of surrounding circumstances in order to more
perfectly understand the intent and meaning of the
Sec. 1-10
1. Caltex vs. CA (Sec.1)
2. HSBC vs. CIR (Secs. 1, 70, 132, 143)
3. SPS. Violago vs. BA Finance (Secs.1 and 52)
4. Juanita Salas vs. CA et al (Secs. 1, 30 and 52)
5. MBTC vs. CA(sec. 1)
6. TRB vs. CA(Sec. 1 and 8)
7. Quirino Gonzales Logging vs. CA(Sec. 1 and 24)
8. Victoria vs. Dolores et al (Sec. 6)
9. PNB vs Rodriguez (Sec. 8 and 9)
Caltex (Philippines), Inc. vs. Court of Appeals
G.R. No. 97753. August 10, 1992.*
CALTEX (PHILIPPINES), INC., petitioner, vs.
COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Commercial Law; Negotiable Instruments Law;
Requisites for an instrument to become
negotiable.—Section 1 of 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.”
Same; Same; Same; The negotiability or
non-negotiability of an instrument is determined from
the writing that is from the face of the instrument
itself.—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. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light
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.
Same; Same; Same; 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 and a holder may be the payee or indorsee of a
bill or note who is in possession of it or the bearer
thereof.—Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from
one person to another in such amanner as to constitute
the transferee the holder thereof, and a holder may be
the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 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.
Same; Same; Same; 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.—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. As such holder of
collateral security, he would be a pledgee but the
requirements there-for 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.
Civil Law; Estoppel; 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.—In a
letter dated November 26, 1982 addressed to
respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: “x x x These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz
to guarantee his purchases of fuel products” (Italics
ours.) This admission is conclusive upon petitioner, its privileged or impeaching matters. The determination
protestations notwithstanding. Under the doctrine of of issues at a pre-trial conference bars the
estoppel, an admission or representation is rendered consideration of other questions on appeal.
conclusive upon the person making it, and cannot be
denied or disproved as against the person relying
thereon. A party may not go back on his own acts and PETITION for review on certiorari of the decision of
representations to the prejudice of the other party who the Court of Appeals. Chua, J.
relied upon them. In the law of evidence, whenever a
party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a
The facts are stated in the opinion of the Court.
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.
Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

Same; Same; An issue raised for the first time on appeal
and not raised timely in the proceedings in the lower
court is barred by estoppel.—As respondent court
REGALADO, J.:
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. 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.

Remedial Law; Pre-trial; The determination of issues at

a pretrial conference bars the consideration of other
questions on appeal.—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
This petition for review on certiorari impugns
and seeks the reversal of the decision
promulgated by respondent court on March 8,
1991 in CA-G.R. CV No. 23615 1 affirming with
modifications, the earlier decision of the
Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed
therein by herein petitioner against respondent
bank.
The undisputed background of this case, as
found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial
banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in
favor of one Angel dela Cruz who deposited
with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues,
Original Records, p. 207; Defendant's Exhibits 1
to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates
of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the
latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz
informed Mr. Timoteo Tiangco, the Sucat
Branch Manger, that he lost all the certificates of
time deposit in dispute. Mr. Tiangco advised
said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant
bank's procedure, if he desired replacement of
said lost CTDs (TSN, February 9, 1987, pp.
48-50).
4. On March 18, 1982, Angel dela Cruz executed
and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On
the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz
negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy
Five Thousand Pesos (P875,000.00). On the
same date, said depositor executed a notarized
Deed of Assignment of Time Deposit (Exhibit
562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control
of the indicated time deposits from and after
date" of the assignment and further authorizes
said bank to pre-terminate, set-off and "apply the
said time deposits to the payment of whatever
amount or amounts may be due" on the loan
upon its maturity (TSN, February 9, 1987, pp.
60-62).
6. Sometime in November, 1982, Mr. Aranas,
Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost
by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by
said depositor (TSN, February 9, 1987, pp.
54-68).
7. On November 26, 1982, defendant received a
letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession
of the CTDs in question and of its decision to
pre-terminate the same.
8. On December 8, 1982, plaintiff was requested
by herein defendant to furnish the former "a
copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation
against which plaintiff proposed to apply the
time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was
furnished herein defendant.
10. Accordingly, defendant bank rejected the
plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz
with the defendant bank matured and fell due
and on August 5, 1983, the latter set-off and
applied the time deposits in question to the
payment of the matured loan (TSN, February 9,
1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the
instant complaint, praying that defendant bank
be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein
at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision
dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court
affirmed the lower court's dismissal of the
complaint, hence this petition wherein petitioner
faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable
despite being clearly negotiable instruments; (2)
that petitioner did not become a holder in due
course of the said certificates of deposit; and (3)
in disregarding the pertinent provisions of the
Code of Commerce relating to lost instruments
payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit
is reproduced below to provide a better
understanding of the issues involved in this
recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____
This is to Certify that B E A R E R has deposited
in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK
SUCAT OFFICE P4,000 & 00 CTS Pesos,
Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation
and surrender of this certificate, with interest at
the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
——————————
———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in
question are non-negotiable instruments,
nationalizing as follows:
. . . While it may be true that the word "bearer"
appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER"
stamped on the space provided supposedly for
the name of the depositor, the words "has
deposited" a certain amount follows. The
document further provides that the amount
deposited shall be "repayable to said depositor"
on the period indicated. Therefore, the text of the
instrument(s) themselves manifest with clarity
that they are payable, not to whoever purports to
be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the
appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit
and further engages itself to pay said depositor
the amount indicated thereon at the stipulated
date. 6
We disagree with these findings and conclusions,
and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument
to become negotiable, viz:
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the
requirements of the law for negotiability. The
parties' bone of contention is with regard to
requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch
Manager way back in 1982, testified in open
court that the depositor reffered to in the CTDs
is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying
that per books of the bank, the depositor referred
(sic) in these certificates states that it was Angel
dela Cruz?
witness:
a Yes, your Honor, and we have the record to
show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr.
Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in
all of these certificates of time deposit insofar as
the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the
negotiability or non-negotiability of an
instrument is determined from the writing, that is,
from the face of the instrument itself.9 In the
construction of a bill or note, the intention of the
parties is to control, if it can be legally
ascertained. 10 While the writing may be read in
the light of surrounding circumstances in order
to more perfectly understand the intent and
meaning of the parties, yet as they have
constituted the writing to be the only outward
and visible expression of their meaning, no other
words are to be added to it or substituted in its
stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly
intended as contradistinguished from what their
words express, but what is the meaning of the
words they have used. What the parties meant
must be determined by what they said. 11
Contrary to what respondent court held, the
CTDs are negotiable instruments. The
documents provide that the amounts deposited
shall be repayable to the depositor. And who,
according to the document, is the depositor? It is
the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to
him. Rather, the amounts are to be repayable to
the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank
to pay the amount to Angel de la Cruz only, it
could have with facility so expressed that fact in
clear and categorical terms in the documents,
instead of having the word "BEARER" stamped
on the space provided for the name of the
depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof.
Thus, petitioner's aforesaid witness merely
declared that Angel de la Cruz is the depositor
"insofar as the bank is concerned," but obviously
other parties not privy to the transaction between
them would not be in a position to know that the
depositor is not the bearer stated in the CTDs.
Hence, the situation would require any party
dealing with the CTDs to go behind the plain
import of what is written thereon to unravel the
agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the
application of the elementary rule that the
interpretation of obscure words or stipulations in
a contract shall not favor the party who caused
the obscurity. 12
The next query is whether petitioner can
rightfully recover on the CTDs. This time, the
answer is in the negative. The records reveal that
Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00
to petitioner without informing respondent bank
thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a
valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery
and indorsement. For, although petitioner seeks
to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz'
purchases of its fuel products. Any doubt as to
whether the CTDs were delivered as payment for
the fuel products or as a security has been
dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to
respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by
Mr. Angel dela Cruz to guarantee his purchases
of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its
protestations notwithstanding. Under the
doctrine of estoppel, an admission or
representation is rendered conclusive upon the
person making it, and cannot be denied or
disproved as against the person relying
thereon. 14 A party may not go back on his own
acts and representations to the prejudice of the
other party who relied upon them. 15 In the law
of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and
deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot,
in any litigation arising out of such declaration,
act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as
payment and not as security, petitioner's credit
manager could have easily said so, instead of
using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of
particularity therein 17 praying, among others,
that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a)
the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and
(b) whether or not it issued a receipt showing
that the CTDs were delivered to it by De la Cruz
as payment of the latter's alleged indebtedness to
it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for,
it could have proved, if such truly was the fact,
that the CTDs were delivered as payment and
not as security. Having opposed the motion,
petitioner now labors under the presumption that
evidence willfully suppressed would be adverse
if produced. 19
Under the foregoing circumstances, this
disquisition in Intergrated Realty Corporation,
et al. vs. Philippine National Bank, et al. 20 is
apropos:
. . . Adverting again to the Court's
pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or what
the form of the transfer was. If it was intended to
secure the payment of money, it must be
construed as a pledge; but if there was some
other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears
to have been absolute, its object and character
might still be qualified and explained by
contemporaneous writing declaring it to have
been a deposit of the property as collateral
security. It has been said that a transfer of
property by the debtor to a creditor, even if
sufficient on its face to make an absolute
conveyance, should be treated as a pledge if the
debt continues in inexistence and is not
discharged by the transfer, and that accordingly
the use of the terms ordinarily importing
conveyance of absolute ownership will not be
given that effect in such a transaction if they are
also commonly used in pledges and mortgages
and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of
clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were
negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person
to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may
be the payee or indorsee of a bill or note, who is
in possession of it, or the bearer thereof. 22 In the
present case, however, there was no negotiation
in the sense of a transfer of the legal title to the
CTDs in favor of petitioner in which situation,
for obvious reasons, mere delivery of the bearer
CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of
Angel de la Cruz (and we even disregard the fact
that the amount involved was not disclosed)
could at the most constitute petitioner only as a
holder for value by reason of his lien.
Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof
and the subsequent disposition of such security,
in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the
holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the
requirements therefor and the effects thereof, not
being provided for by the Negotiable
Instruments Law, shall be governed by the Civil
Code provisions on pledge of incorporeal
rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall
be delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against
third persons if a description of the thing
pledged and the date of the pledge do not appear
in a public instrument.
Aside from the fact that the CTDs were only
delivered but not indorsed, the factual findings
of respondent court quoted at the start of this
opinion show that petitioner failed to produce
any document evidencing any contract of pledge
or guarantee agreement between it and Angel de
la Cruz. 25 Consequently, the mere delivery of
the CTDs did not legally vest in petitioner any
right effective against and binding upon
respondent bank. The requirement under Article
2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby
proof may be made of the date of a pledge
contract, but a rule of substantive law
prescribing a condition without which the
execution of a pledge contract cannot affect third
persons adversely. 26
On the other hand, the assignment of the CTDs
made by Angel de la Cruz in favor of respondent
bank was embodied in a public
instrument. 27 With regard to this other mode of
transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or
action shall produce no effect as against third
persons, unless it appears in a public instrument,
or the instrument is recorded in the Registry of
Property in case the assignment involves real
property.
Respondent bank duly complied with this
statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit
or the extent of its lien nor the execution of any
public instrument which could affect or bind
private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the
latter has definitely the better right over the
CTDs in question.
Finally, petitioner faults respondent court for
refusing to delve into the question of whether or
not private respondent observed the
requirements of the law in the case of lost
negotiable instruments and the issuance of
replacement certificates therefor, on the ground
that petitioner failed to raised that issue in the
lower court. 28
On this matter, we uphold respondent court's
finding that the aspect of alleged negligence of
private respondent was not included in the
stipulation of the parties and in the statement of
issues submitted by them to the trial
court. 29 The issues agreed upon by them for
resolution in this case are:
1. Whether or not the CTDs as worded are
negotiable instruments.
2. Whether or not defendant could legally apply
the amount covered by the CTDs against the
depositor's loan by virtue of the assignment
(Annex "C").
3. Whether or not there was legal compensation
or set off involving the amount covered by the
CTDs and the depositor's outstanding account
with defendant, if any.
4. Whether or not plaintiff could compel
defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the
proceeds of the CTDs.
6. Whether or not the parties can recover
damages, attorney's fees and litigation expenses
from each other.
As respondent court correctly observed, with
appropriate citation of some doctrinal authorities,
the foregoing enumeration does not include the
issue of negligence on the part of respondent
bank. An issue raised for the first time on appeal
and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions
raised on appeal must be within the issues
framed by the parties and, consequently, issues
not raised in the trial court cannot be raised for
the first time on appeal. 31
Pre-trial is primarily intended to make certain
that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the
element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law
and fact which they intend to raise at the trial,
except such as may involve privileged or
impeaching matters. The determination of issues
at a pre-trial conference bars the consideration of
other questions on appeal. 32
To accept petitioner's suggestion that respondent
bank's supposed negligence may be considered
encompassed by the issues on its right to
preterminate and receive the proceeds of the
CTDs would be tantamount to saying that
petitioner could raise on appeal any issue. We
agree with private respondent that the broad
ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be
premised on a multitude of other legal reasons
and causes of action, of which respondent bank's
supposed negligence is only one. Hence,
petitioner's submission, if accepted, would
render a pre-trial delimitation of issues a useless
exercise. 33
Still, even assuming arguendo that said issue of
negligence was raised in the court below,
petitioner still cannot have the odds in its favor.
A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed
in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions,
even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not
mandatory. The very first article cited by
petitioner speaks for itself.
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.
Narvasa, C.J., Padilla and Nocon, JJ., concur.
Footnotes
1 Per Justice Segundino G. Chua, with the
concurrence of Justices Santiago M. Kapunan
and Luis L. Victor.

Art 548. The dispossessed owner, no matter for

2 Judge Ramon Mabutas, Jr., presiding; Rollo,
what cause it may be, may apply to the judge or
64-88.
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 3 Rollo, 24-26.
as in order to prevent the ownership of the
instrument that a duplicate be issued him. 4 Ibid., 12.
(Emphasis ours.)
5 Exhibit A, Documentary Evidence for the
xxx xxx xxx Plaintiff, 8.

The use of the word "may" in said provision 6 Rollo, 28.

shows that it is not mandatory but discretionary
on the part of the "dispossessed owner" to apply 7 TSN, February 9, 1987, 46-47.
to the judge or court of competent jurisdiction
for the issuance of a duplicate of the lost 8 Ibid., id., 152-153.
instrument. Where the provision reads "may,"
this word shows that it is not mandatory but 9 11 Am. Jur. 2d, Bills and Notes, 79.
discretional. 34 The word "may" is usually
permissive, not mandatory. 35 It is an auxiliary 10 Ibid., 86.
verb indicating liberty, opportunity, permission
and possibility. 36
11 Ibid., 87-88.

Moreover, as correctly analyzed by private

12 Art. 1377, Civil Code.
respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor
13 Exhibit 563, Documentary Evidence for the
respondent bank's supposed negligence, merely
Defendant, 442; Original Record, 211.
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 14 Panay Electric Co., Inc. vs. Court of Appeals,
duplicate of the same, and, on the other, an et al., 174 SCRA 500 (1989).
option in favor of the party liable thereon who,
for some valid ground, may elect to refuse to 15 Philippine National Bank vs. Intermediate
issue a replacement of the instrument. Appellate Court, et al., 189 SCRA 680 (1990).
Significantly, none of the provisions cited by
16 Section 2(a), Rule 131, Rules of Court. 33 Rollo, 58.

17 Original Record, 152. 34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati
vs. Ocampo, 113 SCRA 794 (1982).
18 Ibid., 154.
35 Luna vs. Abaya, 86 Phil. 472 (1950).
19 Section 3(e), Rule 131, Rules of Court.
36 Philippine Law Dicti
20 174 SCRA 295 (1989), jointly decided with
Overseas Bank of Manila vs. Court of Appeals,
et al., G.R. No. 60907.

21 Sec. 30, Act No. 2031.

22 Sec. 191, id.

23 Sec. 27, id.; see also Art. 2118, Civil Code.

24 Commentaries and Jurisprudence on the

Philippine Commercial Laws, T.C. Martin, 1985
Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec.
196, Act No. 2031.

25 Rollo, 25.

26 Tec Bi & Co. vs. Chartered Bank of India,

Australia and China, 41 Phil. 596 (1916); Ocejo,
Perez & Co. vs. The International Banking
Corporation, 37 Phil. 631 (1918); Te Pate vs.
Ingersoll, 43 Phil. 394 (1922).

27 Rollo, 25.

28 Ibid., 15.

29 Joint Partial Stipulation of Facts and

Statement of Issues, dated November 27, 1984;
Original Record, 209.

30 Mejorada vs. Municipal Council of Dipolog,

52 SCRA 451 (1973).

31 Sec. 18, Rule 46, Rules of Court; Garcia, et al.

vs. Court of Appeals, et al., 102 SCRA 597
(1981); Matienzo vs. Servidad, 107 SCRA 276
(1981); Aguinaldo Industries Corporation, etc.
vs. Commissioner of Internal Revenue, et al.,
112 SCRA 136 (1982); Dulos Realty &
Development Corporation vs. Court of Appeals,
et al., 157 SCRA 425 (1988).

32 Bergado vs. Court of Appeals, et al., 173

SCRA 497 (1989).
Republic of the Philippines and set aside the decisions of the Court of Tax Appeals
SUPREME COURT (CTA) in CTA Case Nos. 59514 and 6009,5 respectively,
Manila 724 SCRA and dismissed the petitions of petitioner Hongkong and
Shanghai Banking Corporation Limited-Philippine
FIRST DIVISION Branches (HSBC). The corresponding Resolutions, on the
other hand, denied the respective motions for
G.R. No. 166018 June 4, 2014 reconsideration of the said Decisions.

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

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total ₱19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total ₱32,904,437.30
On August 23, 1999, the Bureau of Internal Revenue
(BIR), thru its then Commissioner, Beethoven Rualo,
issued BIR Ruling No. 132-99 to the effect that
instructions or advises from abroad on the management
of funds located in the Philippines which do not involve
transfer of funds from abroad are not subject to DST.
BIR Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO
GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel
Gentlemen:
This refers to your letter dated July
26, 1999 requesting on behalf of your
clients, the CITIBANK & the Philippines."
STANDARD CHARTERED BANK,
for a ruling as to whether or not the
electronic instructions involving the
following transactions of residents
and non-residents of the Philippines
with respect to their local or foreign
currency accounts are subject to
documentary stamp tax under Section
181 of the 1997 Tax Code, viz:
A. Investment purchase transactions:
An overseas client sends instruction
to its bank in the Philippines to
either:
(i) debit its local or foreign currency
account and to pay a named recipient
in the Philippines; or
(ii) receive funds from another bank
in the Philippines for deposit into its
account and to pay a named recipient
in the Philippines."
The foregoing transactions are carried
out under instruction from abroad and
[do] not involve actual fund transfer
since the funds are already in the
Philippine accounts. The instructions
are in the form of electronic messages
(i.e., SWIFT MT100 or MT 202
and/or MT 521). In both cases, the
payment is against the delivery of
investments purchased. The purchase
of investments and the payment
comprise one single transaction. DST
has already been paid under Section
176 for the investment purchase.
B. Other transactions:
An overseas client sends an
instruction to its bank in the
Philippines to either:
(i) debit its local or foreign currency
account and to pay a named recipient,
who may be another bank, a
corporate entity or an individual in
the Philippines; or
(ii) receive funds from another bank
in the Philippines for deposit to its
account and to pay a named recipient,
who may be another bank, a
corporate entity or an individual in
The above instruction is in the form
of an electronic message (i.e., SWIFT
MT 100 or MT 202) or tested cable,
and may not refer to any particular
transaction.
The opening and maintenance by a
non-resident of local or foreign
currency accounts with a bank in the
Philippines is permitted by the
Bangko Sentral ng Pilipinas, subject
to certain conditions.
In reply, please be informed that
pursuant to Section 181 of the 1997
Tax Code, which provides that –
SEC. 181. Stamp Tax Upon
Acceptance of Bills of Exchange and
Others.– Upon any acceptance or
payment of any bill of exchange or
order for the payment of money
purporting to be drawn in a foreign
country but payable in the Philippines,
there shall be collected a
documentary stamp tax of Thirty
centavos (P0.30) on each Two
hundred pesos (₱200), or fractional
part thereof, of the face value of any
such bill of exchange, or order, or
Philippine equivalent of such value, if
expressed in foreign currency.
(Underscoring supplied.)
a documentary stamp tax shall be
imposed on any bill of exchange or
order for payment purporting to be
drawn in a foreign country but
payable in the Philippines.
Under the foregoing provision, the
documentary stamp tax shall be
levied on the instrument, i.e., a bill of
exchange or order for the payment of
money, which purports to draw
money from a foreign country but
payable in the Philippines. In the
instant case, however, while the
payor is residing outside the
Philippines, he maintains a local and
foreign currency account in the
Philippines from where he will draw
the money intended to pay a named
recipient. The instruction or order to
pay shall be made through an
electronic message, i.e., SWIFT MT
100 or MT 202 and/or MT 521.
Consequently, there is no negotiable
instrument to be made, signed or
issued by the payee. In the meantime,
such electronic instructions by the
non-resident payor cannot be
considered as a transaction per se
considering that the same do not
involve any transfer of funds from
abroad or from the place where the
instruction originates. Insofar as the
local bank is concerned, such
instruction could be considered only
as a memorandum and shall be
entered as such in its books of
accounts. The actual debiting of the
payor’s account, local or foreign
currency account in the Philippines,
is the actual transaction that should
be properly entered as such.
Under the Documentary Stamp Tax
Law, the mere withdrawal of money
from a bank deposit, local or foreign
currency account, is not subject to
DST, unless the account so
maintained is a current or checking
account, in which case, the issuance
of the check or bank drafts is subject
to the documentary stamp tax
imposed under Section 179 of the
1997 Tax Code. In the instant case,
and subject to the physical
impossibility on the part of the payor
to be present and prepare and sign an
instrument purporting to pay a certain
obligation, the withdrawal and
payment shall be made in cash. In
this light, the withdrawal shall not be
subject to documentary stamp tax.
The case is parallel to an automatic
bank transfer of local funds from a
savings account to a checking
account maintained by a depositor in
one bank.
Likewise, the receipt of funds from
another bank in the Philippines for
deposit to the payee’s account and
thereafter upon instruction of the
non-resident depositor-payor, through
an electronic message, the depository
bank to debit his account and pay a
named recipient shall not be subject
to documentary stamp tax.
It should be noted that the receipt of
funds from another local bank in the
Philippines by a local depository
bank for the account of its client
residing abroad is part of its regular
banking transaction which is not
subject to documentary stamp tax.
Neither does the receipt of funds
makes the recipient subject to the
documentary stamp tax. The funds
are deemed to be part of the deposits
of the client once credited to his
account, and which, thereafter can be
disposed in the manner he wants. The
payor-client’s further instruction to
debit his account and pay a named
recipient in the Philippines does not
involve transfer of funds from abroad.
Likewise, as stated earlier, such debit
of local or foreign currency account
in the Philippines is not subject to the
documentary stamp tax under the
aforementioned Section 181 of the
Tax Code.
In the light of the foregoing, this
Office hereby holds that the
instruction made through an
electronic message by non-resident
payor-client to debit his local or
foreign currency account maintained
in the Philippines and to pay a certain
named recipient also residing in the
Philippines is not the transaction
contemplated under Section 181 of
the 1997 Tax Code. Such being the
case, such electronic instruction
 purporting to draw funds from a local
account intended to be paid to a
named recipient in the Philippines is
not subject to documentary stamp tax
imposed under the foregoing Section.
This ruling is being issued on the
basis of the foregoing facts as
represented. However, if upon
investigation it shall be disclosed that
the facts are different, this ruling
shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on
October 8, 1999 an administrative claim for the refund
of the amount of ₱19,572,992.10 allegedly representing
erroneously paid DST to the BIR for the period
covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed
another administrative claim for the refund of the
amount of ₱32,904,437.30 allegedly representing
erroneously paid DST to the BIR for the period
covering January to December 1998.
As its claims for refund were not acted upon by the BIR,
HSBC subsequently brought the matter to the CTA as
CTA Case Nos. 5951 and 6009, respectively, in order
to suspend the running of the two-year prescriptive
period.
The CTA Decisions dated May 2, 2002 in CTA Case
No. 6009 and dated December 18, 2002 in CTA Case
No. 5951 favored HSBC. Respondent Commissioner of
Internal Revenue was ordered to refund or issue a tax
credit certificate in favor of HSBC in the reduced
amounts of ₱30,360,570.75 in CTA Case No. 6009 and
₱16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently
substantiated with documentary evidence. The CTA
ruled that HSBC is entitled to a tax refund or tax credit
because Sections 180 and 181 of the 1997 Tax Code do
not apply to electronic message instructions transmitted
by HSBC’s non-resident investor-clients:
The instruction made through an electronic message by
a nonresident investor-client, which is to debit his local
or foreign currency account in the Philippines and pay a
certain named recipient also residing in the Philippines
is not the transaction contemplated in Section 181 of
the Code. In this case, the withdrawal and payment
shall be made in cash. It is parallel to an automatic
bank transfer of local funds from a savings account to a
checking account maintained by a depositor in one
bank. The act of debiting the account is not subject to
the documentary stamp tax under Section 181. Neither
is the transaction subject to the documentary stamp tax
under Section 180 of the same Code. These electronic
message instructions cannot be considered negotiable
instruments as they lack the feature of negotiability,
which, is the ability to be transferred (Words and
Phrases).
These instructions are considered as mere memoranda
and entered as such in the books of account of the local
bank, and the actual debiting of the payor’s local or
foreign currency account in the Philippines is the actual
transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions
dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the
instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE
in favor of Petitioner the amount of ₱30,360,570.75
representing erroneous payment of documentary stamp
tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant
petition is hereby partially granted. Accordingly,
respondent is hereby ORDERED to REFUND, or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in
favor of the petitioner in the reduced amount of
₱16,436,395.83 representing erroneously paid
documentary stamp tax for the months of September
1997 to December 1997.11
However, the Court of Appeals reversed both decisions
of the CTA and ruled that the electronic messages of
HSBC’s investor-clients are subject to DST. The Court
of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of
its investor-clients as regards their passive investments
in the Philippines mainly involving shares of stocks in
domestic corporations. These investor-clients maintain
Philippine peso and/or foreign currency accounts with
[HSBC]. Should they desire to purchase shares of stock
and other investments securities in the Philippines, the
investor-clients send their instructions and advises via
electronic messages from abroad to [HSBC] in the form
of SWIFT MT 100, MT 202, or MT 521 directing the
latter to debit their local or foreign currency account
and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42).
Pursuant to Section 181 of the NIRC, [HSBC] was thus
required to pay [DST] based on its acceptance of these
electronic messages – which, as [HSBC] readily admits
in its petition filed before the [CTA], were essentially
orders to pay the purchases of securities made by its
client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and
collected the [DST] from [HSBC] considering that the
said tax was levied against the acceptances and
payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether
such electronic messages may be equated as a written
document and thus be subject to tax is beside the point.
As We have already stressed, Section 181 of the law
cited earlier imposes the [DST] not on the bill of
exchange or order for payment of money but on the
acceptance or payment of the said bill or order. The
acceptance of a bill or order is the signification by the
drawee of its assent to the order of the drawer to pay a
given sum of money while payment implies not only
the assent to the said order of the drawer and a
recognition of the drawer’s obligation to pay such
aforesaid sum, but also a compliance with such
obligation (Philippine National Bank vs. Court of
Appeals, 25 SCRA 693 [1968]; Prudential Bank vs.
Intermediate Appellate Court, 216 SCRA 257 [1992]).
What is vital to the valid imposition of the [DST] under
Section 181 is the existence of the requirement of
acceptance or payment by the drawee (in this case,
[HSBC]) of the order for payment of money from its
investor-clients and that the said order was drawn from
a foreign country and payable in the Philippines. These
requisites are surely present here.
It would serve the parties well to understand the nature
of the tax being imposed in the case at bar. In
Philippine Home Assurance Corporation vs. Court of
Appeals (301 SCRA 443 [1999]), the Supreme Court
ruled that [DST is] levied on the exercise by persons of
certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships
through the execution of specific instruments,
independently of the legal status of the transactions
giving rise thereto. In the same case, the High Court
also declared – citing Du Pont vs. United States (300
U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an
excise upon the privilege, opportunity, or facility
offered at exchanges for the transaction of the business.
It is an excise upon the facilities used in the transaction
of the business separate and apart from the business
itself. x x x.
To reiterate, the subject [DST] was levied on the
acceptance and payment made by [HSBC] pursuant to
the order made by its client-investors as embodied in
the cited electronic messages, through which the herein
parties’ privilege and opportunity to transact business
respectively as drawee and drawers was exercised,
separate and apart from the circumstances and
conditions related to such acceptance and subsequent
payment of the sum of money authorized by the
concerned drawers. Stated another way, the [DST] was
exacted on [HSBC’s] exercise of its privilege under its
drawee-drawer relationship with its client-investor
through the execution of a specific instrument which, in
the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for
payment may be done in writing by the drawee in the
bill or order itself, or in a separate instrument
(Prudential Bank vs. Intermediate Appellate Court,
supra.)Here, [HSBC]’s acceptance of the orders for the
payment of money was veritably ‘done in writing in a
separate instrument’ each time it debited the local or
foreign currency accounts of its client-investors
pursuant to the latter’s instructions and advises sent by
electronic messages to [HSBC]. The [DST] therefore
must be paid upon the execution of the specified
instruments or facilities covered by the tax – in this
case, the acceptance by [HSBC] of the order for
payment of money sent by the client-investors through
electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed
grave error when it disregarded the factual and legal
conclusions of the CTA. According to HSBC, in the
absence of abuse or improvident exercise of authority,
the CTA’s ruling should not have been disturbed as the
CTA is a highly specialized court which performs
judicial functions, particularly for the review of tax
cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the
taxability of electronic messages involved in these
cases in BIR Ruling No. 132-99 and reiterated in BIR
Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other
hand, claims that Section 181 of the 1997 Tax Code
imposes DST on the acceptance or payment of a bill of
exchange or order for the payment of money. The DST
under Section 18 of the 1997 Tax Code is levied on
HSBC’s exercise of a privilege which is specifically
taxed by law. BIR Ruling No. 132-99 is inconsistent
with prevailing law and long standing administrative
practice, respondent is not barred from questioning his
own revenue ruling. Tax refunds like tax exemptions
are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under
Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable
in the Philippines" and that "a bill of exchange is an
unconditional order in writing addressed by one person
to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at
a fixed or determinable future time a sum certain in
money to order or to bearer." A bill of exchange is one
of two general forms of negotiable instruments under
the Negotiable Instruments Law.15
The Court further agrees with the CTA that the
electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or
foreign currency accounts in the Philippines and pay a
certain named recipient also residing in the Philippines
is not the transaction contemplated under Section 181
of the Tax Code as such instructions are "parallel to an
automatic bank transfer of local funds from a savings
account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the
finding of the CTA that the electronic messages
"cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to
be transferred" and that the said electronic messages are
"mere memoranda" of the transaction consisting of the
"actual debiting of the [investor-client-payor’s] local or
foreign currency account in the Philippines" and
"entered as such in the books of account of the local
bank," HSBC.16
More fundamentally, the instructions given through
electronic messages that are subjected to DST in these
cases are not negotiable instruments as they do not
comply with the requisites of negotiability under
Section 1 of the Negotiable Instruments Law, which
provides:
Sec. 1. Form of negotiable instruments.– An instrument
to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
The electronic messages are not signed by the
investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to
pay a sum certain in money as the payment is supposed
to come from a specific fund or account of the
investor-clients; and, they are not payable to order or
bearer but to a specifically designated third party. Thus,
the electronic messages are not bills of exchange. As
there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines,
there could have been no acceptance or payment that
will trigger the imposition of the DST under Section
181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs
HSBC’s claim for tax refund for taxable year 1998
subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of
Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be
collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos (₱200), or
fractional part thereof, of the face value of any such bill
of exchange, or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis
supplied.)
Section 230 of the 1977 Tax Code, as amended, which
governs HSBC’s claim for tax refund for DST paid
during the period September to December 1997 and
subject of G.R. No. 166018, is worded exactly the same
as its counterpart provision in the 1997 Tax Code
quoted above.
The origin of the above provision is Section 117 of the
Tax Code of 1904,17 which provided: SECTION 117.
The acceptor or acceptors of any bill of exchange or
order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but
payable in the Philippine Islands, shall, before paying
or accepting the same, place thereupon a stamp in
payment of the tax upon such document in the same
manner as is required in this Act for the stamping of
inland bills of exchange or promissory notes, and no
bill of exchange shall be paid nor negotiated until such
stamp shall have been affixed thereto.18 (Emphasis
supplied.)
It then became Section 30(h) of the 1914 Tax Code 19:
SEC. 30. Stamp tax upon documents and papers. –
Upon documents, instruments, and papers, and upon
acceptances, assignments, sales, and transfers of the
obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction
so had or accomplished shall be paid as hereinafter
prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such
act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance
of any bill of exchange or order for the payment of
money purporting to be drawn in a foreign country but
payable in the Philippine Islands, on each two hundred
pesos, or fractional part thereof, of the face value of any
such bill of exchange or order, or the Philippine
equivalent of such value, if expressed in foreign
currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section
39 of Revenue Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes
checks, drafts, and all other kinds of orders for the
payment of money, payable at sight or on demand, or
after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of
exchange or order for the payment of money drawn in a
foreign country but payable in this country whether at
sight or on demand or after a specified period after
sight or from a stated date, is presented for acceptance
or payment, there must be affixed upon acceptance or
payment of documentary stamp equal to P0.02 for each
₱200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code
of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of
Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be
collected a documentary stamp tax of four centavos on
each two hundred pesos, or fractional part thereof, of
the face value of any such bill of exchange or order, or
the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code, 22 as
amended by Presidential Decree Nos. 1457 and
1959,which, as stated earlier, was worded exactly as
Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of
exchange and others. – Upon any acceptance or
payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be
collected a documentary stamp tax of thirty centavos on
each two hundred pesos, or fractional part thereof, of
the face value of any such bill of exchange, or order, or
the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has
therefore remained substantially the same for the past
one hundred years.1âwphi1 The identical text and
common history of Section 230 of the 1977 Tax Code,
as amended, and the 1997 Tax Code, as amended, show
that the law imposes DST on either (a) the acceptance
or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad
but payable in the Philippines.
DST is an excise tax on the exercise of a right or
privilege to transfer obligations, rights or properties
incident thereto.23 Under Section 173 of the 1997 Tax
Code, the persons primarily liable for the payment of
the DST are those (1) making, (2) signing, (3) issuing,
(4) accepting, or (5) transferring the taxable documents,
instruments or papers.24
In general, DST is levied on the exercise by persons of
certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships
through the execution of specific instruments.
Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents,
are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real
property.25
As stated above, Section 230 of the 1977 Tax Code, as
amended, now Section 181 of the 1997 Tax Code,
levies DST on either (a) the acceptance or (b) the
payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable
in the Philippines. In other words, it levies DST as an
excise tax on the privilege of the drawee to accept or
pay a bill of exchange or order for the payment of
money, which has been drawn abroad but payable in
the Philippines, and on the corresponding privilege of
the drawer to have acceptance of or payment for the bill
of exchange or order for the payment of money which
it has drawn abroad but payable in the Philippines.
Acceptance applies only to bills of
exchange.26 Acceptance of a bill of exchange has a very
definite meaning in law.27 In particular, Section 132 of
the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. –
The acceptance of a bill [of exchange28] is the
signification by the drawee of his assent to the order of
the drawer. The acceptance must be in writing and
signed by the drawee. It must not express that the
drawee will perform his promise by any other means
than the payment of money.
Under the law, therefore, what is accepted is a bill of
exchange, and the acceptance of a bill of exchange is
both the manifestation of the drawee’s consent to the
drawer’s order to pay money and the expression of the
drawee’s promise to pay. It is "the act by which the
drawee manifests his consent to comply with the
request contained in the bill of exchange directed to
him and it contemplates an engagement or promise to
pay."29 Once the drawee accepts, he becomes an
acceptor.30 As acceptor, he engages to pay the bill of
exchange according to the tenor of his acceptance.31
Acceptance is made upon presentment of the bill of
exchange, or within 24 hours after such
presentment.32Presentment for acceptance is the
production or exhibition of the bill of exchange to the
drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the
instances where the law requires it.34 In the instances
where presentment for acceptance is not necessary, the
holder of the bill of exchange can proceed directly to
presentment for payment.
Presentment for payment is the presentation of the
instrument to the person primarily liable for the
purpose of demanding and obtaining payment thereof. 35
Thus, whether it be presentment for acceptance or
presentment for payment, the negotiable instrument has
to be produced and shown to the drawee for acceptance
or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the
acceptance or payment (of bills of exchange or orders
for the payment of money that have been drawn abroad
but payable in the Philippines) that is subjected to DST
under Section 181 of the 1997 Tax Code is done after
presentment for acceptance or presentment for payment,
respectively. In other words, the acceptance or payment
of the subject bill of exchange or order for the payment
of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or
order for the payment of money.
Applying the above concepts to the matter subjected to
DST in these cases, the electronic messages received by
HSBC from its investor-clients abroad instructing the
former to debit the latter's local and foreign currency
accounts and to pay the purchase price of shares of
stock or investment in securities do not properly qualify
as either presentment for acceptance or presentment for
payment. There being neither presentment for
acceptance nor presentment for payment, then there
was no acceptance or payment that could have been
subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of
exchange or order for the payment of money on the part
of HSBC. To reiterate, there was no bill of exchange or
order for the payment drawn abroad and made payable
here in the Philippines. Thus, there was no acceptance
as the electronic messages did not constitute the written
and signed manifestation of HSBC to a drawer's order
to pay money. As HSBC could not have been an
acceptor, then it could not have made any payment of a
bill of exchange or order for the payment of money
drawn abroad but payable here in the Philippines. In
other words, HSBC could not have been held liable for
DST under Section 230 of the 1977 Tax Code, as
amended, and Section 181 of the 1997 Tax Code as it is
not "a person making, signing, issuing, accepting, or,
transferring" the taxable instruments under the said
provision. Thus, HSBC erroneously paid DST on the
said electronic messages for which it is entitled to a tax
refund.
WHEREFORE, the petitions are hereby GRANTED
and the Decisions dated May 2, 2002 in CTA Case No.
6009 and dated December 18, 2002 in CT A Case No.
5951 of the Court of Tax Appeals are REINSTATED.
SO ORDERED.
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice
ChairpersonBIENVENIDO L. REYES
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution,
I certify that the conclusions in the above Decision had
been reached in consultation before the case was
assigned to the writer of the opinion of the Court's
Division.
MARIA LOURDES P. A. SERENO
Chief Justice
Footnotes
1
Under Rule 45 of the Rules of Court.
2
Rollo (G.R. No. 166018), pp. 27-37; penned by
Associate Justice Conrado M. Vasquez, Jr. with
Associate Justices Josefina Guevara-Salonga and
Fernanda Lampas Peralta, concurring.
3
Rollo (G.R. No. 167728), pp. 31-4 l; penned by
Associate Justice Marina L. Buzon with Associate
Justices Mario L. Guariña lII and Hakim S.
Abdulwahid, concurring.
4 20
Rollo (G.R. No. 166018), pp. 39-48.
5
Rollo (G.R. No. 167728), pp. 48-64.
6
Id. at 32.
7
Id.
8
Id. at 44-47.
9
Id. at 55.
10
Id. at 63.
11
Rollo (G.R. No. 166018), p. 47.
12
Rollo (G.R. No. 167728), pp. 37-39.
13
Id. at 174-187; Memorandum for HSBC, pp. 13-26.
14
14
Memorandum for the Commissioner of Internal
Revenue, Rollo (G.R. No. 166018), pp. 154-161.
15
The other type is the promissory note. See Titles II
and III, Negotiable Instruments Law.
16
Rollo (G.R. No. 167728), p. 55.
17
Act No. 1189.
18
SECTION 116. There shall be levied, collected, and
paid for and in respect to the several bonds, debentures,
or certificates of stock and of indebtedness, and other
documents, instruments, matters, and things mentioned
and described in this section, or for or in respect to the
vellum, parchment, or paper upon which such
instruments, matters, or things or any of them shall be
written or printed by any person or persons who shall
make, sign, or issue the same, on and after January first,
nineteen hundred and five, the several taxes following:
xxxx
Second. x x x (b) on all bills of exchange (between
points within the Philippine Islands), drafts and
certificates of deposit drawing interest, or order for the
payment of any sum of money otherwise than at sight
or on demand, and on all promissory notes, except bank
notes issued for circulation, and on each renewal of any
such note, on each two hundred pesos or fractional part
thereof, of the face value of any such bill of exchange,
draft, certificate of deposit, or note, two centavos; x x
x.
19
Act No. 2339, February 27, 1914.
Dated March 26, 1924. Entitled "Revised
Documentary Stamp Tax Regulations."
21
Commonwealth Act No. 466, June 15 1939.
22
Presidential Decree No. 1158, June 3, 1977.
23
Michel J. Lhuillier Pawnshop, Inc. v. Commissioner
of Internal Revenue, 522 Phil. 693, 698 (2006).
24
Philacor Credit Corporation v. Commissioner of
Internal Revenue, G.R. No. 169899, February 6, 2013,
690 SCRA 28, 37.
25
Michel J. Lhuillier Pawnshop, Inc. v. Commissioner
of Internal Revenue, supra note 23 at 698-699.
26
Philacor Credit Corporation v. Commissioner of
Internal Revenue, supra note 24.
A bill of exchange is defined under Section 126 of the
Negotiable Instruments Law as follows:
Sec. 126. Bill of exchange, defined.– A bill of
exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
27
Id. In this case, the Court stated that "acceptance" has
"a narrow definition" with respect to foreign bills of
exchange, and it is not limited to the common usage of
the word "accepting" as in receiving.
28
The relevant portion of Section 191 of the Negotiable
Instruments Law provides that "Bill" "means bill of
exchange."
29
Hunt v. Security State Bank, 179 Pac. 248 (1919),
cited in De Leon, Hector, The Philippine Negotiable
Instruments Law (and Allied Laws) Annotated (2010
edition), p. 343.
30
De Leon, id. at 239.
31
See Section 62, Negotiable Instruments Law.
32
Sec. 136 of the Negotiable Instruments Law provides:
Sec. 136. Time allowed drawee to accept.– The drawee
is allowed twenty-four hours after presentment in
which to decide whether or not he will accept the bill;
the acceptance, if given, dates as of the day of
presentation.

33
Campos, Jose Jr., Notes and Selected Cases on
Negotiable Instruments Law (5th Edition), pp. 709-
710.

34
Section 143 of the Negotiable Instruments Law
enumerates the cases where presentment for acceptance
is essential:

Sec. 143. When presentment for

acceptance must be made.–
Presentment for acceptance must be
made:

(a) Where the bill is payable after

sight, or in any other case, where
presentment for acceptance is
necessary in order to fix the maturity
of the instrument; or

(b) Where the bill expressly stipulates

that it shall be presented for
acceptance; or

(c) Where the bill is drawn payable

elsewhere than at the residence or
place of business of the drawee.

In no other case is presentment for

acceptance necessary in order to
render any party to the bill liable.

35
Campos, supra note 33, p. 715.
Republic of the Philippines On August 4, 1983, the spouses and Avelino
SUPREME COURT signed a promissory note under which they bound
Manila themselves to pay jointly and severally to the order of
VMSC the amount of PhP 209,601 in 36 monthly
SECOND DIVISION installments of PhP 5,822.25 a month, the first
installment to be due and payable on September 16,
1983. Avelino prepared a Disclosure Statement of
SPS. PEDRO AND G.R. No. 158262
Loan/Credit Transportation which showed the net
FLORENCIA purchase price of the vehicle, down payment, balance,
VIOLAGO, Present: and finance charges. VMSC then issued a sales invoice
Petitioners, in favor of the spouses with a detailed description of
QUISUMBING, J., the Toyota Cressida car. In turn, the spouses executed a
Chairperson, chattel mortgage over the car in favor of VMSC as
YNARES-SANTIAG security for the amount of PhP 209,601. VMSC,
- versus - O,* through Avelino, endorsed the promissory note to BA
CARPIO MORALES, Finance without recourse. After receiving the amount
TINGA, and of PhP 209,601, VMSC executed a Deed of
VELASCO, JR., JJ. Assignment of its rights and interests under the
promissory note and chattel mortgage in favor of BA
Finance. Meanwhile, the spouses remitted the amount
BA FINANCE
of PhP 60,500 to VMSC through Avelino.[4]
CORPORATION Promulgated:
and AVELINO
VIOLAGO, July 21, 2008 The sales invoice was filed with the Land
Respondents. Transportation Office (LTO)-Baliwag Branch, which
x----------------------------------------------------------------- issued Certificate of Registration No. 0137032 in the
------------------------x name of Pedro on August 8, 1983. The spouses were
unaware that the same car had already been sold in
DECISION 1982 to Esmeraldo Violago, another cousin of Avelino,
VELASCO, JR., J.: and registered in Esmeraldos name by the LTO-San
Rafael Branch. Despite the spouses demand for the car
and Avelinos repeated assurances, there was no
This is a Petition for Review on Certiorari of delivery of the vehicle. Since VMSC failed to deliver
the August 20, 2002 Decision[1] and May 15, 2003 the car, Pedro did not pay any monthly amortization to
Resolution[2] of the Court of Appeals (CA) in CA-G.R. BA Finance. [5]
CV No. 48489 entitled BA Finance Corporation,
Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, On March 1, 1984, BA Finance filed with the
Defendants and Third Party Plaintiffs-Appellants v. Regional Trial Court (RTC), Branch 116
Avelino Violago, Third Party in Pasay City a complaint for Replevin with Damages
Defendant-Appellant.Petitioners-spouses Pedro and against the spouses. The complaint, docketed as Civil
Florencia Violago pray for the reversal of the appellate Case No. 1628-P, prayed for the delivery of the vehicle
courts ruling which held them liable to respondent BA in favor of BA Finance or, if delivery cannot be
Finance Corporation (BA Finance) under a promissory effected, for the payment of PhP 199,049.41 plus
note and a chattel mortgage. Petitioners likewise pray penalty at the rate of 3% per month from February 15,
that respondent Avelino Violago be adjudged directly 1984 until fully paid. BA Finance also asked for the
liable to BA Finance. payment of attorneys fees, liquidated damages, replevin
The Facts bond premium, expenses in the seizure of the vehicle,
and costs of suit. The RTC issued an Order of Replevin
Sometime in 1983, Avelino Violago, President on March 28, 1984. The Violago spouses, as
of Violago Motor Sales Corporation (VMSC), offered defendants a quo, were declared in default for failing to
to sell a car to his cousin, Pedro F. Violago, and the file an answer. Eventually, the RTC rendered
latters wife, Florencia.Avelino explained that he needed on December 3, 1984 a decision in favor of BA
to sell a vehicle to increase the sales quota of VMSC, Finance. A writ of execution was thereafter issued
and that the spouses would just have to pay a down on January 11, 1985, followed by an alias writ of
payment of PhP 60,500 while the balance would be execution.[6]
financed by respondent BA Finance. The spouses
would pay the monthly installments to BA Finance In the meantime, Esmeraldo conveyed the
while Avelino would take care of the documentation vehicle to Jose V. Olvido who was then issued
and approval of financing of the car. Under these terms, Certificate of Registration No. 0014830-4 by the
the spouses then agreed to purchase a Toyota Cressida LTO-Cebu City Branch on April 29, 1985. On May 8,
Model 1983 from VMSC.[3] 1987, Jose executed a Chattel Mortgage over the
vehicle in favor of Generoso Lopez as security for a
loan covered by a promissory note in the amount of
PhP 260,664.This promissory note was later endorsed
to BA Finance, Cebu City branch.[7]
On August 21, 1989, the spouses Violago filed
a Motion for Reconsideration and Motion to Quash
Writ of Execution on the basis of lack of a valid service
of summons on them, among other reasons. The RTC
denied the motions; hence, the spouses filed a petition
for certiorari under Rule 65 before the CA, docketed as
CA G.R. No. 2002-SP. On May 31, 1991, the CA
nullified the RTCs order. This CA decision became
final and executory.
On January 28, 1992, the spouses filed their
Answer before the RTC, alleging the following: they
never received the vehicle from VMSC; the vehicle
was previously sold to Esmeraldo; BA Finance was not
a holder in due course under Section 59 of
the Negotiable Instruments Law (NIL); and the
recourse of BA Finance should be against
VMSC. On February 25, 1995, the Violago spouses,
with prior leave of court, filed a Third Party Complaint
against Avelino praying that he be held liable to them
in the event that they be held liable to BA Finance, as
well as for damages. VMSC was not impleaded as third
party defendant. In his Motion to Dismiss and Answer,
Avelino contended that he was not a party to the
transaction personally, but VMSC. Avelinos motion
was denied and the third party complaint against him
was entertained by the trial court. Subsequently, the
spouses belabored to prove that they affixed their
signatures on the promissory note and chattel mortgage
in favor of VMSC in blank.[8]
The RTC rendered a Decision on March 5,
1994, finding for BA Finance but against the Violago
spouses. The RTC, however, declared that they are
entitled to be indemnified by Avelino. The dispositive
portion of the RTCs decision reads:
WHEREFORE,
defendant-[third]-party plaintiffs
spouses Pedro F. Violago and
Florencia R. Violago are ordered to
deliver to plaintiff BA Finance
Corporation, at its principal office the
BAFC Building, Gamboa St.,
Legaspi Village, Makati, Metro
Manila the Toyota Cressida car,
model 1983, bearing Engine No.
21R-02854117, and with Serial No.
RX60-804614, covered by the deed
of chattel mortgage dated August 4,
1983; or if such delivery cannot be
made, to pay, jointly and severally, to
the plaintiff the sum of P198,003.06
together with the penalty [thereon] at
three percent (3%) a month, from
March 1, 1984, until the amount is
fully paid.
In either case, the
defendant-third-party plaintiffs are
required to pay, jointly and severally,
to the plaintiff a sum equivalent to
twenty-five percent (25%) of
P198,003.06 as attorneys fees, and
another amount also equivalent to
twenty five percent (25%) of the said
unpaid balance, as liquidated
damages. The defendant-third
party-plaintiffs are also required to
shoulder the litigation expenses and
costs.
As indemnification, third-party
defendant Avelino Violago is ordered
to deliver to defendants-third-party
plaintiffs spouses Pedro F. Violago
and Florencia R. Violago the
aforedescribed motor vehicle; or if
such delivery is not possible, to pay
to the said spouses the sum of
P198,003.06, together with the
penalty thereon at three (3%) a month
from March 1, 1984, until the amount
is entirely paid.
In either case, the third-party
defendant should pay to the
defendant-third-party plaintiffs
spouses a sum equivalent to
twenty-five percent (25%) of
P198,003.06 as attorneys fees, and
another sum equivalent also to
twenty-five percent (25%) of the said
unpaid balance, as liquidated
damages.
Third-party defendant Avelino
Violago is further ordered to return to
the third-party plaintiffs the sum of
P60,500.00 they paid to him as down
payment for the car; and to pay them
P15,000.00 as moral damages;
P10,000.00 as exemplary damages;
and reimburse them for all the
expenses and costs of the suit.
The counterclaims of the defendants
and third-party defendant, for lack of
merit, are dismissed.[9]
The Ruling of the CA
Petitioners-spouses and Avelino appealed to
the CA. The spouses argued that the promissory note is
a negotiable instrument; hence, the trial court should
have applied the NIL and not the Civil Code. The
spouses also asserted that since VMSC was not the
owner of the vehicle at the time of sale, the sale was
null and void for the failure in the cause or
consideration of the promissory note, which in this case NOTE MAY BE CONSIDERED A
was the sale and delivery of the vehicle. The spouses HOLDER IN DUE COURSE
also alleged that BA Finance was not a holder in due
course of the note since it knew, through WHETHER OR NOT A CHATTEL
its Cebu City branch, that the car was never delivered MORTGAGE SHOULD BE
to the spouses.[10] On the other hand, Avelino prayed CONSIDERED VALID DESPITE
for the dismissal of the complaint against him because
VITIATION OF CONSENT OF,
he was not a party to the transaction, and for an order to
AND THE FRAUD COMMITTED
the spouses to pay him moral damages and costs of suit.
ON, THE MORTGAGORS BY
The appellate court ruled that the promissory AVELINO, AND THE CLEAR
note was a negotiable instrument and that BA Finance ABSENCE OF OBJECT CERTAIN
was a holder in due course, applying Secs. 8, 24, and 52
of the NIL. The CA faulted petitioners for failing to WHETHER OR NOT THE VEIL OF
implead VMSC, the seller of the vehicle and creditor in CORPORATE ENTITY MAY BE
the promissory note, as a party in their Third Party INVOKED AND SUSTAINED
Complaint. Citing Salas v. Court of Appeals,[11] the DESPITE THE FRAUD AND
appellate court reasoned that since VMSC is an DECEPTION OF AVELINO
indispensable party, any judgment will not bind it or be
enforced against it. The absence of VMSC rendered the
proceedings in the RTC and the judgment in the Third The Courts Ruling
Party Complaint null and void, not only as to the absent
party but also to the present parties, namely the The ruling of the appellate court is set aside
Defendants-Appellants (petitioners herein) and the insofar as it dismissed, without prejudice, the third
Third-Party-Defendant-Appellant (Avelino party complaint of petitioners against Avelino thereby
Violago). The CA set aside the trial courts order effectively absolving Avelino from any liability under
holding Avelino liable for damages to the spouses the third party complaint.
without prejudice to the action of the spouses against
VMSC and Avelino in a separate action.[12] In addressing the threshold issue of whether
BA Finance is a holder in due course of the promissory
The dispositive portion of the August 20, note, we must determine whether the note is a
2002 CA Decision reads: negotiable instrument and, hence, covered by the
NIL. In their appeal to the CA, petitioners argued that
IN THE LIGHT OF ALL THE the promissory note is a negotiable instrument and that
FOREGOING, the appeal of the the provisions of the NIL, not the Civil Code, should be
Plaintiffs-Appellants applied. In the present petition, however, petitioners
is DISMISSED. The appeal of the claim that Article 1318 of the Civil Code[14] should be
Third-Party-Defendant-Appellant applied since their consent was vitiated by fraud, and,
is GRANTED. The Decision of the thus, the promissory note does not carry any legal
Court a quo is AFFIRMED, with the effect despite its negotiation. Either way, the petitioners
modification that the Third-Party arguments deserve no merit.
Complaint against the
Third-Party-Defendant-appellant The promissory note is clearly negotiable. The
appellate court was correct in finding all the requisites
is DISMISSED, without
of a negotiable instrument present. The NIL provides:
prejudice. The counterclaims of the
Third-Party Defendant Appellant Section 1. Form of Negotiable
against the Defendants-Appellants Instruments. An instrument to be
are DISMISSED, also without negotiable must conform to the
prejudice.[13] following requirements:
(a) It must be in writing and
The spouses Violago sought but were denied
signed by the maker or drawer;
reconsideration by the CA per its Resolution of May 15,
(b) Must contain an
2003.
unconditional promise or order to pay
a sum certain in money;
The Issues (c) Must be payable on
demand, or at a fixed or determinable
Petitioners raise the following issues: future time;
(d) Must be payable to order
WHETHER OR NOT THE or to bearer; and
HOLDER OF AN INVALID (e) Where the instrument is
NEGOTIABLE PROMISSORY addressed to a drawee, he must be
 named or otherwise indicated therein AVELINO A. VIOLAGO, Pres. [15]
with reasonable certainty.

The promissory note clearly satisfies the

The promissory note signed by petitioners
reads:
209,601.00 Makati,
Metro Manila, Philippines, August 4,
1983
For value received, I/we, jointly and
severally, promise to pay to the order
of VIOLAGO MOTOR SALES
CORPORATION, its office, the
principal sum of TWO HUNDRED
NINE THOUSAND SIX HUNDRED
ONE ONLY Pesos (P209,601.00),
Philippines Currency, with interest at
the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly
installments of P5,822.25, the first
installment to be paid on 9-16-83,
and the succeeding monthly
installments on the 16th day of each
and every succeeding month
thereafter until the account is fully
paid, provided that the penalty charge
of three (3%) per cent per month or a
fraction thereof shall be added on
each unpaid installment from
maturity thereof until fully paid.
xxxx
Notice of demand, presentment,
dishonor and protest are hereby
waived.
requirements of a negotiable instrument under the
NIL. It is in writing; signed by the Violago spouses; has
an unconditional promise to pay a certain amount, i.e.,
PhP 209,601, on specific dates in the future which
could be determined from the terms of the note; made
payable to the order of VMSC; and names the drawees
with certainty. The indorsement by VMSC to BA
Finance appears likewise to be valid and regular.
The more important issue now is whether or
not BA Finance is a holder in due course. The
resolution of this issue will determine whether
petitioners defense of fraud and nullity of the sale could
validly be raised against respondent corporation. Sec.
52 of the NIL provides:
Section 52. What constitutes a holder
in due course.A holder in due course
is a holder who has taken the
instrument under the following
conditions:
(a) That it is complete and
regular upon its face;
(b) That he became the holder
of it before it was overdue, and
without notice that it had been
previously dishonored, if such was
the fact;
(c) That he took it in good faith
and for value;
(d) That at the time it was
negotiated to him he had no notice of
any infirmity in the instrument or
defect in the title of the person
negotiating it.

(Sgd.) (Sgd.) The law presumes that a holder of a negotiable

PEDRO F. VIOLAGO FLORENCIA instrument is a holder thereof in due course. [16] In this
R. VIOLAGO case, the CA is correct in finding that BA Finance
meets all the foregoing requisites:
763 Constancia St.,
In the present recourse, on its face, (a)
Sampaloc, Manila same
the Promissory Note, Exhibit A, is
(Address) (Address)
complete and regular; (b)
the Promissory Note was endorsed
(Sgd.) (Sgd.)
by the VMSC in favor of the
Marivic Avaria Jesus Tuazon
Appellee; (c) the Appellee, when it
(WITNESS) (WITNESS)
accepted the Note, acted in good faith
and for value; (d) the Appellee was
PAY TO THE ORDER OF BA
never informed, before and at the
FINANCE CORPORATION
time the Promissory Note was
WITHOUT RECOURSE
endorsed to the Appellee, that the
VIOLAGO MOTOR SALES
vehicle sold to the
CORPORATION
Defendants-Appellants was not
By: (Sgd.)
delivered to the latter and that VMSC
 had already previously sold the
vehicle to Esmeraldo
Violago. Although Jose Olvido
mortgaged the vehicle to Generoso
Lopez, who assigned his rights to the
BA Finance Corporation (Cebu
Branch), the same occurred only
on May 8, 1987, much later
than August 4, 1983, when VMSC
assigned its rights over the Chattel
Mortgage by the
Defendants-Appellants to the
Appellee. Hence, Appellee was a
holder in due course.[17]
In the hands of one other than a holder in due
course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.[18] A holder in
due course, however, holds the instrument free from
any defect of title of prior parties and from defenses
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount
thereof.[19] Since BA Finance is a holder in due course,
petitioners cannot raise the defense of non-delivery of
the object and nullity of the sale against the
corporation. The NIL considers every negotiable
instrument prima facie to have been issued for a
valuable consideration.[20] In Salas, we held that a party
holding an instrument may enforce payment of the
instrument for the full amount thereof. As
such, the maker cannot set up the defense of nullity of
the contract of sale.[21] Thus, petitioners are liable to
respondent corporation for the payment of the amount
stated in the instrument.
From the third party complaint to the present
petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged
directly liable to BA Finance. Petitioners likewise pray
for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of
corporation law that a corporation is
an entity separate and distinct from
its stockholders and from other
corporations to which it may be
connected. But, this separate and
distinct personality of a corporation is
merely a fiction created by law for
convenience and to promote
justice. So, when the notion of
separate juridical personality is used
to defeat public convenience, justify
wrong, protect fraud or defend crime,
or is used as a device to defeat the
labor laws, this separate personality
of the corporation may be
disregarded or the veil of corporate
fiction pierced. This is true likewise
when the corporation is merely an
adjunct, a business conduit or an alter
ego of another corporation.
xxxx
The test in determining the
applicability of the doctrine of
piercing the veil of corporate fiction
is as follows:
1. Control, not mere majority or
complete stock control, but
complete domination, not only
of finances but of policy and
business practice in respect to
the transaction attacked so that
the corporate entity as to this
transaction had at the time no
separate mind, will or existence
of its own;
2. Such control must have been
used by the defendant to commit
fraud or wrong, to perpetuate
the violation of a statutory or
other positive legal duty, or
dishonest and unjust acts in
contravention of plaintiffs legal
rights; and
3. The aforesaid control and
breach of duty must proximately
cause the injury or unjust loss
complained of.[22]
This case meets the foregoing test. VMSC is a
family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the
vehicle to petitioners, a vehicle that was previously sold
to Avelinos other cousin, Esmeraldo. Nowhere in the
pleadings did Avelino refute the fact that the vehicle in
this case was already previously sold to Esmeraldo; he
merely insisted that he cannot be held liable because he
was not a party to the transaction. The fact that Avelino
and Pedro are cousins, and that Avelino claimed to
have a need to increase the sales quota, was likely
among the factors which motivated the spouses to buy
the car. Avelino, knowing fully well that the vehicle
was already sold, and with abuse of his relationship
with the spouses, still proceeded with the sale and
collected the down payment from petitioners. The trial
court found that the vehicle was not delivered to the
spouses. Avelino clearly defrauded petitioners. His
actions were the proximate cause of petitioners loss. He
cannot now hide behind the separate corporate
personality of VMSC to escape from liability for the
amount adjudged by the trial court in favor of
petitioners.
The fact that VMSC was not included as
defendant in petitioners third party complaint does not
preclude recovery by petitioners from Avelino; neither Remedios Salazar-Fernando and Danilo B. Pine (now
would such non-inclusion constitute a bar to the retired).
application of the piercing-of-the-corporate-veil [2]
Id. at 30-31.
doctrine. We suggested as much in Arcilla v. Court of [3]
Id. at 15.
Appeals, an appellate proceeding involving petitioner [4]
Id. at 15-16.
Arcillas bid to avoid the adverse CA decision on the [5]
Id.
argument that he is not personally liable for the amount [6]
Id. at 16-17.
adjudged since the same constitutes a corporate liability [7]
Id. at 18.
which nevertheless cannot even be enforced against the [8]
corporation which has not been impleaded as a party Id. at 18-19.
[9]
below. In that case, the Court found as well-taken the Id.
[10]
CAs act of disregarding the separate juridical Id. at 20-26.
[11]
personality of the corporation and holding its president, G.R. No. 76788, January 22, 1990, 181
Arcilla, liable for the obligations incurred in the name SCRA 296.
of the corporation although it was not a party to the [12]
Rollo, p. 19.
collection suit before the trial court. An excerpt [13]
Supra note 1, at 27.
from Arcilla: [14]
Art. 1318. There is no contract unless the
following requisites concur:
x x x In short, even if We (1) Consent of the contracting parties;
are to assume arguendo that the (2) Object certain which is the subject
obligation was incurred in the name matter of the contract;
of the corporation, the petitioner (3) Cause of the obligation which is
[Arcilla] would still be personally established.
liable therefor because for all legal [15]
Rollo, p. 21.
intents and purposes, he and the [16]
NIL, Sec. 59.
corporation are one and the same. [17]
Rollo, p. 25.
Csar Marine Resources, Inc. is [18]
NIL, Sec. 58.
nothing more than his business [19]
Id., Sec. 57.
conduit and alter ego. The fiction of [20]
Id., Sec. 24.
separate juridical personality [21]
Supra note 11, at 302-303.
conferred upon such corporation by [22]
G.R. No. 108734, May 29, 1996, 257
law should be disregarded. SCRA 149, 157-159.
Significantly, petitioner does not [23]
G.R. No. 89804, October 23, 1992, 215
seriously challenge the [CAs] SCRA 120, 129.
application of the doctrine which
permits the piercing of the corporate
veil and the disregarding of the
fiction of a separate juridical
personality; this is because he knows
only too well that from the beginning,
he merely used the corporation for his
personal purposes.[23]
WHEREFORE, the CAs August 20,
2002 Decision and May 15, 2003 Resolution in
CA-G.R. CV No. 48489 are SET ASIDE insofar as
they dismissed without prejudice the third party
complaint of petitioners-spouses Pedro and Florencia
Violago against respondent Avelino Violago. The
March 5, 1994 Decision of the RTC
is REINSTATED and AFFIRMED. Costs against
Avelino Violago.

SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice

*
Additional member as per Special Order No. 509
dated July 1, 2008.
[1]
Rollo, pp. 14-28. Penned by Associate
Justice Romeo J. Callejo, Sr. (former member of this
Court) and concurred in by Associate Justices
 Corporation v. Salas", which modified the decision of
the Regional Trial Court of San Fernando, Pampanga in
Civil Case No. 5915, a collection suit between the same
parties.

Records disclose that on February 6, 1980, Juanita

Salas (hereinafter referred to as petitioner) bought a
motor vehicle from the Violago Motor Sales
Corporation (VMS for brevity) for P58,138.20 as
evidenced by a promissory note. This note was
subsequently endorsed to Filinvest Finance & Leasing
Corporation (hereinafter referred to as private
respondent) which financed the purchase.

Petitioner defaulted in her installments beginning May

21, 1980 allegedly due to a discrepancy in the engine
and chassis numbers of the vehicle delivered to her and
those indicated in the sales invoice, certificate of
registration and deed of chattel mortgage, which fact
she discovered when the vehicle figured in an accident
on 9 May 1980.

This failure to pay prompted private respondent to

initiate Civil Case No. 5915 for a sum of money against
petitioner before the Regional Trial Court of San
Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court

held, thus:

WHEREFORE, and in view of all the foregoing,

judgment is hereby rendered ordering the defendant to
pay the plaintiff the sum of P28,414.40 with interest
Republic of the Philippines thereon at the rate of 14% from October 2, 1980 until
SUPREME COURT the said sum is fully paid; and the further amount of
Manila P1,000.00 as attorney's fees.

THIRD DIVISION The counterclaim of defendant is dismissed.

G.R. No. 76788 January 22, 1990 With costs against defendant. 1

JUANITA SALAS, petitioner, Both petitioner and private respondent appealed the
vs. aforesaid decision to the Court of Appeals.
HON. COURT OF APPEALS and FIRST
FINANCE & LEASING Imputing fraud, bad faith and misrepresentation against
CORPORATION, respondents. VMS for having delivered a different vehicle to
petitioner, the latter prayed for a reversal of the trial
Arsenio C. Villalon, Jr. for petitioner. court's decision so that she may be absolved from the
Labaguis, Loyola, Angara & Associates for private obligation under the contract.
respondent.
On October 27, 1986, the Court of Appeals rendered its
assailed decision, the pertinent portion of which is
quoted hereunder:
FERNAN, C.J.:
The allegations, statements, or admissions contained in
Assailed in this petition for review on certiorari is the a pleading are conclusive as against the pleader. A
decision of the Court of Appeals in C.A.-G.R. CV No. party cannot subsequently take a position contradictory
00757 entitled "Filinvest Finance & Leasing of, or inconsistent with his pleadings (Cunanan vs.
Amparo, 80 Phil. 227). Admissions made by the parties
in the pleadings, or in the course of the trial or other
proceedings, do not require proof and cannot be
contradicted unless previously shown to have been
made through palpable mistake (Sec. 2, Rule 129,
Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023,
Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written
instrument, copied in or attached to the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall
be deemed admitted unless the adverse party, under
oath, specifically denied them, and sets forth what he
claims to be the facts (Sec. 8, Rule 8, Revised Rules of
Court; Hibbered vs. Rohde and McMillian, 32 Phil.
476).
A perusal of the evidence shows that the amount of
P58,138.20 stated in the promissory note is the amount
assumed by the plaintiff in financing the purchase of
defendant's motor vehicle from the Violago Motor
Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the
defendant was able to pay twice (as admitted by the
plaintiff, defendant's account became delinquent only
beginning May, 1980) or in the total sum of P3,229.90,
she is therefore liable to pay the remaining balance of
P54,908.30 at l4% per annum from October 2, 1980
until full payment.
WHEREFORE, considering the foregoing, the appealed
decision is hereby modified ordering the defendant to
pay the plaintiff the sum of P54,908.30 at 14% per
annum from October 2, 1980 until full payment. The
decision is AFFIRMED in all other respects. With costs
to defendant. 2
Petitioner's motion for reconsideration was denied;
hence, the present recourse.
In the petition before us, petitioner assigns twelve (12)
errors which focus on the alleged fraud, bad faith and
misrepresentation of Violago Motor Sales Corporation
in the conduct of its business and which fraud, bad faith
and misrepresentation supposedly released petitioner
from any liability to private respondent who should
instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the
law on sales by description 4 which she alleges is
applicable here, no contract ever existed between her
and VMS and therefore none had been assigned in
favor of private respondent.
She contends that it is not necessary, as opined by the
appellate court, to implead VMS as a party to the case
before it can be made to answer for damages because
VMS was earlier sued by her for "breach of contract
with damages" before the Regional Trial Court of
Olongapo City, Branch LXXII, docketed as Civil Case
No. 2916-0. She cites as authority the decision therein
where the court originally ordered petitioner to pay the
remaining balance of the motor vehicle installments in
the amount of P31,644.30 representing the difference
between the agreed consideration of P49,000.00 as
shown in the sales invoice and petitioner's initial
downpayment of P17,855.70 allegedly evidenced by a
receipt. Said decision was however reversed later on,
with the same court ordering defendant VMS instead to
return to petitioner the sum of P17,855.70.
Parenthetically, said decision is still pending
consideration by the First Civil Case Division of the
Court of Appeals, upon an appeal by VMS, docketed as
AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the
dismissal of the petition and counters that the issues
raised and the allegations adduced therein are a mere
rehash of those presented and already passed upon in
the court below, and that the judgment in the "breach of
contract" suit cannot be invoked as an authority as the
same is still pending determination in the appellate
court.
We see no cogent reason to disturb the challenged
decision.
The pivotal issue in this case is whether the promissory
note in question is a negotiable instrument which will
bar completely all the available defenses of the
petitioner against private respondent.
Petitioner's liability on the promissory note, the due
execution and genuineness of which she never denied
under oath is, under the foregoing factual milieu, as
inevitable as it is clearly established.
The records reveal that involved herein is not a simple
case of assignment of credit as petitioner would have it
appear, where the assignee merely steps into the shoes
of, is open to all defenses available against and can
enforce payment only to the same extent as, the
assignor-vendor.
Recently, in the case of Consolidated Plywood
Industries Inc. v. IFC Leasing and Acceptance
Corp., 6 this Court had the occasion to clearly
distinguish between a negotiable and a non-negotiable
instrument.
Among others, the instrument in order to be considered
negotiable must contain the so-called "words of
negotiability — i.e., must be payable to "order" or
"bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must
always be a specified person named in the instrument
and the bill or note is to be paid to the person
designated in the instrument or to any person to whom
he has indorsed and delivered the same. Without the
words "or order or "to the order of", the instrument is
payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder
of a negotiable instrument, but will merely "step into
the shoes" of the person designated in the instrument
and will thus be open to all defenses available against
the latter. Such being the situation in the above-cited
case, it was held that therein private respondent is not a
holder in due course but a mere assignee against whom
all defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different.
Indubitably, the basis of private respondent's claim
against petitioner is a promissory note which bears all
the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise
to pay Violago Motor Sales Corporation or order, at its
office in San Fernando, Pampanga, the sum of FIFTY
EIGHT THOUSAND ONE HUNDRED THIRTY
EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said
principal sum, to be payable, without need of notice or
demand, in installments of the amounts following and
at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and
payable on the 21st day of each month starting March
21, 1980 thru and inclusive of February 21, 1983.
P_________ monthly for ______ months due and
payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________
provided that interest at 14% per annum shall be added
on each unpaid installment from maturity hereof until
fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING
CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note
shows that it is a negotiable instrument, having
complied with the requisites under the law as follows:
[a] it is in writing and signed by the maker Juanita
Salas; [b] it contains an unconditional promise to pay
the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is "P1,614.95 monthly
for 36 months due and payable on the 21 st day of each
month starting March 21, 1980 thru and inclusive of
Feb. 21, 1983;" [d] it is payable to Violago Motor Sales
Corporation, or order and as such, [e] the drawee is
named or indicated with certainty. 9
It was negotiated by indorsement in writing on the
instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation 10 and it is an
indorsement of the entire instrument. 11
Under the circumstances, there appears to be no
question that Filinvest is a holder in due course, having
taken the instrument under the following conditions: [a]
it is complete and regular upon its face; [b] it became
the holder thereof before it was overdue, and without
notice that it had previously been dishonored; [c] it
took the same in good faith and for value; and [d] when
it was negotiated to Filinvest, the latter had no notice of
any infirmity in the instrument or defect in the title of
VMS Corporation. 12
Accordingly, respondent corporation holds the
instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument
for the full amount thereof. 13 This being so, petitioner
cannot set up against respondent the defense of nullity
of the contract of sale between her and VMS.
Even assuming for the sake of argument that there is an
iota of truth in petitioner's allegation that there was in
fact deception made upon her in that the vehicle she
purchased was different from that actually delivered to
her, this matter cannot be passed upon in the case
before us, where the VMS was never impleaded as a
party.
Whatever issue is raised or claim presented against
VMS must be resolved in the "breach of contract" case.
13 Section 57, Negotiable Instruments Law;
Consolidated Plywood Industries, Inc. v. IFC
Leasing and Acceptance Corporation, (supra).
14 Rollo, pp. 22-23.

Hence, we reach a similar opinion as did respondent

court when it held:

We can only extend our sympathies to the defendant

(herein petitioner) in this unfortunate incident. Indeed,
there is nothing We can do as far as the Violago Motor
Sales Corporation is concerned since it is not a party in
this case. To even discuss the issue as to whether or not
the Violago Motor Sales Corporation is liable in the
transaction in question would amount, to denial of due
process, hence, improper and unconstitutional. She
should have impleaded Violago Motor Sales.14

IN VIEW OF THE FOREGOING, the assailed decision

is hereby AFFIRMED. With costs against petitioner.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortés, JJ., concur.

Footnotes

1 Rollo, p. 21.

2 Rollo, pp. 23-24.

3 Rollo, pp. 57-59.

4 Art. 1481, New Civil Code.

5 Rollo, p. 10.

6 149 SCRA 459 (1987).

7 Ibid.

8 Ex. "7 "; Folder of Exhibits.

9 Section 1, Negotiable Instruments Law, emphasis

supplied.

10 Section 31, NIL.

11 Section 32, NIL.

12 Section 52, NIL.


Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST
COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS &
LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA
CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for
petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson &
Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for
respondent Golden Savings & Loan Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a
simple question of negligence. The facts, pruned of all
non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial
bank with branches throughout the Philippines and
even abroad. Golden Savings and Loan Association
was, at the time these events happened, operating in
Calapan, Mindoro, with the other private respondents
as its principal officers.
In January 1979, a certain Eduardo Gomez opened an
account with Golden Savings and deposited over a
period of two months 38 treasury warrants with a total
value of P1,755,228.37. They were all drawn by the
Philippine Fish Marketing Authority and purportedly
signed by its General Manager and countersigned by
its Auditor. Six of these were directly payable to
Gomez while the others appeared to have been
indorsed by their respective payees, followed by
Gomez as second indorser.1
On various dates between June 25 and July 16, 1979,
all these warrants were subsequently indorsed by
Gloria Castillo as Cashier of Golden Savings and
deposited to its Savings Account No. 2498 in the
Metrobank branch in Calapan, Mindoro. They were
then sent for clearing by the branch office to the
31
principal office of Metrobank, which forwarded them
to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria
Castillo went to the Calapan branch several times to
ask whether the warrants had been cleared. She was
told to wait. Accordingly, Gomez was meanwhile not
allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also
as an accommodation for a "valued client," the
petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the
amount of P508,000.00, the second on July 13, 1979,
in the amount of P310,000.00, and the third on July 16,
1979, in the amount of P150,000.00. The total
withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez
to make withdrawals from his own account,
eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently
cleared warrants. The last withdrawal was made on
July 16, 1979.
On July 21, 1979, Metrobank informed Golden
Savings that 32 of the warrants had been dishonored
by the Bureau of Treasury on July 19, 1979, and
demanded the refund by Golden Savings of the
amount it had previously withdrawn, to make up the
deficit in its account.
The demand was rejected. Metrobank then sued
Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor
of Golden Savings, which, however, filed a motion for
reconsideration even as Metrobank filed its notice of
appeal. On November 4, 1986, the lower court
modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the
plaintiff;
2. Dissolving and lifting the writ of attachment of the
properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno
Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of
debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was
made including the amount of P812,033.37 in favor of
defendant Golden Savings and Loan Association, Inc.
and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden
Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses
Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was
affirmed, prompting Metrobank to file this petition for
review on the following grounds:
1. Respondent Court of Appeals erred in disregarding
and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to
charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which
cannot be held liable for its failure to collect on the
warrants.
2. Under the lower court's decision, affirmed by
respondent Court of Appeals, Metrobank is made to
pay for warrants already dishonored, thereby
perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding
that as between Metrobank and Golden Savings, the
latter should bear the loss.
4. Respondent Court of Appeals erred in holding that
the treasury warrants involved in this case are not
negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to
the Court that Metrobank was indeed negligent in
giving Golden Savings the impression that the
treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw
the proceeds thereof from his account with it. Without
such assurance, Golden Savings would not have
allowed the withdrawals; with such assurance, there
was no reason not to allow the withdrawal. Indeed,
32
Golden Savings might even have incurred liability for
its refusal to return the money that to all appearances
belonged to the depositor, who could therefore
withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury
warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld
from Gomez until Metrobank allowed Golden Savings
itself to withdraw them from its own deposit. 7 It was
only when Metrobank gave the go-signal that Gomez
was finally allowed by Golden Savings to withdraw
them from his own account.
The argument of Metrobank that Golden Savings
should have exercised more care in checking the
personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury
warrants were subject to clearing, pending which the
depositor could not withdraw its proceeds. There was
no question of Gomez's identity or of the genuineness
of his signature as checked by Golden Savings. In fact,
the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers,
not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted
with due care and diligence and cannot be faulted for
the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary
carelessness. The amount involved was not trifling —
more than one and a half million pesos (and this was
1979). There was no reason why it should not have
waited until the treasury warrants had been cleared; it
would not have lost a single centavo by waiting. Yet,
despite the lack of such clearance — and
notwithstanding that it had not received a single
centavo from the proceeds of the treasury warrants, as
it now repeatedly stresses — it allowed Golden
Savings to withdraw — not once, not twice, but thrice
— from the uncleared treasury warrants in the total
amount of P968,000.00
Its reason? It was "exasperated" over the persistent
inquiries of Gloria Castillo about the clearance and it
also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply
because of "the lapse of one week." 8 For a bank with
its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank
would invoke the conditions printed on the dorsal side
of the deposit slips through which the treasury
warrants were deposited by Golden Savings with its
Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the
bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in
selecting correspondents, and until such time as actual
payment shall have come into possession of this
bank, the right is reserved to charge back to the
depositor's account any amount previously credited,
whether or not such item is returned. This also applies
to checks drawn on local banks and bankers and their
branches as well as on this bank, which are unpaid
due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly
show that it was acting only as a collecting agent for
Golden Savings and give it the right to "charge back
to the depositor's account any amount previously
credited, whether or not such item is returned. This
also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft
of any other reason." It is claimed that the said
conditions are in the nature of contractual stipulations
and became binding on Golden Savings when Gloria
Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of
the conditions, considering that they have apparently
been imposed by the bank unilaterally, without the
consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so
only to identify himself and not to agree to the
conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter
at this time. At any rate, the Court feels that even if
the deposit slip were considered a contract, the
petitioner could still not validly disclaim
responsibility thereunder in the light of the
circumstances of this case.
In stressing that it was acting only as a collecting
agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary,
Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for
fraud, but also for negligence, which shall be judged
'with more or less rigor by the courts, according to
whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently
established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it
33
was already safe to allow Gomez to withdraw the
proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have
been no express clearance, as Metrobank insists
(although this is refuted by Golden Savings) but in
any case that clearance could be implied from its
allowing Golden Savings to withdraw from its account
not only once or even twice but three times. The total
withdrawal was in excess of its original balance
before the treasury warrants were deposited, which
only added to its belief that the treasury warrants had
indeed been cleared.
Metrobank's argument that it may recover the disputed
amount if the warrants are not paid for any reason is
not acceptable. Any reason does not mean no reason
at all. Otherwise, there would have been no need at all
for Golden Savings to deposit the treasury warrants
with it for clearance. There would have been no need
for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a
condition, if interpreted in the way the petitioner
suggests, is not binding for being arbitrary and
unconscionable. And it becomes more so in the case at
bar when it is considered that the supposed dishonor
of the warrants was not communicated to Golden
Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's
earlier negligence in giving express or at least implied
clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not
all. On top of this, the supposed reason for the
dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer
corporation, has not been established.9 This was the
finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of
Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et
al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done
in the present case.
A no less important consideration is the circumstance
that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face
is the word "non-negotiable." Moreover, and this is of
equal significance, it is indicated that they are payable
from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments
Law, especially the underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An
instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An
unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with —
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to
be debited with the amount; or
(b) A statement of the transaction which gives rise to
the instrument judgment.
But an order or promise to pay out of a particular
fund is not unconditional.
The indication of Fund 501 as the source of the
payment to be made on the treasury warrants makes
the order or promise to pay "not unconditional" and
the warrants themselves non-negotiable. There should
be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case
at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith
and for value of a negotiable instrument and is entitled
to the rights and privileges of a holder in due course,
free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For
one thing, the document bearing on its face the words
"payable from the appropriation for food
administration, is actually an Order for payment out of
"a particular fund," and is not unconditional and does
not fulfill one of the essential requirements of a
negotiable instrument (Sec. 3 last sentence and section
[1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the
warrants in general, Golden Savings assumed that
they were "genuine and in all respects what they
purport to be," in accordance with Section 66 of the
34
Negotiable Instruments Law. The simple reason is that
this law is not applicable to the non-negotiable
treasury warrants. The indorsement was made by
Gloria Castillo not for the purpose of guaranteeing the
genuineness of the warrants but merely to deposit
them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped
on the back of the warrants: "All prior indorsement
and/or lack of endorsements guaranteed, Metropolitan
Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai
Corporation v. Bank of the Philippine Islands,12 but
we feel this case is inapplicable to the present
controversy.1âwphi1 That case involved checks
whereas this case involves treasury warrants. Golden
Savings never represented that the warrants were
negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of
forgery was proved in that case but not in the case
before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without
question from one Antonio Ramirez notwithstanding
that the payee was the Inter-Island Gas Services, Inc.
and it did not appear that he was authorized to indorse
it. No similar negligence can be imputed to Golden
Savings.
We find the challenged decision to be basically
correct. However, we will have to amend it insofar as
it directs the petitioner to credit Golden Savings with
the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored
was P1,754,089.00, from which Gomez was allowed
to withdraw P1,167,500.00 before Golden Savings
was notified of the dishonor. The amount he has
withdrawn must be charged not to Golden Savings but
to Metrobank, which must bear the consequences of
its own negligence. But the balance of P586,589.00
should be debited to Golden Savings, as obviously
Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of
the warrants. Gomez has in fact disappeared. To also
credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the
fact that it has already been informed of the dishonor
of the treasury warrants.
WHEREFORE, the challenged decision is
AFFIRMED, with the modification that Paragraph 3
of the dispositive portion of the judgment of the lower
court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of
P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw Assailed in this Petition for Review on Certiorari is
the amount outstanding thereon, if any, after the debit. the Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer
SO ORDERED. of Central Bank Certificate of Indebtedness (CBCI)
No. D891,2 with a face value of P500,000.00, from the
Narvasa, Gancayco, Griño-Aquino and Medialdea, Philippine Underwriters Finance Corporation
JJ., concur. (Philfinance) to the petitioner Trader's Royal Bank
(TRB), under a Repurchase Agreement3 dated
February 4, 1981, and a Detached Assignment4dated
April 27, 1981.
Footnotes
Docketed as Civil Case No. 83-17966 in the Regional
1 Trial Court of Manila, Branch 32, the action was
Rollo, pp. 12-13.
originally filed as a Petition for Mandamus5 under
2
Rule 65 of the Rules of Court, to compel the Central
Ibid., p. 52. Bank of the Philippines to register the transfer of the
subject CBCI to petitioner Traders Royal Bank
3
Id., p. 14. (TRB).

4
Id. In the said petition, TRB stated that:

5
Through Judge Marciano T. Virola. 3. On November 27, 1979, Filriters Guaranty
Assurance Corporation (Filriters) executed a
6
Penned by Ejercito, J., with Pe and Victor, JJ., "Detached Assignment" . . ., whereby Filriters, as
concurring. registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance
7 Corporation (Philfinance) all its rights and title to
Rollo, p. 84.
Central Bank Certificates of Indebtedness of PESOS:
8
TSN, July 29, 1983, p. 20. FIVE HUNDRED THOUSAND (P500,000) and
having an aggregate value of PESOS: THREE
9
Rollo, p. 61. MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
10
143 SCRA 20.
4. The aforesaid Detached Assignment (Annex "A")
11 contains an express authorization executed by the
81 Phil. 359.
transferor intended to complete the assignment
12 through the registration of the transfer in the name of
66 SCRA 29.F
PhilFinance, which authorization is specifically
phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer
the said bond/certificates on the books of its fiscal
Republic of the Philippines agent;
SUPREME COURT
Manila 5. On February 4, 1981, petitioner entered into a
Repurchase Agreement with PhilFinance . . ., whereby,
SECOND DIVISION for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance
G.R. No. 93397 March 3, 1997 sold, transferred and delivered to petitioner CBCI
4-year, 8th series, Serial No. D891 with a face value
TRADERS ROYAL BANK, petitioner, of P500,000.00 . . ., which CBCI was among those
vs. previously acquired by PhilFinance from Filriters as
COURT OF APPEALS, FILRITERS averred in paragraph 3 of the Petition;
GUARANTY ASSURANCE CORPORATION and
CENTRAL BANK of the 6. Pursuant to the aforesaid Repurchase Agreement
PHILIPPINES, respondents. (Annex "B"), Philfinance agreed to repurchase CBCI
Serial No. D891 (Annex "C"), at the stipulated price
TORRES, JR., J.: of PESOS: FIVE HUNDRED NINETEEN

35
THOUSAND THREE HUNDRED SIXTY-ONE &
11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the
agreed date of maturity, April 27, 1981, when the
checks it issued in favor of petitioner were dishonored
for insufficient funds;
8. Owing to the default of PhilFinance, it executed a
Detached Assignment in favor of the Petitioner to
enable the latter to have its title completed and
registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred and
assigned all, its rights and title in the said CBCI
(Annex "C") to petitioner and, furthermore, it did
thereby "irrevocably authorize the said issuer
(respondent herein) to transfer the said
bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"),
together with the two (2) aforementioned Detached
Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and
requested the latter to effect the transfer of the CBCI
on its books and to issue a new certificate in the name
of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the
transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over
the same and despite repeated demands in writing, the
latest of which is hereto attached as Annex "E" and
made an integral part hereof;
11. The express provisions governing the transfer of
the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said
office (where the Certificate has been registered) by
the registered owner hereof, in person or by his
attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer
fee which may be required, a new Certificate shall be
issued to the transferee of the registered holder
thereof."
and, without a doubt, the Detached Assignments
presented to respondent were sufficient authorizations
in writing executed by the registered owner, Filriters,
and its transferee, PhilFinance, as required by the
above-quoted provision;
12. Upon such compliance with the aforesaid
requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a
36
new certificate to the transferee devolves upon the
respondent;
Upon these assertions, TRB prayed for the registration
by the Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the
case took cognizance of the defendant Central Bank of
the Philippines' Motion for Admission of Amended
Answer with Counter Claim for Interpleader 6 thereby
calling to fore the respondent Filriters Guaranty
Assurance Corporation (Filriters), the registered
owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses
the following:
11. Respondent is the registered owner of CBCI No.
891;
12. The CBCI constitutes part of the reserve
investment against liabilities required of respondent as
an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever
to Filriters, in violation of law and the trust fund
doctrine and to the prejudice of policyholders and to
all who have present or future claim against policies
issued by Filriters, Alfredo Banaria, then Senior
Vice-President-Treasury of Filriters, without any
board resolution, knowledge or consent of the board
of directors of Filriters, and without any clearance or
authorization from the Insurance Commissioner,
executed a detached assignment purportedly assigning
CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior
Vice-President-Comptroller are Pilar Jacobe,
Vice-President-Treasury of Filriters (both of whom
were holding the same positions in Philfinance),
without any consideration or benefit redounding to
Filriters and to the grave prejudice of Filriters, its
policy holders and all who have present or future
claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and
inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and
not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No.
769;
16. The assignment of the CBCI to Philfinance is a
personal act of Alfredo Banaria and not the corporate
act of Filriters and such null and void;
a) The assignment was executed without consideration
and for that reason, the assignment is void from the
beginning (Article 1409, Civil Code);
b) The assignment was executed without any
knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of
Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an
insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal act
in the sense of malum in se or malum prohibitum, for
anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments
of Filriters is expressly prohibited by law, is immoral
and against public policy;
e) The assignment of the CBCI has resulted in the
capital impairment and in the solvency deficiency of
Filriters (and has in fact helped in placing Filriters
under conservatorship), an inevitable result known to
the officer who executed assignment.
17. Plaintiff had acted in bad faith and with
knowledge of the illegality and invalidity of the
assignment.
a) The CBCI No. 891 is not a negotiable instrument
and as a certificate of indebtedness is not payable to
bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides
that the Central Bank shall treat the registered owner
as the absolute owner and that the value of the
registered certificates shall be payable only to the
registered owner; a sufficient notice to plaintiff that
the assignments do not give them the registered
owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and
Regulations Governing CBCIs) provides that the
registered certificates are payable only to the
registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by
Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary
course of business;
37
a) The CBCI constitutes part of the reserve
investments of Filriters against liabilities requires by
the Insurance Code and its assignment or transfer is
expressly prohibited by law. There was no attempt to
get any clearance or authorization from the Insurance
Commissioner;
b) The assignment by Filriters of the CBCI is clearly
not a transaction in the usual or regular course of its
business;
c) The CBCI involved substantial amount and its
assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which
requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional
Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance,
and the subsequent assignment of the same CBCI by
Philfinance in favor of Traders Royal Bank null and
void and of no force and effect. The dispositive
portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in
favor of the respondent Filriters Guaranty Assurance
Corporation and against the plaintiff Traders Royal
Bank:
(a) Declaring the assignment of CBCI No. 891 in
favor of PhilFinance, and the subsequent assignment
of CBCI by PhilFinance in favor of the plaintiff
Traders Royal Bank as null and void and of no force
and effect;
(b) Ordering the respondent Central Bank of the
Philippines to disregard the said assignment and to
pay the value of the proceeds of the CBCI No. D891
to the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay
respondent Filriters Guaranty Assurance Corp. The
sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in
the Court of Appeals 10, but their appeals likewise
failed. The findings of the fact of the said court are
hereby reproduced:
The records reveal that defendant Filriters is the
registered owner of CBCI No. D891. Under a deed of
assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891,
which was still registered in the name of Filriters, to
appellant Traders Royal Bank (TRB). The transfer
was made under a repurchase agreement dated
February 4, 1981, granting Philfinance the right to
repurchase the instrument on or before April 27, 1981.
When Philfinance failed to buy back the note on
maturity date, it executed a deed of assignment, dated
April 27, 1981, conveying to appellant TRB all its
right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought
the transfer and registration of CBCI No. D891 in its
name before the Security and Servicing Department of
the Central Bank (CB). Central Bank, however,
refused to effect the transfer and registration in view
of an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil
action for mandamus against the Central Bank in the
Regional Trial Court of Manila. The suit, however,
was subsequently treated by the lower court as a case
of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and
the court adjudge which of them is entitled to the
ownership of CBCI No. D891. Failing to get a
favorable judgment. TRB now comes to this Court on
appeal. 11
In the appellate court, petitioner argued that the
subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a
holder in due course, its possession of the same is thus
free fro any defect of title of prior parties and from
any defense available to prior parties among
themselves, and it may thus, enforce payment of the
instrument for the full amount thereof against all
parties liable thereon. 12
In ignoring said argument, the appellate court that the
CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to
Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the
words of negotiability which serve as an expression of
consent that the instrument may be transferred by
negotiation.
Obviously, the assignment of the certificate from
Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central
Bank Circular No. 769, series of 1980, better known
as the "Rules and Regulations Governing Central
Bank Certificates of Indebtedness", which provided
that any "assignment of registered certificates shall not
be valid unless made . . . by the registered owner
38
thereof in person or by his representative duly
authorized in writing."
Petitioner's claimed interest has no basis, since it was
derived from Philfinance whose interest was
inexistent, having acquired the certificate through
simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister
corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the
deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters
to act for the latter. For lack of such authority, the
assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No.
769 which has the force and effect of a law, resulting
in the nullity of the transfer (People v. Que Po Lay, 94
Phil. 640; 3M Philippines, Inc. vs. Commissioner of
Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under
CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register
with the Central Bank.
WHEREFORE, the judgment appealed from is
AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the
argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical
corporate officers, thus demanding the application of
the doctrine or piercing the veil of corporate fiction, as
to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the
payment by TRB to Philfinance of CBCI, as actual
payment to Filriters. Thus, there is no merit to the
lower court's ruling that the transfer of the CBCI from
Filriters to Philfinance was null and void for lack of
consideration.
Admittedly, the subject CBCI is not a negotiable
instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law
(Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for
value received, hereby promises to pay bearer, of if
this Certificate of indebtedness be registered, to
FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND
PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness
pertains to certificates for the creation and
maintenance of a permanent improvement revolving
fund, is similar to a "bond," (82 Minn. 202). Being
equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum
of money. It is usually used for the purpose of long
term loans.
The appellate court ruled that the subject CBCI is not
a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay
Filriters Guaranty Assurance Corporation, the
registered owner hereof." Very clearly, the instrument
is payable only to Filriters, the registered owner,
whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an
expression of consent that the instrument may be
transferred by negotiation.15
A reading of the subject CBCI indicates that the same
is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else,
thus, discounting the petitioner's submission that the
same is a negotiable instrument, and that it is a holder
in due course of the certificate.
The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom
to circulate as a substitute for money. Hence, freedom
of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom
of negotiability is the foundation for the protection
which the law throws around a holder in due course
(11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely
to pay a sum of money to a specified person or entity
for a period of time.
As held in Caltex (Philippines), Inc. v. Court of
Appeals, 16:
The accepted rule is that the negotiability or
non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument
itself. In the construction of a bill or note, the
39
intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light
of surrounding circumstance in order to more
perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be
the only outward and visible expression of their
meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what
their words express, but what is the meaning of the
words they have used. What the parties meant must be
determined by what they said.
Thus, the transfer of the instrument from Philfinance
to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The
pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently
from Philfinance to TRB, in accord with existing law,
so as to entitle TRB to have the CBCI registered in its
name with the Central Bank?
The following are the appellate court's
pronouncements on the matter:
Clearly shown in the record is the fact that
Philfinance's title over CBCI No. D891 is defective
since it acquired the instrument from Filriters
fictitiously. Although the deed of assignment stated
that the transfer was for "value received", there was
really no consideration involved. What happened was
Philfinance merely borrowed CBCI No. D891 from
Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete
nullity.
What is more, We find that the transfer made by
Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise
known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official
Gazette on November 19, 1980, Section 3 thereof
provides that any assignment of registered certificates
shall not be valid unless made . . . by the registered
owner thereof in person or by his representative duly
authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the
deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters
to act for the latter. For lack of such authority, the
assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No.
769 which has the force and effect of a law, resulting
in the nullity of the transfer (People vs. Que Po Lay,
94 Phil. 640; 3M Philippines, Inc. vs. Commissioner
of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under
CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register
with the Central Bank
Petitioner now argues that the transfer of the subject
CBCI to TRB must upheld, as the respondent Filriters
and Philfinance, though separate corporate entities on
paper, have used their corporate fiction to defraud
TRB into purchasing the subject CBCI, which
purchase now is refused registration by the Central
Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the
two companies have the same corporate officers, if the
principle of piercing the veil of corporate entity were
to be applied in this case, then TRB's payment to
Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from
claiming, as it has, that it never received any payment
for that CBCI sold and that said CBCI was sold
without its authority.
xxx xxx xxx
We respectfully submit that, considering that the
Court of Appeals has held that the CBCI was merely
borrowed by Philfinance from Filriters, a sister
corporation, to guarantee its (Philfinance's) financing
operations, if it were to be consistent therewith, on the
issued raised by TRB that there was a piercing a veil
of corporate entity, the Court of Appeals should have
ruled that such veil of corporate entity was, in fact,
pierced, and the payment by TRB to Philfinance
should be construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil
of corporate entity, as this merely an equitable remedy,
and may be awarded only in cases when the corporate
fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of
a person. 18
Peiercing the veil of corporate entity requires the court
to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could
be subject to, or distinguished one corporation from a
seemingly separate one, were it not for the existing
40
corporate fiction. But to do this, the court must be sure
that the corporate fiction was misused, to such an
extent that injustice, fraud, or crime was committed
upon another, disregarding, thus, his, her, or its rights.
It is the protection of the interests of innocent third
persons dealing with the corporate entity which the
law aims to protect by this doctrine.
The corporate separateness between Filriters and
Philfinance remains, despite the petitioners insistence
on the contrary. For one, other than the allegation that
Filriters is 90% owned by Philfinance, and the identity
of one shall be maintained as to the other, there is
nothing else which could lead the court under
circumstance to disregard their corporate
personalities.
Though it is true that when valid reasons exist, the
legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders
and from other corporations may be disregarded, 19 in
the absence of such grounds, the general rule must
upheld. The fact that Filfinance owns majority shares
in Filriters is not by itself a ground to disregard the
independent corporate status of Filriters. In Liddel &
Co., Inc. vs. Collector of Internal Revenue, 20 the mere
ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate
personalities.
In the case at bar, there is sufficient showing that the
petitioner was not defrauded at all when it acquired
the subject certificate of indebtedness from
Philfinance.
On its face the subject certificates states that it is
registered in the name of Filriters. This should have
put the petitioner on notice, and prompted it to inquire
from Filriters as to Philfinance's title over the same or
its authority to assign the certificate. As it is, there is
no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make
inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision
on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery
unless it is registered in the owner's name at any office
of the Bank or any agency duly authorized by the
Bank, and such registration is noted hereon. After
such registration no transfer thereof shall be valid
unless made at said office (where the Certificates has
been registered) by the registered owner hereof, in
person, or by his attorney, duly authorized in writing
and similarly noted hereon and upon payment of a
nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the
registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer
of this Certificate, or if this Certificate is registered as
herein authorized, the person in whose name the same
is registered as the absolute owner of this Certificate,
for the purpose of receiving payment hereof, or on
account hereof, and for all other purpose whether or
not this Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a
written authorization for the transfer or to require
Philfinance to submit such an authorization from
Filriters.
Petitioner knew that Philfinance is not registered
owner of the CBCI No. D891. The fact that a
non-owner was disposing of the registered CBCI
owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance
to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB
Circular No. 769, series of 1990 21, known as the
Rules and Regulations Governing Central Bank
Certificates of Indebtedness, Section 3, Article V of
which provides that:
Sec. 3. Assignment of Registered Certificates. —
Assignment of registered certificates shall not be valid
unless made at the office where the same have been
issued and registered or at the Securities Servicing
Department, Central Bank of the Philippines, and by
the registered owner thereof, in person or by his
representative, duly authorized in writing. For this
purpose, the transferee may be designated as the
representative of the registered owner.
Petitioner, being a commercial bank, cannot feign
ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate
agents within circumstances showing that the agents
are acting in excess of corporate authority, may not
hold the corporation liable. 22 This is only fair, as
everyone must, in the exercise of his rights and in the
performance of his duties, act with justice, give
everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not
conform to the said. Central Bank Circular, which for
all intents, is considered part of the law. As found by
the courts a quo, Alfredo O. Banaria, who had signed
the deed of assignment from Filriters to Philfinance,
purportedly for and in favor of Filriters, did not have
the necessary written authorization from the Board of
Directors of Filriters to act for the latter. As it is, the
41
sale from Filriters to Philfinance was fictitious, and
therefore void and inexistent, as there was no
consideration for the same. This is fatal to the
petitioner's cause, for then, Philfinance had no title
over the subject certificate to convey the Traders
Royal Bank. Nemo potest nisi quod de jure potest —
no man can do anything except what he can do
lawfully.
Concededly, the subject CBCI was acquired by
Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a
mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his
testimony given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of
Indebtedness, in short, CBCI No. D891 in the face
value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be
examined by the Insurance Commission sometime in
early 1981 and this CBCI No. 891 was among the
CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you
have the knowledge of this CBCI No. 891 before
1981?
A Yes, sir. This CBCI is an investment of Filriters
required by the Insurance Commission as legal reserve
of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required
to put up legal reserves under Section 213 of the
Insurance Code equivalent to 40 percent of the
premiums receipt and further, the Insurance
Commission requires this reserve to be invested
preferably in government securities or government
binds. This is how this CBCI came to be purchased by
the company.
It cannot, therefore, be taken out of the said funds,
without violating the requirements of the law. Thus,
the anauthorized use or distribution of the same by a
corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of
Directors, and the maintenance of the required reserve
fund.
Consequently, the title of Filriters over the subject 19 Guatson International Travel and Tours, Inc. vs.
certificate of indebtedness must be upheld over the National Labor Relations Commission, 230 SCRA
claimed interest of Traders Royal Bank. 815.

ACCORDINGLY, the petition is DISMISSED and the 20 2 SCRA 632.

decision appealed from dated January 29, 1990 is
hereby AFFIRMED. 21 Official Gazette 9370.

SO ORDERED. 22 See Article 1883, Civil Code.

Regalado, Romero and Mendoza, JJ., concur. 23 See Article 19, Civil Code.

Puno, J., took no part. 24 Sec. 213 Every insurance company, other than life,
shall maintain a reserve fro unearned premiums on its
Footnotes policies in force, which shall be charged as a liability
in any determination of its financial condition. Such
1 Justice Ricardo L. Pronove, Jr., ponente; concurred reserve shall be equal to forty per centum of the gross
in by Justices Alfredo L. Benipayo and Serafain V.C. permiums, less returns and cancellations, received on
Guingona, p. 18, Rollo. policies or risks having more than a year to
run; Provided That for marine cargo risks, the reserve
2 P. 143, Record. shall be equal to forty per centum of the premiums
written in the policies upon yearly risks, and the full
3 Ibid. at p. 146. amount of premiums written during the last two
months of the calendar year upon all other marine
risks not terminated. Presidential Decree No. 612 (The
4 Ibid., at p. 148.
Insurance Code of the Philippines).

5 P. 1, Record.

6 P. 75, Record.

7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.

15 Campos and Campos, Negotiable Instruments Law,

p. 38, 1971 ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245

SCRA 134.

42

THIRD DIVISION
[G. R. No. 126568. April 30, 2003]
QUIRINO GONZALES LOGGING
CONCESSIONAIRE, QUIRINO
GONZALES and EUFEMIA
GONZALES, petitioners, vs. THE COURT
OF APPEALS (CA) and REPUBLIC
PLANTERS BANK, respondents.
DECISION
CARPIO-MORALES, J.:
In the expansion of its logging business, petitioner
Quirino Gonzales Logging Concessionaire (QGLC),
through its proprietor, general manager - co-petitioner
Quirino Gonzales, applied on October 15, 1962 for credit
accommodations[1] with respondent Republic Bank (the
Bank), later known as Republic Planters Bank.
The Bank approved QGLCs application on
December 21, 1962, granting it a credit line
of P900,000.00[2] broken into an overdraft line
of P500,000.00 which was later reduced to P450,000.00
and a Letter of Credit (LC) line of P400,000.00.[3]
Pursuant to the grant, the Bank and petitioners
QGLC and the spouses Quirino and Eufemia Gonzales
executed ten documents: two denominated Agreement for
Credit in Current Account,[4]four denominated
Application and Agreement for Commercial Letter of
Credit,[5] and four denominated Trust Receipt.[6]
Petitioners obligations under the credit line were
secured by a real estate mortgage on four parcels of
land: two in Pandacan, Manila, one in Makati (then part
of Rizal), and another in Diliman, Quezon City.[7]
In separate transactions, petitioners, to secure certain
advances from the Bank in connection with QGLCs
exportation of logs, executed a promissory note in 1964 in
favor of the Bank. They were to execute three more
promissory notes in 1967.
In 1965, petitioners having long defaulted in the
payment of their obligations under the credit line, the
Bank foreclosed the mortgage and bought the properties
covered thereby, it being the highest bidder in the auction
sale held in the same year. Ownership over the properties
was later consolidated in the Bank on account of which
new titles thereto were issued to it.[8]
On January 27, 1977, alleging non-payment of the
balance of QGLCs obligation after the proceeds of the
43
foreclosure sale were applied thereto, and non-payment of
the promissory notes despite repeated demands, the Bank
filed a complaint for sum of money (Civil Case No.
106635) against petitioners before the Regional Trial
Court (RTC) of Manila.
The complaint listed ten causes of action. The first
concerns the overdraft line under which the Bank claimed
that petitioners withdrew amounts (unspecified) at twelve
percent per annum which were unpaid at maturity and that
after it applied the proceeds of the foreclosure sale to the
overdraft debt, there remained an unpaid balance
of P1,224,301.56.
The Banks second to fifth causes of action pertain to
the LC line under which it averred that on the strength of
the LCs it issued, the beneficiaries thereof drew and
presented sight drafts to it which it all paid after
petitioners acceptance; and that it delivered the tractors
and equipment subject of the LCs to petitioners who have
not paid either the full or part of the face value of the
drafts.
Specifically with respect to its second cause of
action, the Bank alleged that it issued LC No. 63-0055D
on January 15, 1963 in favor of Monark International
Incorporated[9] covering the purchase of a tractor[10] on
which the latter allegedly drew a sight draft with a face
value of P71,500.00,[11] which amount petitioners have
not, however, paid in full.
Under its third cause of action, the Bank charged
that it issued LC No. 61-1110D on December 27, 1962
also in favor of Monark International covering the
purchase of another tractor and other equipment;[12] and
that Monark International drew a sight draft with a face
value of P80,350.00,[13] and while payments for the value
thereof had been made by petitioners, a balance
of P68,064.97 remained.
Under the fourth cause of action, the Bank
maintained that it issued LC No. 63-0182D on February
11, 1963 in favor of J.B.L. Enterprises, Inc. [14] covering
the purchase of two tractors,[15] and J.B.L. Enterprises
drew on February 13, 1963 a sight draft on said LC in the
amount of P155,000.00 but petitioners have not paid said
amount.
On its fifth cause of action, the Bank alleged that it
issued LC No. 63-0284D on March 14, 1963 in favor of
Super Master Auto Supply (SMAS) covering the purchase
of Eight Units GMC (G.I.) Trucks; that on March 14,
1963, SMAS drew a sight draft with a face value
of P64,000.00[16] on the basis of said LC; and that the
payments made by petitioners for the value of said draft
were deficient by P45,504.74.
The Bank thus prayed for the settlement of the
above-stated obligations at an interest rate of eleven
percent per annum, and for the award of trust receipt
commissions, attorneys fees and other fees and costs of
collection.
 The sixth to ninth causes of action are anchored on
the promissory notes issued by petitioners allegedly to
secure certain advances from the Bank in connection with
the exportation of logs as reflected above.[17] The notes
were payable 30 days after date and provided for the
solidary liability of petitioners as well as attorneys fees at
ten percent of the total amount due[18] in the event of their
non-payment at maturity.
The note dated June 18, 1964, subject of the sixth
cause of action, has a face value of P55,000.00 with
interest rate of twelve percent per annum;[19] that dated
July 7, 1967 subject of the seventh has a face value
of P20,000.00;[20] that dated July 18, 1967 subject of the
eighth has a face value of P38,000.00;[21] and that dated
August 23, 1967 subject of the ninth has a face value
of P11,000.00.[22] The interest rate of the last three notes
is pegged at thirteen percent per annum.[23]
On its tenth and final cause of action, the Bank
claimed that it has accounts receivable from petitioners in
the amount of P120.48.
In their Answer[24] of March 3, 1977, petitioners
admit the following: having applied for credit
accommodations totaling P900,000.00 to secure which
they mortgaged real properties; opening of the LC/Trust
Receipt Line; the issuance by the Bank of the various
LCs; and the foreclosure of the real estate mortgage and
the consolidation of ownership over the mortgaged
properties in favor of the Bank. They deny, however,
having availed of the credit accommodations and having
received the value of the promissory notes, as they do
deny having physically received the tractors and
equipment subject of the LCs.
As affirmative defenses, petitioners assert that the
complaint states no cause of action, and assuming that it
does, the same is/are barred by prescription or null and
void for want of consideration.
By Order of March 10, 1977, Branch 36 of the
Manila RTC attached the preferred shares of stocks of the
spouses Quirino and Eufemia Gonzales with the Bank
with a total par value of P414,000.00.
Finding for petitioners, the trial court rendered its
Decision of April 22, 1992 the dispositive portion of
which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described
in the first to the tenth causes of action of its complaint
are denied for the reasons earlier mentioned in the body of
this decision;
2. As regards the claims of defendants pertaining to their
counterclaim (Exhibits 1, 2 and 3), they are hereby given
ten (10) years from the date of issuance of the torrens title
to plaintiff and before the transfer thereof in good faith to
44
a third party buyer within which to ask for the
reconveyance of the real properties foreclosed by plaintiff,
3. The order of attachment which was issued against the
preferred shares of stocks of defendants-spouses Quirino
Gonzales and Eufemia Gonzales with the Republic Bank
now known as Republic Planters Bank dated March 21,
1977 is hereby dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum
of P20,000.00, as and for attorneys fees, with costs
against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court
ratiocinated:[25]
Art. 1144 of the Civil Code states that an action upon a
written contract prescribes in ten (10) years from the time
the right of action accrues. Art. 1150 states that
prescription starts to run from the day the action may be
brought. The obligations allegedly created by the written
contracts or documents supporting plaintiffs first to the
sixth causes of action were demandable at the latest in
1964. Thus when the complaint was filed on January 27,
1977 more than ten (10) years from 1964 [when the
causes of action accrued] had already lapsed. The first to
the sixth causes of action are thus barred by
prescription. . . .
As regards the seventh and eight causes of action, the
authenticity of which documents were partly in doubt in
the light of the categorical and uncontradicted statements
that in 1965, defendant Quirino Gonzales logging
concession was terminated based on the policy of the
government to terminate logging concessions covering
less than 20,000 hectares. If this is the case, the Court is in
a quandary why there were log exports in 1967? Because
of the foregoing, the Court does not find any valid ground
to sustain the seventh and eight causes of action of
plaintiffs complaint.
As regards the ninth cause of action, the Court is baffled
why plaintiff extended to defendants another loan when
defendants according to plaintiffs records were defaulting
creditors? The above facts and circumstances has (sic)
convinced this Court to give credit to the testimony of
defendants witnesses that the Gonzales spouses signed the
documents in question in blank and that the promised
loan was never released to them. There is therefore a total
absence of consent since defendants did not give their
consent to loans allegedly procured , the proceeds of
which were never received by the alleged debtors,
defendants herein. . . .
Plaintiff did not present evidence to support its tenth
cause of action. For this reason, it must consequently be
denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they
seek the return of the real and personal properties which
they have given in good faith to plaintiff. Again,
prescription may apply. The real properties of defendants
acquired by plaintiff were foreclosed in 1965 and
consequently, defendants had one (1) year to redeem the
property or ten (10) years from issuance of title on the
ground that the obligation foreclosed was fictitious.
xxx
On appeal,[26] the Court of Appeals (CA) reversed
the decision of the trial court by Decision[27] of June 28,
1996 which disposed as follows:[28]
WHEREFORE, premises considered, the appealed
decision (dated April 22, 1992) of the Regional Trial
Court (Branch 36) in Manila in Civil Case No. 82-4141 is
hereby REVERSED---and let the case be remanded back
to the court a quo for the determination of the amount(s)
to be awarded to the [the Bank]-appellant relative to its
claims against the appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the
CA upheld the contention of the Bank that the notices of
foreclosure sale were tantamount to demand letters upon
the petitioners which interrupted the running of the
prescriptive period.[29]
As regards the seventh to ninth causes of action, the
CA also upheld the contention of the Bank that the written
agreements-promissory notes prevail over the oral
testimony of petitioner Quirino Gonzales that the
cancellation of their logging concession in 1967 made it
unbelievable for them to secure in 1967 the advances
reflected in the promissory notes.[30]
With respect to petitioners counterclaim, the CA
agreed with the Bank that:[31]
Certainly, failure on the part of the trial court to pass upon
and determine the authenticity and genuineness of [the
Banks] documentary evidence [the trial court having ruled
on the basis of prescription of the Banks first to sixth
causes of action] makes it impossible for the trial court to
eventually conclude that the obligation foreclosed (sic)
was fictitious. Needless to say, the trial courts ruling
averses (sic) the well-entrenched rule that courts must
render verdict on their findings of facts. (China Banking
Co. vs. CA, 70 SCRA 398)
Furthermore, the defendants-appellees [herein petitioners]
counterclaim is basically an action for the reconveyance
45
of their properties, thus, the trial courts earlier ruling that
the defendants-appellees counterclaim has prescribed is
itself a ruling that the defendants-appellees separate action
for reconveyance has also prescribed.
The CA struck down the trial courts award of
attorneys fees for lack of legal basis.[32]
Hence, petitioners now press the following issues
before this Court by the present petition for review on
certiorari:
1. WHETHER OR NOT RESPONDENT COURT
ERRED IN SO HOLDING THAT
RESPONDENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK[S] FIRST, SECOND, THIRD,
FOURTH, FIFTH AND SIXTH CAUSES OF ACTION
HAVE NOT PRESCRIBED CONTRARY TO THE
FINDINGS OF THE LOWER COURT, RTC BRANCH
36 THAT THE SAID CAUSES OF ACTION HAVE
ALREADY PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT
ERRED IN SO HOLDING THAT
RESPODNENT-APPELLEES (SIC.) REPUBLIC
PLANTERS BANK[S] SEVENTH, EIGHT AND
NINTH CAUSES OF ACTION APPEARS (SIC.) TO BE
IMPRESSED WITH MERIT CONTRARY TO THE
FINDINGS OF THE LOWER COURT RTC BRANCH
36 THAT THE SAID CAUSES HAVE NO VALID
GROUND TO SUSTAIN [THEM] AND FOR LACK OF
EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT
[ERRED] IN REVERSING THE FINDINGS OF THE
REGIONAL TRIAL COURT BRANCH 36 OF MANILA
THAT PETITIONERS-APPELLANT (SIC.) MAY SEEK
THE RETURN OF THE REAL AND PERSONAL
PROPERTIES WHICH THEY MAY HAVE GIVEN IN
GOOD FAITH AS THE SAME IS BARRED BY
PRESCRIPTION AND THAT
PETITIONERS-APPELLANT (SIC.) HAD ONE (1)
YEAR TO REDEEM THE PROPERTY OR TEN (10)
YEARS FROM ISSUANCE OF THE TITLE ON THE
GROUND THAT THE OBLIGATION FORECLOSED
WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT
ERRED IN SO HOLDING THAT
PEITIONERS-APPELLANTS [SIC] ARE NOT
ENTITLED TO AN AWARD OF ATTORNEYS FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an
action upon a written contract, an obligation created by
law, and a judgment must be brought within ten years
from the time the right of action accrues.[33]
 The finding of the trial court that more than ten years
had elapsed since the right to bring an action on the Banks
first to sixth causes had arisen[34] is not disputed. The
Bank contends, however, that the notices of foreclosure
sale in the foreclosure proceedings of 1965 are
tantamount to formal demands upon petitioners for the
payment of their past due loan obligations with the Bank,
hence, said notices of foreclosure sale
interrupted/forestalled the running of the prescriptive
period.[35]
The Banks contention does not impress. Prescription
of actions is interrupted when they are filed before the
court, when there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgment
of the debt by the debtor. [36]
The law specifically requires a written
extrajudicial demand by the creditors which is absent
in the case at bar. The contention that the notices of
foreclosure are tantamount to a written extrajudicial
demand cannot be appreciated, the contents of said
notices not having been brought to light.
But even assuming arguendo that the notices
interrupted the running of the prescriptive period, the
argument would still not lie for the following reasons:
With respect to the first to the fifth causes of action,
as gleaned from the complaint, the Bank seeks the
recovery of the deficient amount of the obligation after
the foreclosure of the mortgage. Such suit is in the nature
of a mortgage action because its purpose is precisely to
enforce the mortgage contract.[37] A mortgage action
prescribes after ten years from the time the right of action
accrued.[38]
The law gives the mortgagee the right to claim for
the deficiency resulting from the price obtained in the sale
of the property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. [39] In
the present case, the Bank, as mortgagee, had the right to
claim payment of the deficiency after it had foreclosed the
mortgage in 1965.[40] In other words, the prescriptive
period started to run against the Bank in 1965. As it filed
the complaint only on January 27, 1977, more than ten
years had already elapsed, hence, the action on its first to
fifth causes had by then prescribed. No other conclusion
can be reached even if the suit is considered as one upon a
written contract or upon an obligation to pay the
deficiency which is created by law,[41] the prescriptive
period of both being also ten years.[42]
As regards the promissory note subject of the sixth
cause of action, its period of prescription could not have
been interrupted by the notices of foreclosure sale not
only because, as earlier discussed, petitioners contention
that the notices of foreclosure are tantamount to written
extra-judicial demand cannot be considered absent any
showing of the contents thereof, but also because it does
not appear from the records that the said note is covered
by the mortgage contract.
46
Coming now to the second issue, petitioners seek to
evade liability under the Banks seventh to ninth causes of
action by claiming that petitioners Quirino and Eufemia
Gonzales signed the promissory notes in blank; that they
had not received the value of said notes, and that the
credit line thereon was unnecessary in view of their
money deposits, they citing Exhibits 2 to 2-B,[43] in, and
unremitted proceeds on log exports from, the Bank. In
support of their claim, they also urge this Court to look at
Exhibits B (the Banks recommendation for approval of
petitioners application for credit accommodations), P (the
Application and Agreement for Commercial Letter of
Credit dated January 16, 1963) and T (the Application and
Agreement for Commercial Letter of Credit dated
February 14, 1963).
The genuineness and due execution of the notes had,
however, been deemed admitted by petitioners, they
having failed to deny the same under oath.[44] Their claim
that they signed the notes in blank does not thus lie.
Petitioners admission of the genuineness and due
execution of the promissory notes notwithstanding, they
raise want of consideration[45] thereof. The promissory
notes, however, appear to be negotiable as they meet the
requirements of Section 1[46] of the Negotiable
Instruments Law. Such being the case, the notes are prima
facie deemed to have been issued for consideration.[47] It
bears noting that no sufficient evidence was adduced by
petitioners to show otherwise.
Exhibits 2 to 2-B to which petitioners advert in
support of their claim that the credit line on the notes was
unnecessary because they had deposits in, and remittances
due from, the Bank deserve scant consideration. Said
exhibits are merely claims by petitioners under their then
proposals for a possible settlement of the case dated
February 3, 1978. Parenthetically, the proposals were not
even signed by petitioners but by certain Attorneys
Osmundo R. Victoriano and Rogelio P. Madriaga.
In any case, it is no defense that the promissory
notes were signed in blank as Section 14[48] of the
Negotiable Instruments Law concedes the prima
facie authority of the person in possession of negotiable
instruments, such as the notes herein, to fill in the blanks.
As for petitioners reliance on Exhibits B, P and T,
they have failed to show the relevance thereof to the
seventh up to the ninth causes of action of the Bank.
On the third issue, petitioners asseverate that with
the trial courts dismissal of the Banks complaint and the
denial of its first to sixth causes of action, it is but fair and
just that the real properties which were mortgaged and
foreclosed be returned to them.[49] Such, however, does
not lie. It is not disputed that the properties were
foreclosed under Act No. 3135 (An Act to Regulate the
Sale of Property under Special Powers Inserted in or
Annexed to Real Estate Mortgages), as amended. Though
the Banks action for deficiency is barred by prescription,
nothing irregular attended the foreclosure proceedings to
 [17]
warrant the reconveyance of the properties covered The Bank acted as an intermediary or agent of
thereby. petitioners in the export transactions.
[18]
As for petitioners prayer for moral and exemplary Records at 160, 161, 162 and 163.
damages, it not having been raised as issue before the [19]
Id. at 160.
courts below, it can not now be considered. Neither can
the award attorneys fees for lack of legal basis. [20]
Id. at 161.
WHEREFORE, the CA Decision is hereby [21]
Id. at 162.
AFFIRMED with MODIFICATION.
[22]
Id. at 163.
Republic Banks Complaint with respect to its first to
[23]
sixth causes of action is hereby DISMISSED. Its Id. at 161, 162 and 163.
complaint with respect to its seventh to ninth causes of [24]
Id. at 121.
action is REMANDED to the court of origin, the Manila
[25]
Regional Trial Court, Branch 36, for it to determine the Id. at 323-324.
amounts due the Bank thereunder. [26]
The Bank filed a notice of appeal on May 13, 1992
SO ORDERED. (Records at 326) while petitioners filed their own
on May 14, 1992 (Records at 328).
Puno, (Chairman), Panganiban,
[27]
Sandoval-Gutierrez, and Corona, JJ., concur. CA Rollo at 84-98.
[28]
CA Rollo at 98.
[29]
Id. at 93.
[1]
Records at 128. [30]
Id. at 94-95.
[2]
Id. at 129. [31]
Id. at 96-97.
[3]
Vide Complaint, Records at 100. [32]
Id. at 98.
[4]
Dated December 26, 1962 (Records at 134) and [33]
Civil Code, Art. 1144.
February 10, 1964 (Records at 135).
[34]
[5]
Records at 323.
Records at 136, 143, 149 and 154.
[35]
[6]
Rollo at 95.
Dated: January 15, 1963, Records at 141; January 15,
[36]
1963, Records at 148; February 13, 1963, Civil Code, Art. 1155.
Records at 151; and March 14, 1963, Records at [37]
Caltex Philippines, Inc. v. Intermediate Appellate
159.
Court, 176 SCRA 741, 754 (1989).
[7]
Records at 100. [38]
Civil Code, Article 1142. The right of action accrues
[8] when there exists a cause of action, which
Id. at 103.
[9]
consists of 3 elements, namely: a) a right in favor
Id. at 104. of the plaintiff by whatever means and under
[10]
One unit of used caterpillar D7 tractor, Serial No. whatever law it arises or is created; b) an
3T10074. obligation on the part of defendant to respect
such right; and c) an act or omission on the part
[11]
Exhibits H and H-1 (Records at 140). of such defendant violative of the right of the
[12]
One unit of used CAT D7 Tractor with Serial No. plaintiff (Paraaque Kings Enterprises, Inc. v.
3T13002 equipped with Hydraulic Angledozer Court of Appeals, 268 SCRA 727, 739 [1997];
and D7N Hyster Winch; two pieces of Cat D8 Espaňol v. Chairman, Philippine Veterans
Track Link Assembly; and two pieces of D8 Administration, 137 SCRA 314, 318 [1985]
Sprocket Rim (Records at 106-107). [citations omitted]).
[39]
[13]
Exhibits M and M-1 (Records at 146). DBP v. Tomeldan, 101 SCRA171, 174 (1980)
(citations omitted); See also Development Bank
[14]
Records at 108-109. of the Philippines v. Mirang, 66 SCRA 141,
[15]
144-145 [1975], citing Philippine Bank of
Two Units D7 Crawler Tractors with Angledozer
Commerce v. Tomas de Vera 6 SCRA 1026
Blades Bearing Serial Nos. 5T179 and 4T2567.
(1962).
[16]
Records at 157. [40]
See id.

47
[41]
Id.
[42]
Civil Code, Art. 1144.
[43]
Vide, Petition, Rollo at 10.
[44]
Rules of Court, Rule 8 Section 8.
[45]
Republic v. Court of Appeals, 296 SCRA 171,
181-182 (1998) (citations omitted).
[46]
SECTION 1. Form of negotiable instruments. An
instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to pay
a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein THIRD DIVISION
with reasonable certainty.
[47]
Negotiable Instruments Law, Section 24.0
[48]
Blanks; when may be filled. Where the instrument is
wanting in any material particular, the person in
possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And
a signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
instrument operates as a prima facie authority to
fill it up as such for any amount. In order,
however, that any such instrument when
completed may be enforced against a person who
became a party thereto prior to its completion, it
must be filled up strictly in accordance with the
authority given and within a reasonable time. But
if any such instrument, after completion, is
negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands, and he
may enforce it as if it had been filled up strictly
in accordance with the authority given and
within a reasonable time.
[49]
Vide Petition, Rollo at 12.

48
 VICTORIA J. ILANO G.R. No. 161756 CARPIO MORALES, J.:
represented by her
Attorney-in-fact, MILO Present: The Court of Appeals having affirmed the dismissal by
ANTONIO C. ILANO, Branch 20 of the Regional Trial Court (RTC) of Cavite at
P PANGANIBA Imus, for lack of cause of action, Civil Case No. 2079-00,
e N, Chairman, the complaint filed by herein petitioner Victoria J. Ilano
t SANDOVAL- for Revocation/Cancellation of Promissory Notes and
i GUTIERREZ, Bills of Exchange (Checks) with Damages and Prayer for
t CORONA, Preliminary Injunction or Temporary Restraining Order
i CARPIO (TRO),[1] against herein respondents 15 named defendants
o MORALES, (and several John Does), a recital of the pertinent
n and allegations in the complaint, quoted verbatim as follows,
e GARCIA, JJ. is in order:
r
s xxx
,
3. That defendant AMELIA O. ALONZO,
is a trusted employee of [petitioner].
- versus - She has been with them for several
years already, and through the years,
defendant ALONZO was able to
HON. DOLORES L. gain the trust and confidence of
ESPAOL, in her capacity [petitioner] and her family;
as Executive Judge, RTC
of Imus, Cavite, Br. 90, Promulgated: 4. That due to these trust and confidence
and, AMELIA ALONZO, reposed upon defendant ALONZO
EDITH CALILAP, by [petitioner], there were occasions
DANILO CAMACLANG, December 16, 2005 when defendant ALONZO was
ESTELA CAMACLANG, entrusted with [petitioners]
ALLAN CAMACLANG, METROBANK Check Book
LENIZA REYES, EDWIN containing either signed or unsigned
REYES, JANE blank checks, especially in those
BACAREL, CHERRY times when [petitioner] left for the
CAMACLANG, FLORA United States for medical check-up;
CABRERA, ESTELITA
LEGASPI, 5. Sometime during the second week of
CARMENCITA December 1999, or thereabouts,
GONZALES, NEMIA defendant ALONZO by means
CASTRO, GLORIA of deceit and abuse of confidence
DOMINGUEZ, ANNILYN succeeded in procuring
C. SABALE and several Promissory Notes and signed
JOHN DOES, blank checks from [petitioner]
R who was then recuperating from
e illness;
s
p 6. That as stated, aside from the said
o blank checks, defendant ALONZO
n likewise succeeded
d in inducing [petitioner] to sign the
e Promissory Notes antedated June
n 8, 1999 in the amount of PESOS:
t ONE MILLION FOUR HUNDRED
s TWENTY EIGHT THOUSAND
. TWO HUNDRED SEVENTY
xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - TWO (Php 1,428,272.00) payable to
- - - - - - -xx defendants EDITH CALILAP and
DANILO CALILAP, and another
DECISION Promissory Noted dated March
1999 in the amount of PESOS:
49
 ONE MILLION (Php Metrobank
1,000,000.00) payable to the same Check No.
defendants EDITH CALILAP and 0111515
DANILO CALILAP, copies of said
Promissory Notes are hereto all in the total amount of Php
attached as Annexes A and A-1 3,031,600.00, copies of said checks
hereof; are hereto attached as Annexes C,
C-1, C-2, C-3 and C-4, respectively;
7. That another Promissory Note
antedated October 1, 1999 thru 10. That aside from the checks mentioned
the machination of defendant heretofore, defendant
ALONZO, was signed by ALONZO, confederated and
[petitioner] in the amount of conspired with the following
PESOS: THREE MILLION co-defendants, FLORA CABRERA,
FORTY SIX THOUSAND FOUR NEMIA CASTRO, EDITH
HUNDRED ONE (Php CALILAP, DANILO CALILAP,
3,046,401.00) excluding interest, in GLORIA DOMINGUEZ,
favor of her co-defendants ESTELA CARMENCITA GONZALES and
CAMACLANG, ALLAN ANNILYN C. SABALE and took
CAMACLANG, LENIZA REYES, advantage of the signature of
EDWIN REYES, JANE BACAREL [petitioner] in said blank
and CHERRY CAMACLANG, a checks which were later on
copy of said Promissory Note is completed by them indicated
hereto attached as Annex B hereof; opposite their respective names and
the respective amount thereof, as
8. That the Promissory Notes and follows:
blank checks were procured thru
fraud and deceit. The consent of
the [petitioner] in the issuance of
the two (2) aforementioned NAME AMOUNT METROBAN
Promissory Notes was K Check No.
vitiated. Furthermore, the same Flora Cabrera Php 0111460
were issued for want of 337,584.58
consideration, hence, the same Flora Cabrera 98,000.00 0111514
should be cancelled, revoked or Nemia Castro 100,000.00 0111542
declared null and void;
Nemia Castro 150,000.00 0084078
Edith 490,000.00 0111513
9. That as clearly shown heretofore,
Calilap/Danilo
defendant ALONZO in collusion
Calilap
with her co-defendants, ESTELA
Edith 790,272.00 0111512
CAMACLANG, ALLAN
Calilap/Danilo
CAMACLANG and ESTELITA
Calilap
LEGASPI likewise was able to
induce plaintiff to sign several Edith 1,220,000.0 0111462
undated blank checks, among Calilap/Danilo 0
which are: Calilap
Gloria 1,046,040.0 0111543
Metrobank Dominguez/ 0
Check No. Carmencita
0111544 Gonzales
Metrobank Annilyn C. 150,000.00 0085134
Check No. Sable
0111545 Annilyn C. 250,000.00 0085149
Metrobank Sable
Check No. Annilyn C. 186,000.00 0085112
0111546 Sable
Metrobank
Check No.
0111547

50
 Copy attached as Annexes D, D-1, D-2, [petitioner] entitling her to moral
D-3, D-4, D-5, D-6, D-7, D-8, D-9 and damages of at least in the amount of
D-10, respectively; PESOS: FIVE HUNDRED
THOUSAND (Php 500,000.00);
Furthermore, defendant
ALONZO colluded and conspired with 15. That to avoid repetition of similar
defendant NEMIA CASTO in acts and as a correction for the
procuring the signature of [petitioner] public good, the defendants should
in documents denominated be held liable to [petitioner] for
as Malayang Salaysay dated July 22, exemplary damages in the sum of
1999 in the amount of PESOS: ONE not less than the amount of PESOS:
HUNDRED FIFTY THOUSAND (Php TWO HUNDRED THOUSAND
150,000.00) and another Malayang (Php 200,000.00);
Salaysay dated November 22, 1999 in
the amount of PESOS: ONE HUNDRED 16. That to protect the rights and interest
THOUSAND (Php 100,000.00) Annexes of the [petitioner] in the illegal
D-11 and D-12 hereof; actuations of the defendants, she
was forced to engage the services of
11. That said defendants took undue counsel for which she was obliged
advantage of the signature of to pay the sum of PESOS: ONE
[petitioner] in the said blank HUNDRED THOUSAND (Php
checks and furthermore forged 100,000.00) by way of Attorneys
and or falsified the signature of fees plus the amount of PESOS:
[petitioner] in other unsigned THREE THOUSAND (Php
checks and as it was made to 3,000.00) per appearance in court;
appear that said [petitioner] is
under the obligation to pay them x x x (Emphasis and underscoring
several amounts of money, when supplied)
in truth and in fact, said
[petitioner] does not owe any of
said defendant any single amount; The named defendants-herein respondents filed their
respective Answers invoking, among other grounds for
12. That the issuance of the dismissal, lack of cause of action, for while the checks
aforementioned checks or subject of the complaint had been issued on account and
Promissory Notes or the for value, some had been dishonored due to ACCOUNT
aforementioned Malayang CLOSED; and the allegations in the complaint are bare and
Salaysay to herein defendants general.
were tainted with fraud and deceit,
and defendants conspired with By Order[2] dated October 12, 2000, the trial court
one another to defraud herein dismissed petitioners complaint for failure to allege the
[petitioner] as the aforementioned ultimate facts-bases of petitioners claim that her right was
documents were issued for want violated and that she suffered damages thereby.
of consideration;
On appeal to the Court of Appeals, petitioner contended
that the trial court:
13. That the aforesaid
defendants conspiring and
A. . . . FAILED TO STATE CLEARLY
confederating together and
AND DISTINCTLY THE FACTS
helping one another committed
AND LAW ON WHICH THE
acts of falsification and
APPEALED ORDER WAS BASED,
defraudation which they should
THEREBY RENDERING SAID
be held accountable under law;
ORDER NULL AND VOID.
14. The foregoing acts, and
transactions, perpetrated by
herein defendants in all bad faith
B. . . . ERRED IN HOLDING THAT
and malice, with malevolence and
THE COMPLAINT FAILED TO
selfish intent are causing anxiety,
ALLEGE ULTIMATE FACTS ON
tension, sleepless nights, wounded
WHICH [PETITIONER] RELIES ON
feelings, and embarrassment to
HER CLAIM THEREBY
51
 DISMISSING THE CASE FOR LACK
OF CAUSE OF ACTION.
C. . . . ERRED IN GIVING DUE
COURSE TO THE MOTION TO
DISMISS THAT CONTAINED A
FAULTY NOTICE OF HEARING AS
THE SAME IS MERELY
ADDRESSED TO THE BRANCH
CLERK OF COURT.[3]
In its Decision[4] of March 21, 2003 affirming the dismissal
order of the trial court, the appellate court held that the
elements of a cause of action are absent in the case:
xxx
Such allegations in the complaint are
only general averments of fraud, deceit
and bad faith. There were no allegations
of facts showing that the acts
complained of were done in the manner
alleged. The complaint did not clearly
ascribe the extent of the liability of each
of [respondents]. Neither did it state
any right or cause of action on the part
of [petitioner] to show that she is
indeed entitled to the relief prayed for.
In the first place, the record shows
that subject checks which she sought to
cancel or revoke had already been
dishonored and stamped ACCOUNT
CLOSED. In fact, there were already
criminal charges for violation of Batas
Pambansa Blg. 22 filed against
[petitioner] previous to the filing of the
civil case for revocation/cancellation.
Such being the case, there was actually
nothing more to cancel or revoke. The
subject checks could no longer be
negotiated. Thus, [petitioners]
allegation that the [respondents] were
secretly negotiating with third persons
for their delivery and/or assignment, is
untenable.
In the second place, we find nothing on
the face of the complaint to show that
[petitioner] denied the genuineness or
authenticity of her signature on the
subject promissory notes and the
allegedly signed blank checks. She
merely alleged abuse of trust and
confidence on the part of [Alonzo].
Even assuming arguendo that such
allegations were true, then [petitioner]
cannot be held totally blameless for her
predicament as it was by her own
52
negligence that subject
instruments/signed blank checks fell
into the hands of third persons.
Contrary to [petitioners] allegations, the
promissory notes show that some of the
[respondents] were actually creditors of
[petitioner] and who were issued the
subject checks as securities for the
loan/obligation incurred. Having taken
the instrument in good faith and for
value, the [respondents] are therefore
considered holders thereof in due
course and entitled to payment.
x x x (Underscoring supplied)
Hence, the present petition for review on certiorari,
petitioner faulting the appellate court:
1. . . . in sustaining the dismissal of the
complaint upon the ground of
failure to state a cause of action
when there are other several
causes of action which ventilate
such causes of action in the
complaint;
2. . . . in finding that a requirement that
a Decision which should express
therein clearly and distinctly the
facts and the law on which it is
based does not include cases
which had not reached pre-trial or
trial stage;
3. . . . in not finding that a notice of
hearing which was addressed to
the Clerk of Court is totally
defective and that subsequent
action of the court did not cure the
flaw.[5]
In issue then is whether petitioners complaint failed to state
a cause of action.
A cause of action has three elements: (1) the legal right of
the plaintiff, (2) the correlative obligation of the defendant,
and (3) the act or omission of the defendant in violation of
said legal right. In determining the presence of these
elements, inquiry is confined to the four corners of the
complaint[6] including its annexes, they being parts
thereof.[7] If these elements are absent, the complaint
becomes vulnerable to a motion to dismiss on the ground
of failure to state a cause of action.[8]
As reflected in the above-quoted allegations in
petitioners complaint, petitioner is seeking twin reliefs, one
for revocation/cancellation of promissory notes and checks,
and the other for damages.
Thus, petitioner alleged, among other things, that
respondents, through deceit, abuse of confidence
machination, fraud, falsification, forgery, defraudation, and
bad faith, and with malice, malevolence and selfish intent,
succeeded in inducing her to sign antedated promissory
notes and some blank checks, and [by taking] undue
advantage of her signature on some other blank checks,
succeeded in procuring them, even if there was no
consideration for all of these instruments on account of
which she suffered anxiety, tension, sleepless nights,
wounded feelings and embarrassment.
While some of the allegations may lack particulars, and are
in the form of conclusions of law, the elements of a cause
of action are present. For even if some are not stated with
particularity, petitioner alleged 1) her legal right not to be
bound by the instruments which were bereft of
consideration and to which her consent was vitiated; 2) the
correlative obligation on the part of the
defendants-respondents to respect said right; and 3) the act
of the defendants-respondents in procuring her signature
on the instruments through deceit, abuse of confidence
machination, fraud, falsification, forgery, defraudation, and
bad faith, and with malice, malevolence and selfish intent.
Where the allegations of a complaint are vague, indefinite,
or in the form of conclusions, its dismissal is not proper for
the defendant may ask for more particulars.[9]
With respect to the checks subject of the complaint, it is
gathered that, except for Check No. 0084078,[10] they
were drawn all against petitioners Metrobank Account No.
00703-955536-7.
Annex D-8[11] of the complaint, a photocopy of
Check No. 0085134, shows that it was dishonored
on January 12, 2000 due to ACCOUNT CLOSED. When
petitioner then filed her complaint on March 28, 2000, all
the checks subject hereof which were drawn against
the same closed account were already rendered valueless
or non-negotiable, hence, petitioner had, with respect to
them, no cause of action.
With respect to above-said Check No. 0084078, however,
which was drawn against another account of petitioner,
albeit the date of issue bears only the year − 1999, its
validity and negotiable character at the time the complaint
was filed on March 28, 2000 was not affected. For
Section 6 of the Negotiable Instruments Law provides:
Section 6. Omission; seal; particular
money. The validity and negotiable
character of an instrument are not
affected by the fact that
(a) It is not dated; or
53
(b) Does not specify the value given, or
that any value had been given therefor;
or
(c) Does not specify the place where it
is drawn or the place where it is payable;
or
(d) Bears a seal; or
(e) Designates a particular kind of
current money in which payment is to
be made.
x x x (Emphasis supplied)
However, even if the holder of Check No. 0084078 would
have filled up the month and day of issue thereon to be
December and 31, respectively, it would have, as it did,
become stale six (6) months or 180 days thereafter,
following current banking practice.[12]
It is, however, with respect to the
questioned promissory notes that the present petition
assumes merit. For, petitioners allegations in the
complaint relative thereto, even if lacking particularity,
does not as priorly stated call for the dismissal of the
complaint.
WHEREFORE, the petition is PARTLY GRANTED.
The March 21, 2003 decision of the appellate court
affirming the October 12, 2000 Order of the trial court,
Branch 20 of the RTC of Imus, Cavite,
is AFFIRMED with MODIFICATION in light of the
foregoing discussions.
The trial court is DIRECTED to REINSTATE Civil
Case No. 2079-00 to its docket and take further
proceedings thereon only insofar as the complaint seeks
the revocation/cancellation of the subject promissory
notes and damages.
Let the records of the case be then REMANDED to the
trial court.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice
ARTEMIO V. PANGANIBAN
Associate Justice
Chairman
HILARIO G. DAVIDE, JR.
Chief Justice
[1]
Records at 2-10.
[2]
Records at 185-186.
[3]
Court of Appeals Rollo at 19.
[4]
Rollo at 52-59.
[5]
Id. at 32-33.
[6]
Dabuco v. Court of Appeals, 322 SCRA 853, 863
(2000).
[7]
Sea-Land Service, Inc. v. Court of Appeals, 327 SCRA
135, 139-140 (2000); Fil-Estate Golf and
Development, Inc. v. Court of Appeals, 265 SCRA
614, 637 (1996).
[8]
Bank of America NT & SA v. Court of Appeals, 400
SCRA 156, 167 (2003).
[9]
Tantuico, Jr. v. Republic, 204 SCRA 428, 437-438
(1991). Vide Virata v. Sandiganbayan, 272 SCRA
661, 675-676 (1997).
[10]
Id. at 16.
[11]
Records at 18.
[12]
Wong v. Court of Appeals, 351 SCRA 100, 111
(2001); Pacheco v. Court of Appeals, 319 SCRA 595,
605 (1999).

54
Republic of the Philippines
Supreme Court
Manila

THIRD DIVISION

PHILIPPINE NATIONAL BANK, G.R. No. 170325

Petitioner,
Present:
YNARES-SANTIAGO, J.,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:

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

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to
order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended
Decision[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial
Court (RTC).[2]

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine

National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and
demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit
(Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they
had a discounting[3] arrangement with the Philnabank Employees Savings and Loan Association
(PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client
of PNB Amelia Avenue Branch. The association maintained current and savings accounts with
petitioner bank.

55
 PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As was customary,
the spouses would replace the postdated checks with their own checks issued in the name of the
members.

It was PEMSLAs policy not to approve applications for loans of members with outstanding
debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans
despite their outstanding loan accounts. They took out loans in the names of unknowing members,
without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then
given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the
named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the
members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand,
were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was an irregular procedure made
possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in
the PNB Branch. It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in
the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were
all members of PEMSLA.[4]

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this
scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by
the spouses were returned or dishonored for the reason Account Closed. The corresponding Rodriguez
checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were
returned, spouses Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for
damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner
PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings
account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to
the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the
claim for damages should come from the payees of the checks, and not from spouses Rodriguez. Since
there was no demand from the said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.

In its Answer,[5] PNB claimed it is not liable for the checks which it paid to the PEMSLA
account without any indorsement from the payees. The bank contended that spouses Rodriguez, the
makers, actually did not intend for the named payees to receive the proceeds of the
checks. Consequently, the payees were considered as fictitious payees as defined under the Negotiable
Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the
checks were negotiable by mere delivery. PNBs Answer included its cross-claim against its
co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the
bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay.

56
 After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled
that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims
were dismissed. The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment,

as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00
or reinstate or restore the amount of P775,337.00 in the PNBig Demand
Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez,
and the amount of P1,570,467.00 in the PNBig Demand Deposit,
Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or
Norma Rodriguez, plus legal rate of interest thereon to be computed from
the filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable
amount of damages suffered by them taking into consideration the standing
of the plaintiffs being sugarcane planters, realtors, residential subdivision
owners, and other businesses:

(a) Consequential damages, unearned income in the amount

of P4,000,000.00, as a result of their having incurred great
dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the contractor
even threatened to file a case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorneys fees in the amount of P150,000.00 considering that

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

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.[6]

CA Disposition

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

In a Decision[7] dated July 22, 2004, the CA reversed and set aside the RTC disposition. The
CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The
court a quo declared:

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

Rodriguez) that their cause of action arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite
the checks being payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the plaintiffs-appellees
and PEMSLAs business arrangement that the value of the rediscounted checks of the
plaintiffs-appellees would be deposited in PEMSLAs account for payment of the
loans it has approved in exchange for PEMSLAs checks with the full value of the said
loans. This is the only obvious explanation as to why all the disputed sixty-nine (69)

57
 checks were in the possession of PEMSLAs errand boy for presentment to the
defendant-appellant that led to this present controversy. It also appears that the teller
who accepted the said checks was PEMSLAs officer, and that such was a regular
practice by the parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to order, but
instead, to PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA

allegedly issued post-dated checks to its qualified members who had applied for
loans. However, because of PEMSLAs insufficiency of funds, PEMSLA approached
the plaintiffs-appellees for the latter to issue rediscounted checks in favor of said
applicant members. Based on the investigation of the defendant-appellant, meanwhile,
this arrangement allowed the plaintiffs-appellees to make a profit by issuing
rediscounted checks, while the officers of PEMSLA and other members would be
able to claim their loans, despite the fact that they were disqualified for one reason or
another. They were able to achieve this conspiracy by using other members who had
loaned lesser amounts of money or had not applied at all. x x x.[8] (Emphasis added)

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

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

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

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

plaintiffs-appellees Sps. Rodriguez for the following:

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

at 6% per annum from 14 May 1999 until fully paid;

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

3. Attorneys fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby

rendered by Us AFFIRMING WITH MODIFICATION the assailed decision
rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding
paragraph hereof, and SETTING ASIDE Our original decision promulgated in this
case on 22 July 2004.

SO ORDERED.[9]

The CA ruled that the checks were payable to order. According to the appellate
court, PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they

58
really intended the checks to be received by the specified payees. Thus, PNB is liable for the value of
the checks which it paid to PEMSLA without indorsements from the named payees.The award for
damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with
the highest degree of care considering the fiduciary nature of their relationship, which constrained
respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

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

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

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining

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

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

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. A check is a bill of exchange drawn on a
bank payable on demand.[11] It is either an order or a bearer instrument. Sections 8 and 9 of the NIL
states:

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

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

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

(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

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

otherwise indicated therein with reasonable certainty.

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

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

59
 (b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person,
and such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any
person; or
(e) Where the only or last indorsement is an indorsement in
blank.[12] (Underscoring supplied)

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

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

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

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

We have yet to discuss a broader meaning of the term fictitious as used in the NIL. It is for
this reason that We look elsewhere for guidance. Court rulings in the United States are a logical
starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable
Instruments Law of the United States.[13]

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

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

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
Bank.[16] In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of
its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company
Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation
without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing
authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his
own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his

60
own personal profit. When the corporation filed an action against the bank to recover the amount of the
checks, the claim was denied.

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

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

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

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

Consequently, a transferees lapse of wary vigilance, disregard of suspicious

circumstances which might have well induced a prudent banker to investigate and
other permutations of negligence are not relevant considerations under Section 3-405
x x x. Rather, there is a commercial bad faith exception to UCC 3-405, applicable
when the transferee acts dishonestly where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a
fraudulent scheme. x x x Such a test finds support in the text of the Code, which
omits a standard of care requirement from UCC 3-405 but imposes on all parties an
obligation to act with honesty in fact. x x x[19] (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank
transferees of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the
payees were actual, existing, and living persons who were members of PEMSLA that had a
rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were fictitious in its
broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did
not intend for the named payees to be part of the transaction involving the checks. At most, the banks
thesis shows that the payees did not have knowledge of the existence of the checks. This lack of
knowledge on the part of the payees, however, was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the checks proceeds. Considering
that respondents-spouses were transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the officers of PEMSLA that the payees
would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both
lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that
the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a

61
requisite condition of a fictitious-payee situation that the maker of the check intended for the payee to
have no interest in the transaction.

Because of a failure to show that the payees were fictitious in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order.Consequently,
the drawee bank bears the loss.[20]

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or
tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from
the named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. [21] This Court has recognized the
unique public interest possessed by the banking industry and the need for the people to have full trust
and confidence in their banks.[22] For this reason, banks are minded to treat their customers accounts
with utmost care, confidence, and honesty.[23]

In a checking transaction, the drawee bank has the duty to verify the genuineness of the
signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the
drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the drawers account.[24]

In the case at bar, respondents-spouses were the banks depositors. The checks were drawn
against respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions
of the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any
type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in
strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values
of the checks not to the named payees or their order, but to PEMSLA, a third party to the transaction
between the drawers and the payees.

Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking
industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their
employees. In Bank of the Philippine Islands v. Court of Appeals,[25] this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very

nature of their work the degree of responsibility, care and trustworthiness expected of
their employees and officials is far greater
than those of ordinary clerks and employees. For obvious reasons, the banks are
expected to exercise the highest degree of diligence in the selection and supervision
of their employees.[26]

PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid
deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank
employees that caused the loss, the bank should be held liable. [27]

PNBs argument that there is no loss to compensate since no demand for payment has been
made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason Account Closed. These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.

62
 A bank that has been remiss in its duty must suffer the consequences of its negligence. Being
issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require
that the checks be properly indorsed before accepting them for deposit and payment. In
fine, PNB should be held liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNBs cross-claim against its
co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two
defendants in answer to the complaint of respondents-spouses and cross-claim of PNB. The Rules
expressly provide that failure to file an answer is a ground for a declaration that defendant
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file
responsive pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment
shall be without prejudice to whatever action the bank might take against its co-defendants in the trial
court.

To PNBs credit, it became involved in the controversial transaction not of its own volition but due to
the actions of some of its employees. Considering that moral damages must be understood to be in
concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral
damages to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision is AFFIRMED with the

MODIFICATION that the award for moral damages is reduced to P50,000.00, and that this is without
prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC,
and the employees involved.

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

63
ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons
Attestation, I certify that the conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P. Dicdican,
with Associate Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; rollo, pp. 29-42.
[2]
Civil Case No. 99-10892, Regional Trial Court in Negros Occidental, Branch 51, Bacolod City,
dated May 10, 2002; CA rollo, pp. 63-72.
[3]
A financing scheme where a postdated check is exchanged for a current check with a discounted face
value.
[4]
Current Account No. 810480-4 in the name of Erlando T. Rodriguez
Name of Payees Check No. Date Amount
Issued
01. Simon 0001110 11.27.98 40,934.00
Carmelo B.
Libo-on
02. Simon 0000011589 02.01.99 29,877.00
Carmelo Libo-on
03. Simon 0000011567 01.25.99 50,350.00
Libo-on
04. Pacifico 0000011565 01.22.99 39,995.00
Castillo
05. Jose Bago-od 0000011587 02.01.99 38,000.00
06. Dioleto 0000011594 02.02.99 28,500.00
Delcano
07. Antonio 0000011593 02.02.99 37,715.00

64
Maravilla
08. Josel Juguan 0000011595 02.02.99 45,002.00
09. Domingo Roa, 0000011591 02.01.99 35,373.00
Jr.
10. Antonio 0001657 02.05.99 39,900.00
Maravilla
11. Christy Mae 0001655 02.05.99 28,595.00
Berden
12. Nelson 0000011588 02.01.99 34,819.00
Guadalupe
13. Antonio 0000011596 02.05.99 32,851.00
Londres
14. Arnel 0000011597 02.05.99 28,785.00
Navarosa
15. Estrella 0000011600 02.05.99 32,509.00
Alunan
16. Dennis 0000011598 02.05.99 43,691.00
Montemayor
17. Mickle 0000011599 02.05.99 31,498.00
Argusar
18. Perlita 0000011564 01.21.99 38,000.00
Gallego
19. Sheila 0000011563 01.19.99 38,000.00
Arcobillas
20. Danilo 0001656 02.05.99 32,006.00
Villarosa
21. Almie Borce 0000011583 02.01.99 20,093.00
22. Ronie Aragon 0000011566 01.20.99 28,844.00
Total: 775,337.0
0

Current Account No. 810624-6 in the name of Erlando and/or Norma Rodriguez
Name of Payees Check Date Amount
No. Issued
01. Elma Bacarro 0001944 01.15.99 37,449.0
0
02. Delfin Recarder 0001927 01.14.99 30,020.0
0
03. Elma Bacarro 0001926 01.14.99 34,884.0
0
04. Perlita Gallego 0001924 01.14.99 35,502.0
0
05. Jose Weber 0001932 01.14.99 38,323.0
0
06. Rogelio Alfonso 0001922 01.14.99 43,852.0
0
07. Gianni Amantillo 0001928 01.14.99 32,414.0
0
08. Eddie Bago-od 0001929 01.14.99 38,361.0
0
09. Manuel Longero 0001933 01.14.99 38,285.0
0
10. Anavic Lorenzo 0001923 01.14.99 29,982.0
0
11. Corazon Salva 0001945 01.15.99 37,449.0
0

65
Name of Payees Check Date Amount
No. Issued
12. Arlene Diamante 0001951 01.18.99 39,995.0
0
13. Joselin Laurilla 0001955 01.18.99 37,221.0
0
14. Andy Javellana 0001960 01.22.99 30,923.0
0
15. Erdelinda Porras 0001958 01.22.99 40,679.0
0
16. Nelson 0001956 01.18.99 24,700.0
Guadalupe 0
17. Barnard Escano 0001969 01/22/99 38,304.0
0
18. Buena 0001968 01/22/99 37,706.0
Coscolluela 0
19. Erdelinda Porras 0002021 02/01/99 36,727.0
0
20. Neda Algara 0002023 02/01/99 38,000.0
0
21. Eddie Bago-od 0002030 02/02/99 26,600.0
0
22. Gianni Amantillo 0002032 02/02/99 19,000.0
0
23. Alfredo Llena 0002020 02/01/99 32,282.0
0
24. Emmanuel Fermo 0001972 01/22/99 36,376.0
0
25. Yvonne Ano-os 0001967 01/22/99 36,566.0
0
26. Joel Abibuag 0002022 02/01/99 37,981.0
0
27. Ma. Corazon 0002029 02/02/99 25,270.0
Salva 0
28. Jose Bago-od 0001957 01/18/99 34,656.0
0
29. Avelino Brion 0001965 01/22/99 31,882.0
0
30. Mickle Algusar 0001962 01/22/99 25,004.0
0
31. Jose Weber 0001959 01/22/99 37,001.0
0
32. Joel Velasco 0002028 02/02/99 9,500.00
33. Elma Bacarro 0002031 02/02/99 23,750.0
0
34. Grace Tambis 0001952 01/18/99 39,995.0
0
35. Proceso Mailim 0001980 01/21/99 37,193.0
0
36. Ronnie Aragon 0001983 01/22/99 30,324.0
0
37. Danilo Villarosa 0001931 01/14/99 31,008.0
0
38. Joel Abibuag 0001954 01/18/99 26,600.0
0
39. Danilo Villarosa 0001984 01/22/99 26,790.0

66
Name of Payees Check Date Amount
No. Issued
0
40. Reynard Guia 0001985 01/22/99 42,959.0
0
41. Estrella Alunan 0001925 01/14/99 39,596.0
0
42. Eddie Bago-od 0001982 01/22/99 31,018.0
0
43. Jose Bago-od 0001982 01/22/99 37,240.0
0
44. Nicandro Aguilar 0001964 01/22/99 52,250.0
0
45. Guandencia 0001963 01/22/99 38,000.0
Banaston 0
46. Dennis 0001961 01/22/99 26,600.0
Montemayor 0
47. Eduardo Buglosa 0002027 01/02/99 14,250.0
0

Total 1,570,467.00
Grand Total . 2,345,804.00

[5]
Rollo, pp. 64-69.
[6]
CA rollo, pp. 71-72.
[7]
Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Elvi John S.
Asuncion and Ramon M. Bato, Jr., concurring.
[8]
Id. at 47.
[9]
Id. at 41.
[10]
Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921).
[11]
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.
Section 126. Bill of exchange defined. A bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
[12]
Id.
[13]
Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments
Law (1994), 5th ed., pp. 8-9.
[14]
Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F. 839
(1923); United States v. Chase Nat. Bank, 250 F. 105 (1918).
[15]
Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920).
[16]
Id.
[17]
Mueller & Martin v. Liberty Insurance Bank, id.
[18]
90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405.
[19]
Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc., id., citing Peck
v. Chase Manhattan Bank, 190 AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi Trust Co., 186
AD 2d 425, 427 (1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276 (1989); Merrill Lynch,
Pierce, Fenner & Smith v. Chemical Bank, 57 NY 2d 447 (1982).
[20]
See Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002,
390 SCRA 608.
[21]
Id.
[22]
Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, December 6, 2006, 510 SCRA
259.

67
[23]
Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994,
232 SCRA 559; Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No.
69162, February 21, 1992, 206 SCRA 408.
[24]
Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612, January 31, 1996, 252 SCRA
620, 631.
[25]
G.R. No. 102383, November 26, 1992, 216 SCRA 51.
[26]
Bank of the Philippine Islands v. Court of Appeals, id. at 71.
[27]
Id. at 77.
[28]
Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of. If the defending party fails to
answer within the time allowed therefor, the court shall, upon motion of the claiming party with notice
to the defending party, and proof of such failure, declare the defending party in default. Thereupon, the
court shall proceed to render judgment granting the claimant such relief as his pleading may warrant,
unless the court in its discretion requires the claimant to submit evidence. Such reception of evidence
may be delegated to the clerk of court.
[29]
Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274 SCRA 282.

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