House Rules
stating that it is a negotiable instrument citing the definition of a "check" as basically a "bill of
exchange" under Section 185 of the NIL and that it should be payable to "order" or to "bearer"
under Section 126 of game law. Petitioner alleges that with the cancellation of the printed words "or
bearer from the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction over
the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein
petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as to the
character or nature of the checks subject of its jurisdiction. The pertinent provisions quoted in
petitioners memorandum simply refer to check(s). Where the law does not distinguish, we shall not
distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court
categorically stated that there are four kinds of checks in this jurisdiction; the regular check; the
cashier's check; the traveller's check; and the crossed check. The Court, further elucidated, that
while the Negotiable Instruments Law does not contain any provision on crossed checks, it is coon
practice in commercial and banking operations to issue checks of this character, obviously in
accordance with Article 541 of the Code of Commerce. Attention is likewise called to Section 185
of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange
payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an express
stipulation negating or limiting his own liability to the holder. Consequently, it appears that the use
of the term "check" in the Articles of Incorporation of PCHC is to be perceived as not limited to
negotiable checks only, but to checks as is generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC Board of Directors that:
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on
the validity of "all prior endorsements." Thus, stamped at the back of the checks are the defendant's
clear warranty; ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. With. out such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the defendant from denying the
existence of the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing
checks and other clearing items." No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere
debemos." 2 It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and phrases in a statute
should ordinarily be accorded their natural and general significance. In other words, there should be
no distinction in the application of a statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for courts are
not authorized to distinguish where the law makes no distinction. They should instead administer
the law not as they think it ought to be but as they find it and without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be conceived to be limited to negotiable
checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate
banking operations. It is of the essence to be payable on demand, because the contract between the
banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of
PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR
clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general agreement and understanding that
any participant in the Philippine Clearing House Corporation, MICR clearing operations by the
mere fact of their participation, thereby manifests its agreement to these Rules and Regulations and
its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in the clearing operations of the
PCHC shall be deemed its written and subscribed consent to the binding effect of this arbitration
agreement as if it had done so in accordance with section 4 of the Republic Act No. 876, otherwise
known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any
controversy existing between them at the time of the submission and which may be the subject of an
action, or the parties of any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them. Such submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other
controversies which may be collateral, incidental, precedent or subsequent to any issue between the
parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement when
such endorsement is necessary for negotiation shall be returned by direct presentation or demand to
the Presenting Bank and not through the regular clearing house facilities within the period
prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity
sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not
be interpreted to be applicable only to checks which are negotiable instruments but also to non-
negotiable instruments and that the PCHC has jurisdiction over this case even as the checks subject
of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in
question. It stamped its guarantee on the back of the checks and subsequently presented these
checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds
were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the
liabilities of an endorser by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements"
(Exh. A-2 to F-2) is now estopped from claiming that the checks under consideration are not
negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its
guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and
positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as
negotiable instruments and accordingly assumed the warranty of the endorser when it stamped its
guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that
it was acting as endorser of the checks and on the strength of this guarantee said respondent cleared
the checks in question and credited the account of the petitioner. Petitioner is now barred from
taking an opposite posture by claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the
issue when it stated the doctrine of estoppel is based upon the grounds of public policy, fair dealing,
good faith and justice and its purpose is to forbid one to speak against his own act, representations
or commitments to the injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to
be a forged endorsement. Whenever any bank treats the signature at the back of the checks as
endorsements and thus logically guarantees the same as such there can be no doubt said bank has
considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. This is laid down in the case of PNB vs. National City Bank. 6 In
another case, this court held that if the drawee-bank discovers that the signature of the payee was
forged after it has paid the amount of the check to the holder thereof, it can recover the amount paid
from the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party from repudiating
an obligation voluntarily assumed after having accepted benefits therefrom. To countenance such
repudiation would be contrary to equity and put premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY &
Motor Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to
deny the genuineness of the drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it
can not recover from a holder who did not participate in the forgery and did not have actual notice
thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is used
in Section 62 of the Negotiable Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the
alteration or the forgery. Very akin to the case at bar is one which involves a suit filed by the drawer
of checks against the collecting bank and this came about in Farmers State Bank 10 where it was
held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as a
result of the bank breaching its implied warranty of the genuineness of the indorsements of the
name of the payee by bringing about the presentation of the checks (to the drawee bank) and
collecting the amounts thereof, the right to enforce that cause of action was not destroyed by the
circumstance that another cause of action for the recovery of the amounts paid on the checks would
have accrued in favor of the appellee against another or to others than the bank if when the checks
were paid they have been indorsed by the payee. (United States vs. National Exchange Bank, 214
US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84; Onondaga County Savings Bank vs.
United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all subsequent holders in due course'
(a) that the instrument is genuine and in all respects what it purports to be; (b) that he has good title
to it; (c) that all prior parties have capacity to contract; and (d) that the instrument is at the time of
his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs.
Yorkville Bank 12that: "the drawer owes no duty of diligence to the collecting bank (one who had
accepted an altered check and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and check stubs or other
equivalent record, and to inform the drawee thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no defense to the
collecting bank are that there is no privity between the drawer and the collecting bank (Corn
Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that bank no duty of
vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of
the collecting bank is induced by any act or representation or admission of the drawer (Seaboard
National Bank vs. Bank of America (supra) and it follows that negligence on the part of the drawer
cannot create any liability from it to the collecting bank, and the drawer thus is neither a necessary
nor a proper party to an action by the drawee bank against such bank. It is quite true that depositors
in banks are under the obligation of examining their passbooks and returned vouchers as a
protection against the payment by the depository bank against forged checks, and negligence in the
performance of that obligation may relieve that bank of liability for the repayment of amounts paid
out on forged checks, which but for such negligence it would be bound to repay. A leading case on
that subject is Morgan vs. United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn.
Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the
law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high standard
of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser
thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and
would deal a negative blow to the whole banking system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled to
receive payment payable for the Checks. As the checks are not payable to defendant's depositor,
payments to persons other than payees named therein, their successor-in-interest or any person
authorized to receive payment are not valid. Article 1240, New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted,
or his successo-in-interest, or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive payments
for the Checks, payments to any of them give rise to an obligation to return the amounts received.
Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding that
the underlying transactions were fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs right
to recover from the defendant. Such nullity clearly emphasizes the obligation of the payees to return
the proceeds of the Checks. If a failure of consideration is sufficient to warrant a finding that a
payee is not entitled to payment or must return payment already made, with more reason the
defendant, who is neither the payee nor the person authorized by the payee, should be compelled to
surrender the proceeds of the Checks received by it. Defendant does not have any title to the
Checks; neither can it claim any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on
the validity of "all prior endorsements." Thus, stamped at the bank of the checks are the defendant's
clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages
sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the defendant from denying the
existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to
this case. These Checks have been made the subject of contracts of endorsement wherein the
defendant made expressed warranties to induce payment by the drawer of the Checks; and the
defendant cannot now refuse liability for breach of warranty as a consequence of such forged
endorsements. The defendant has falsely warranted in favor of plaintiff the validity of all
endorsements and the genuineness of the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting
bank has privity with the depositor who is the principal culprit in this case. The defendant knows the
depositor; her address and her history, Depositor is defendant's client. It has taken a risk on its
depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of
negligence; the risk of wrongful payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no reason
to reverse the decision of the Arbiter. The defendant's failure to reimburse the plaintiff has
constrained the plaintiff to regular the services of counsel in order to protect its interest
notwithstanding that plaintiffs claim is plainly valid just and demandable. In addition, defendant's
clear obligation is to reimburse plaintiff upon direct presentation of the checks; and it is undenied
that up to this time the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs.
The decision of the respondent court of 24 March 1986 and its order of 3 June 1986 are hereby
declared to be immediately executory.
SO ORDERED.
G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.
FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of
First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the
order declaring him in default, 1and from the order of said court in the same case denying his motion
to set aside the judgment rendered after he was declared in default. 2 These two appeals of the
defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file
one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the
consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil
Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon
from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30)
days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and
costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes
of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be
recovered represents the cost of the printing of "World Current Events," a periodical published by
the defendant. To facilitate the payment of the printing the defendant obtained a credit
accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the
printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the
payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also
required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant
undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn
over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all
obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On
December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the
hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for extension.
Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the
ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the
amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo
Engraving), without knowledge or consent of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an
accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in
the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was received by
the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting
upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order
dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A
copy of the order setting aside the order of dismissal was received by the defendant on March 11,
1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila,
Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to
postpone the trial of the case on the ground that there having been no answer as yet, the issues had
not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing
the following defenses: That he signed the document upon which the plaintiff sues in his capacity as
President of the Philippine Education Foundation; that his liability is only secondary; and that he
believed that he was signing only as an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the
ground that the defendant should have filed his answer on March 11, 1960. He contends that by
filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial
court declared the defendant in default. 18 The defendant learned of the order declaring him in
default on March 21, 1960. On March 22, 1960 the defendant filed a otion to set aside the order of
default alleging that although the order of the court dated March 7, 1960 was received on March 11,
1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his
answer on the last day of the reglementary period, March 11, 1960, within office hours, especially
because the order of the court dated March 7, 1960 was brought to the attention of counsel only in
the early hours of March 12, 1960. The defendant also alleged that he has a good and substantial
defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he
served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the
afternoon and the affidavit of the defendant Aruego that he has a good and substantial
defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the
trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35
representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes
of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's
fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying
his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00,
and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to set aside the order of
default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's
order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its
previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30,
1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960,
informing the defendant that the record on appeal filed ed by the defendant was forwarded to the
Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in
default reiterating the same ground previously advanced by him in his motion for relief from the
order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the
defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20,
1960, the defendant filed his notice of appeal from the order of the court denying his motion to set
aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals
with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set
aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his
motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I The defendant also contends that he signed the drafts only as an accommodation party and as such,
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE
DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE
AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN
APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF
ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him through his
mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a
meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must
not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence
but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the summons on
December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a
motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on
January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon
the motion for reconsideration, the trial court issued an order setting aside the order of dismissal;
that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is excusable. The
order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It
was therefore impossible for him to have filed his answer on that same day because the courts then
held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his
answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to excusable
negligence, he has failed to show that he has a meritorious defense. The defendant does not have a
good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-
Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or
additional party obligor, to add to the security of said plaintiff bank. The reason for this statement is
that unlike real bills of exchange, where payment of the face value is advanced to the drawer only
upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills
of exchange were made before acceptance; so that in effect, although these documents are labelled
bills of exchange, legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the defendant as only
additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the
Philippine Education Foundation Company where he is president. Section 20 of the Negotiable
Instruments Law provides that "Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere addition of words describing him as
an agent or as filing a representative character, without disclosing his principal, does not exempt
him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
was signing as a representative of the Philippine Education Foundation Company. 34 He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.
should be made liable only after a showing that the drawer is incapable of paying. This contention is
also without merit.
An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the
taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name
to enable the accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because he wants
to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he
should not have signed as an acceptor/drawee. In doing so, he became primarily and personally
liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere
pieces of evidence of indebtedness because payments were made before acceptance. This is also
without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order
in writting addressed by one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer. 36 As long as a commercial paper conforms with the definition of a bill
of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only
in the determination of the kind of liabilities of the parties involved, but not in the determination of
whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will
result in a new trial which will serve no purpose and will just waste the time of the courts as well as
of the parties because the defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of
Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.
SO ORDERED.

EN BANC
G.R. No. L-10221 February 28, 1958
Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-
appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.
BENGZON, J.:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, Pacifica
Jimenez presented for payment four promissory notes signed by Pacita for different amounts
totalling twenty-one thousand pesos (P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing,
the administrator manifested willingness to pay provided adjustment of the sums be made in line
with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that the
notes should be paid in the currency prevailing after the war, and that consequently plaintiff was
entitled to recover P21,000 plus attorneys fees for the sum of P2,000.
Hence this appeal.
Executed in the month of August 1944, the first promissory note read as follows:
Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos payable six
months after the war, without interest.
The other three notes were couched in the same terms, except as to amounts and dates.
There can be no serious question that the notes were promises to pay "six months after the war," the
amounts mentioned.
But the important question, which obviously compelled the administrator to appeal, is whether the
amounts should be paid, peso for peso, or whether a reduction should be made in accordance with
the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has received our
attention in many litigations after the liberation. The gist of our adjudications, in so far as material
here, is that if the loan should be paid during the Japanese occupation, the Ballantyne schedule
should apply with corresponding reduction of the amount. 1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable after those dates, no
reduction could be effected, and peso-for-peso payment shall be ordered in Philippine currency.2
The Ballantyne Conversion Table does not apply where the monetary obligation, under the contract,
was not payable during the Japanese occupation but until after one year counted for the date of
ratification of the Treaty of Peace concluding the Greater East Asia War. (Arellano vs. De
Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the Japanese occupation, to be discharged after the
war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil.,
173.)
Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso for
peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the loan therein given could have
been repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one
year. Payment could therefore have been made during January 1945. The notes here in question
were payable only after the war.
The appellant administrator calls attention to the fact that the notes contained no express promise to
pay a specified amount. We declare the point to be without merit. In accordance with doctrines on
the matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousand pesos
six months after the war, without interest." And so of the other notes.
"An acknowledgment may become a promise by the addition of words by which a promise of
payment is naturally implied, such as, "payable," "payable" on a given day, "payable on demand,"
"paid . . . when called for," . . . (10 Corpus Juris Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, to a promise to pay. In other words, if over and above the mere
acknowledgment of the debt there may be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills,
10, 11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge myself to be
indebted to A in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on May
5th," are held to be promissory notes, significance being given to words of payment as indicating a
promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific
Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign these notes, his
estate is not liable for the same. This defense, however, was not interposed in the lower court. There
the only issue related to the amount to be amount, considering that the money had been received in
Japanese money. It is now unfair to put up this new defense, because had it been raised in the court
below, appellees could have proved, what they now alleged that Pacita contracted the obligation to
support and maintain herself, her son and her husband (then concentrated at Santo Tomas
University) during the hard days of the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
In order that a question may be raised on appeal, it is essential that it be within the issues made by
the parties in their pleadings. Consequently, when a party deliberately adopts a certain theory, and
the case is tried and decided upon that theory in the court below, he will not be permitted to change
his theory on appeal because, to permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express
Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480;
Toribio vs. Dacasa, 55 Phil., 461.)
Appellant's last assignment of error concerns attorneys fees. He says there was no reason for making
this and exception to the general rule that attorney's fees are not recoverable in the absence of
stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case if
defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and
demandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"
(Article 2208 Civil Code). These are if applicable some of the exceptions to the general rule
that in the absence of stipulation no attorney's fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is
desirable that the decision should state the reason why such award is made bearing in mind that it
must necessarily rest on an exceptional situation. Unless of course the text of the decision plainly
shows the case to fall into one of the exceptions, for instance "in actions for legal support," when
exemplary damages are awarded," etc. In the case at bar, defendant could not obviously be held to
have acted in gross and evident bad faith." He did not deny the debt, and merely pleaded for
adjustment, invoking decisions he thought to be controlling. If the trial judge considered it "just and
equitable" to require payment of attorney's fees because the defense adjustment under Ballantyne
schedule proved to be untenable in view of this Court's applicable rulings, it would be error to
uphold his view. Otherwise, every time a defendant loses, attorney's fees would follow as a matter
of course. Under the article above cited, even a clearly untenable defense would be no ground for
awarding attorney's fees unless it amounted to "gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept her
offer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is tenable,
defendant's attitude being merely a consequence of his line of defense, which though erroneous does
not amount to "gross and evident bad faith." For one thing, there is a point raised by defendant,
which so far as we are informed, has not been directly passed upon in this jurisdiction: the notes
contained no express promise to pay a definite amount.
There being no circumstance making it reasonable and just to require defendant to pay attorney's
fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as to
the attorney's fees which are hereby disapproved. So ordered.
EN BANC
G.R. No. L-18103 June 8, 1922
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in this jurisdiction of a provision
in a promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to
appear and confess judgment thereon for the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc.,
executed and delivered to the Philippine National Bank, a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand
only pesos at Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case
this note be not paid at maturity, to appear in my name and confess judgment for the above sum with
interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors and waiver
of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal,
from levy or sale. Value received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand.
The Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000,
the amount of the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated with
the Philippine National Bank, entered his appearance in representation of the defendant, and filed a motion
confessing judgment. The defendant, however, in a sworn declaration, objected strongly to the unsolicited
representation of attorney Recto. Later, attorney Antonio Gonzalez appeared for the defendant and filed a
demurrer, and when this was overruled, presented an answer. The trial judge rendered judgment on the
motion of attorney Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise squarely the question which was
suggested in the beginning of this opinion. In view of the importance of the subject to the business
community, the advice of prominent attorneys-at-law with banking connections, was solicited. These
members of the bar responded promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar that although the sanction of
judgement notes in the Philippines might prove of immediate value to clients, every one of the attorneys
has looked upon the matter in a big way, with the result that out of their independent investigations has
come a practically unanimous protest against the recognition in this jurisdiction of judgment notes. 1
Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a
confession of judgment commonly called a judgment note. On the contrary, the provisions of the Code of
Civil Procedure, in relation to constitutional safeguards relating to the right to take a man's property only
after a day in court and after due process of law, contemplate that all defendants shall have an opportunity
to be heard. Further, the provisions of the Code of Civil Procedure pertaining to counter claims argue
against judgment notes, especially as the Code provides that in case the defendant or his assignee omits to
set up a counterclaim, he cannot afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96,
97.) At least one provision of the substantive law, namely, that the validity and fulfillment of contracts
cannot be left to the will of one of the contracting parties (Civil Code, art. 1356), constitutes another
indication of fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly
recognizes judgment notes, and that they are enforcible under the regular procedure. The Negotiable
Instruments Law, in section 5, provides that "The negotiable character of an instrument otherwise
negotiable is not affected by a provision which ". . . (b) Authorizes a confession of judgment if the
instrument be not paid at maturity." We do not believe, however, that this provision of law can be taken to
sanction judgments by confession, because it is a portion of a uniform law which merely provides that, in
jurisdiction where judgment notes are recognized, such clauses shall not affect the negotiable character of
the instrument. Moreover, the same section of the Negotiable Instruments. Law concludes with these
words: "But nothing in this section shall validate any provision or stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in the absence of statute of a
provision in a note authorizing an attorney to appear and confess judgment against the maker. This
situation, in reality, has its advantages for it permits us to reach that solution which is best grounded in the
solid principles of the law, and which will best advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of
time a warrant of attorney to confess judgement became a familiar common law security. At common law,
there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other
by confession relicta verificatione. A number of jurisdictions in the United States have accepted the
common law view of judgments by confession, while still other jurisdictions have refused to sanction
them. In some States, statutes have been passed which have either expressly authorized confession of
judgment on warrant of attorney, without antecedent process, or have forbidden judgments of this
character. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney
for the confession of judgement. The weight of opinion is that, unless authorized by statute, warrants of
attorney to confess judgment are void, as against public policy.
Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo.,
717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on
October 4, 1990, the defendant executed and delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the note at any time after the note became
due in any court of record in the State of Missouri, or elsewhere, to waive the issuing and service of
process, and to confess judgement in favor of the First National Bank of Kansas City for the amount that
might then be due thereon, with interest at the rate therein mentioned and the costs of suit, together with
an attorney's fee of 10 per cent and also to waive and release all errors in said proceedings and judgment,
and all proceedings, appeals, or writs of error thereon. Plaintiff filed a petition in the Circuit Court to
which was attached the above-mentioned instrument. An attorney named Denham appeared pursuant to
the authority given by the note sued on, entered the appearance of the defendant, and consented that
judgement be rendered in favor of the plaintiff as prayed in the petition. After the Circuit Court had
entered a judgement, the defendants, through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:
But going beyond the mere technical question in our preceding paragraph discussed, we come to a
question urged which goes to the very root of this case, and whilst new and novel in this state, we do not
feel that the case should be disposed of without discussing and passing upon that question.
xxx xxx xxx
And if this instrument be considered as security for a debt, as it was by the common law, it has never so
found recognition in this state. The policy of our law has been against such hidden securities for debt. Our
Recorder's Act is such that instruments intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion, and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his
creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would
follow the footsteps of such a diversion in the way of security for debt. Such instruments procured by
duress could shortly be placed in judgment in a foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some other appellate court is granted to all persons
against whom an adverse judgment is rendered, and this statutory right is by the instrument stricken down.
True it is that such right is not claimed in this case, but it is a part of the bond and we hardly know why
this pound of flesh has not been demanded. Courts guard with jealous eye any contract innovations upon
their jurisdiction. The instrument before us, considered in the light of a contract, actually reduces the
courts to mere clerks to enter and record the judgment called for therein. By our statute (Rev. St. 1899,
sec. 645) a party to a written instrument of this character has the right to show a failure of consideration,
but this right is brushed to the wind by this instrument and the jurisdiction of the court to hear that
controversy is by the whose object is to oust the jurisdiction of the courts are contrary to public policy and
will not be enforced. Thus it is held that any stipulation between parties to a contract distinguishing
between the different courts of the country is contrary to public policy. The principle has also been applied
to a stipulation in a contract that a party who breaks it may not be sued, to an agreement designating a
person to be sued for its breach who is nowise liable and prohibiting action against any but him, to a
provision in a lease that the landlord shall have the right to take immediate judgment against the tenant in
case of a default on his part, without giving the notice and demand for possession and filing the complaint
required by statute, to a by-law of a benefit association that the decisions of its officers on claim shall be
final and conclusive, and to many other agreements of a similar tendency. In some courts, any agreement
as to the time for suing different from time allowed by the statute of limitations within which suit shall be
brought or the right to sue be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so far as it goes beyond the usual provisions of
a note, is void as against the public policy of the state, as such public policy is found expressed in our laws
and decisions. Such agreements are iniquitous to the uttermost and should be promptly condemned by the
courts, until such time as they may receive express statutory recognition, as they have in some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and the
judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65;
Ann. Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record
contained waiver of presentment and protest, homestead and exemption rights real and personal, and other
rights, and also the following material provision: "And we do hereby empower and authorize the said A.
B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of Record to appear for us
and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for the
above named sum with costs of suit and release of all errors and without stay of execution after the
maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the
judgment note above described, speaking through Mr. Justice Miller, in part said:
As both sides agree the question presented is one of first impression in this State. We have no statutes, as
has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to
render, we must have recourse to the rules and principles of the common law, in force here, and to our
statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly fifty
years of judicial history this question, strong evidence, we think, that such notes, if at all, have never been
in very general use in this commonwealth. And in most states where they are current the use of them has
grown up under statutes authorizing them, and regulating the practice of employing them in commercial
transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here as
in other cases. We do not think so. Strong reasons exist, as we have shown, for denying its application,
when holders of contracts of this character seek the aid of the courts and of their execution process to
enforce them, defendant having had no day in court or opportunity to be heard. We need not say in this
case that a debtor may not, by proper power of attorney duly executed, authorize another to appear in
court, and by proper endorsement upon the writ waive service of process, and confess judgement. But we
do not wish to be understood as approving or intending to countenance the practice employing in this state
commercial paper of the character here involved. Such paper has heretofore had little if any currency here.
If the practice is adopted into this state it ought to be, we think, by act of the Legislature, with all proper
safeguards thrown around it, to prevent fraud and imposition. The policy of our law is, that no man shall
suffer judgment at the hands of our courts without proper process and a day to be heard. To give currency
to such paper by judicial pronouncement would be to open the door to fraud and imposition, and to subject
the people to wrongs and injuries not heretofore contemplated. This we are unwilling to do.
A case typical of those authorities which lend support to judgment notes is First National Bank of Las
Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in
part, said:
In some of the states the judgments upon warrants of attorney are condemned as being against public
policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas.
[1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am.
St. Rep., 612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be
said by the courts that such judgments are against public policy we are unable to understand. It was a
practice from time immemorial at common law, and the common law comes down to us sanctioned as
justified by the reason and experience of English-speaking peoples. If conditions have arisen in this
country which make the application of the common law undesirable, it is for the Legislature to so
announce, and to prohibit the taking of judgments can be declared as against the public policy of the state.
We are aware that the argument against them is that they enable the unconscionable creditor to take
advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On the other
hand, it may be said in their favor that it frequently enables a debtor to obtain money which he could by
no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at
times. In some of the states there judgments have been condemned by statute and of course in that case are
not allowed.
Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a
promissory note confers a valid power, and authorizes a confession of judgment in any court of competent
jurisdiction in an action to be brought upon said note; that our cognovit statute does not cover the same
field as that occupied by the common-law practice of taking judgments upon warrant of attorney, and does
not impliedly or otherwise abrogate such practice; and that the practice of taking judgments upon warrants
of attorney as it was pursued in this case is not against any public policy of the state, as declared by its
laws.
With reference to the conclusiveness of the decisions here mentioned, it may be said that they are based on
the practice of the English-American common law, and that the doctrines of the common law are binding
upon Philippine courts only in so far as they are founded on sound principles applicable to local
conditions.
Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way
to settle and secure debts. They are a quick remedy and serve to save the court's time. They also save the
time and money of the litigants and the government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special agreements, with power to enter up
judgments on them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which outweigh the considerations just
mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for
fraud, because under these instruments the promissor bargains away his right to a day in court, and
because the effect of the instrument is to strike down the right of appeal accorded by statute. The
recognition of such a form of obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can readily be seen that judgement
notes, instead of resulting to the advantage of commercial life in the Philippines might be the source of
abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case,
the judgement is ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated
by our law. We are further of the opinion that provisions in notes authorizing attorneys to appear and
confess judgments against makers should not be recognized in this jurisdiction by implication and should
only be considered as valid when given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to the lower court for further
proceedings in accordance with this decision. Without special finding as to costs in this instance, it is so
ordered.