SECOND DIVISION 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
G.R. No. 97753 August 10, 1992 5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
CALTEX (PHILIPPINES), INC., petitioner, 5 Mar. 82 70147 to 90150 4 16,000
vs. 8 Mar. 82 90001 to 90020 20 80,000
COURT OF APPEALS and SECURITY BANK AND TRUST 9 Mar. 82 90023 to 90050 28 112,000
COMPANY, respondents. 9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
Bito, Lozada, Ortega & Castillo for petitioners. ——— ————
Total 280 P1,120,000
Nepomuceno, Hofileña & Guingona for private. ===== ========

2. Angel dela Cruz delivered the said certificates of time

(CTDs) to herein plaintiff in connection with his purchased of
REGALADO, J.: fuel products from the latter (Original Record, p. 208).

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
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 the payment of the matured loan (TSN, February 9, 1987, pp.
bank "full control of the indicated time deposits from and 130-131).
after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to 12. In view of the foregoing, plaintiff filed the instant
the payment of whatever amount or amounts may be due" on complaint, praying that defendant bank be ordered to pay it
the loan upon its maturity (TSN, February 9, 1987, pp. 60-62). the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest
6. Sometime in November, 1982, Mr. Aranas, Credit Manager therein at 16% per annum, moral and exemplary damages as
of plaintiff Caltex (Phils.) Inc., went to the defendant bank's well as attorney's fees.
Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were After trial, the court a quo rendered its decision dismissing
delivered to herein plaintiff "as security for purchases made the instant complaint. 3
with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68). On appeal, as earlier stated, respondent court affirmed the lower court's
dismissal of the complaint, hence this petition wherein petitioner faults
7. On November 26, 1982, defendant received a letter respondent court in ruling (1) that the subject certificates of deposit are non-
(Defendant's Exhibit 563) from herein plaintiff formally negotiable despite being clearly negotiable instruments; (2) that petitioner
informing it of its possession of the CTDs in question and of did not become a holder in due course of the said certificates of deposit; and
its decision to pre-terminate the same. (3) in disregarding the pertinent provisions of the Code of Commerce
relating to lost instruments payable to bearer. 4
8. On December 8, 1982, plaintiff was requested by herein
defendant to furnish the former "a copy of the document The instant petition is bereft of merit.
evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz" A sample text of the certificates of time deposit is reproduced below to
obligation against which plaintiff proposed to apply the time provide a better understanding of the issues involved in this recourse.
deposits (Defendant's Exhibit 564).
SECURITY BANK
9. No copy of the requested documents was furnished herein AND TRUST COMPANY
defendant. 6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
10. Accordingly, defendant bank rejected the plaintiff's SUCAT OFFICEP 4,000.00
demand and claim for payment of the value of the CTDs in a CERTIFICATE OF DEPOSIT
letter dated February 7, 1983 (Defendant's Exhibit 566). Rate 16%

11. In April 1983, the loan of Angel dela Cruz with the Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
defendant bank matured and fell due and on August 5, 1983,
the latter set-off and applied the time deposits in question to This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
 FOUR THOUSAND ONLY, SECURITY
BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon
presentation and surrender of this certificate,
with interest at the rate of 16% per cent per
annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather
boldly in the CTDs issued, it is important to note that after
the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further
provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they
are payable, not to whoever purports to be the "bearer" but
only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further
engages itself to pay said depositor the amount indicated
thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the depositor
reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying
that per books of the bank, the depositor
referred (sic) in these certificates states that it
was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to
show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company,
Mr. Witness?
 witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified
in all of these certificates of time deposit
insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability
of an instrument is determined from the writing, that is, from the face of the
instrument itself.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but
what is the meaning of the words they have used. What the parties meant
must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as
the bank is concerned," but obviously other parties not privy to the
transaction between them would not be in a position to know that the
depositor is not the bearer stated in the CTDs. Hence, the situation would
require any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words
or stipulations in a contract shall not favor the party who caused the
obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de la
Cruz, whom petitioner chose not to implead in this suit for reasons of its
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for
the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it
as a security for De la Cruz' purchases of its fuel products. Any doubt as to
whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's
own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon
them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to
falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the
words "to guarantee" in the letter aforequoted. Besides, when respondent
bank, as defendant in the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be required to
aver with sufficient definiteness or particularity (a) the due date or dates
of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and
(b) whether or not it issued a receipt showing that the CTDs were delivered
to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion. 18 Had it produced the receipt
prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion,
petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez,
supra, we quote therefrom:
The character of the transaction between the
parties is to be determined by their intention,
regardless of what language was used or what
the form of the transfer was. If it was intended
to secure the payment of money, it must be
construed as a pledge; but if there was some
other intention, it is not a pledge. However,
even though a transfer, if regarded by itself,
appears to have been absolute, its object and
character might still be qualified and
explained by contemporaneous writing
declaring it to have been a deposit of the
property as collateral security. It has been said
that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make
an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence
and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily
importing conveyance of absolute ownership
will not be given that effect in such a
transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and
unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it
is transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In
the present case, however, there was no negotiation in the sense of a transfer
of the legal title to the CTDs in favor of petitioner in which situation, for
obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder for value
by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the event of non-
payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, . . . may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons
if a description of the thing pledged and the date of the
pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the date
of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz
in favor of respondent bank was embodied in a public instrument. 27 With
regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall
produce no effect as against third persons, unless it appears
in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real
property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements of
the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of
alleged negligence of private respondent was not included in the stipulation
of the parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable
instruments.
2. Whether or not defendant could legally apply the amount
covered by the CTDs against the depositor's loan by virtue of
the assignment (Annex "C").
3. Whether or not there was legal compensation or set off
involving the amount covered by the CTDs and the
depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to
preterminate the CTDs before the maturity date provided
therein.
5. Whether or not plaintiff is entitled to the proceeds of the
CTDs.
6. Whether or not the parties can recover damages, attorney's
fees and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel. 30 Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues not raised in the trial
court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may
involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed
negligence may be considered encompassed by the issues on its right to
preterminate and receive the proceeds of the CTDs would be tantamount to
saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the
proceeds of the questioned certificates can be premised on a multitude of
other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the
CTDs in the case at bar, are merely permissive and not mandatory. The very
first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it
may be, may apply to the judge or court of competent
jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as
well as in order to prevent the ownership of the instrument
that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory
but discretionary on the part of the "dispossessed owner" to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is
not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558
of the Code of Commerce, on which petitioner seeks to anchor respondent
bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument
so that he may obtain a duplicate of the same, and, on the other, an option
in favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the
provisions cited by petitioner categorically restricts or prohibits the issuance
a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement
therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
FIRST DIVISION bank, HSBC serves as the collection/payment agent with respect to
dividends and other income derived from its investor-clients’ passive
G.R. No. 166018 June 4, 2014 investments.6

THE HONGKONG AND SHANGHAI BANKING CORPORATION HSBC’s investor-clients maintain Philippine peso and/or foreign currency
LIMITED-PHILIPPINE BRANCHES, Petitioner, accounts, which are managed by HSBC through instructions given through
vs. electronic messages. The said instructions are standard forms known in the
COMMISSIONER OF INTERNAL REVENUE, Respondent; banking industry as SWIFT, or "Society for Worldwide Interbank Financial
Telecommunication." In purchasing shares of stock and other investment in
x-----------------------x securities, the investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts and to pay
G.R. No. 167728 the purchase price therefor upon receipt of the securities.7

THE HONGKONG AND SHANGHAI BANKING CORPORATION Pursuant to the electronic messages of its investor-clients, HSBC purchased
LIMITED-PHILIPPINE BRANCHES, Petitioner, and paid Documentary Stamp Tax (DST) from September to December 1997
vs. and also from January to December 1998 amounting to ₱19,572,992.10 and
COMMISSIONER OF INTERNAL REVENUE, Respondent. ₱32,904,437.30, respectively, broken down as follows:

DECISION A. September to December 1997

LEONARDO-DE CASTRO, J.: September 1997 P 6,981,447.90

These petitions for review on certiorari1 assail the Decision2 and Resolution October 1997 6,209,316.60
dated July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals
November 1997 3,978,510.30
in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated
September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals in December 1997 2,403,717.30
CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly
Total ₱19,572,992.10
reversed and set aside the decisions of the Court of Tax Appeals (CTA) in
CTA Case Nos. 59514 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited- B. January to December 1998
Philippine Branches (HSBC). The corresponding Resolutions, on the other
hand, denied the respective motions for reconsideration of the said January 1998 P 3,328,305.60
Decisions.
February 1998 4,566,924.90
HSBC performs, among others, custodial services on behalf of its investor- March 1998 5,371,797.30
clients, corporate and individual, resident or non-resident of the Philippines,
with respect to their passive investments in the Philippines, particularly April 1998 4,197,235.50
investments in shares of stocks in domestic corporations. As a custodian
May 1998 2,519,587.20 to their local or foreign currency accounts are subject to documentary stamp
tax under Section 181 of the 1997 Tax Code, viz:
June 1998 2,301,333.00
July 1998 1,586,404.50 A. Investment purchase transactions:

August 1998 1,787,359.50 An overseas client sends instruction to its bank in the Philippines to either:
September 1998 1,231,828.20
(i) debit its local or foreign currency account and to pay a
October 1998 1,303,184.40 named recipient in the Philippines; or
November 1998 2,026,379.70
(ii) receive funds from another bank in the Philippines for
December 1998 2,684,097.50 deposit into its account and to pay a named recipient in the
Philippines."
Total ₱32,904,437.30
The foregoing transactions are carried out under instruction from abroad
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then and [do] not involve actual fund transfer since the funds are already in the
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect Philippine accounts. The instructions are in the form of electronic messages
that instructions or advises from abroad on the management of funds (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment
located in the Philippines which do not involve transfer of funds from is against the delivery of investments purchased. The purchase of
abroad are not subject to DST. BIR Ruling No. 132-99 reads: investments and the payment comprise one single transaction. DST has
already been paid under Section 176 for the investment purchase.
Date: August 23, 1999
B. Other transactions:
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES An overseas client sends an instruction to its bank in the Philippines to
G/F AFC Building, Alfaro St. either:
Salcedo Village, Makati
Metro Manila (i) debit its local or foreign currency account and to pay a
named recipient, who may be another bank, a corporate
Attn: Atty. Tomas C. Toledo entity or an individual in the Philippines; or
Tax Counsel
(ii) receive funds from another bank in the Philippines for
Gentlemen: deposit to its account and to pay a named recipient, who may
be another bank, a corporate entity or an individual in the
This refers to your letter dated July 26, 1999 requesting on behalf of your Philippines."
clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as
to whether or not the electronic instructions involving the following
transactions of residents and non-residents of the Philippines with respect
The above instruction is in the form of an electronic message (i.e., SWIFT MT
100 or MT 202) or tested cable, and may not refer to any particular
transaction.
The opening and maintenance by a non-resident of local or foreign currency
accounts with a bank in the Philippines is permitted by the Bangko Sentral
ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax
Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.–
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency. (Underscoring
supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order
for payment purporting to be drawn in a foreign country but payable in the
Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied
on the instrument, i.e., a bill of exchange or order for the payment of money,
which purports to draw money from a foreign country but payable in the
Philippines. In the instant case, however, while the payor is residing outside
the Philippines, he maintains a local and foreign currency account in the
Philippines from where he will draw the money intended to pay a named
recipient. The instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there
is no negotiable instrument to be made, signed or issued by the payee. In the
meantime, such electronic instructions by the non-resident payor cannot be
considered as a transaction per se considering that the same do not involve
any transfer of funds from abroad or from the place where the instruction
originates. Insofar as the local bank is concerned, such instruction could be
considered only as a memorandum and shall be entered as such in its books
of accounts. The actual debiting of the payor’s account, local or foreign
currency account in the Philippines, is the actual transaction that should be
properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money
from a bank deposit, local or foreign currency account, is not subject to DST,
unless the account so maintained is a current or checking account, in which
case, the issuance of the check or bank drafts is subject to the documentary
stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant
case, and subject to the physical impossibility on the part of the payor to be
present and prepare and sign an instrument purporting to pay a certain
obligation, the withdrawal and payment shall be made in cash. In this light,
the withdrawal shall not be subject to documentary stamp tax. The case is
parallel to an automatic bank transfer of local funds from a savings account
to a checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for
deposit to the payee’s account and thereafter upon instruction of the non-
resident depositor-payor, through an electronic message, the depository
bank to debit his account and pay a named recipient shall not be subject to
documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing
abroad is part of its regular banking transaction which is not subject to
documentary stamp tax. Neither does the receipt of funds makes the
recipient subject to the documentary stamp tax. The funds are deemed to be
part of the deposits of the client once credited to his account, and which,
thereafter can be disposed in the manner he wants. The payor-client’s
further instruction to debit his account and pay a named recipient in the
Philippines does not involve transfer of funds from abroad. Likewise, as
stated earlier, such debit of local or foreign currency account in the
Philippines is not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction
made through an electronic message by non-resident payor-client to debit
his local or foreign currency account maintained in the Philippines and to
pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the 1997 Tax Code. Such
being the case, such electronic instruction purporting to draw funds from a
local account intended to be paid to a named recipient in the Philippines is
not subject to documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are
different, this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of ₱19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering
September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim
for the refund of the amount of ₱32,904,437.30 allegedly representing
erroneously paid DST to the BIR for the period covering January to
December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA as CTA Case Nos. 5951 and 6009,
respectively, in order to suspend the running of the two-year prescriptive
period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax
credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75
in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951,
representing erroneously paid DST that have been sufficiently substantiated
with documentary evidence. The CTA ruled that HSBC is entitled to a tax
refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do
not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in the
Philippines and pay a certain named recipient also residing in the
Philippines is not the transaction contemplated in Section 181 of the Code.
In this case, the withdrawal and payment shall be made in cash. It is parallel
to an automatic bank transfer of local funds from a savings account to a
checking account maintained by a depositor in one bank. The act of debiting
the account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under
Section 180 of the same Code. These electronic message instructions cannot
be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such
in the books of account of the local bank, and the actual debiting of the
payor’s local or foreign currency account in the Philippines is the actual
transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the
amount of ₱30,360,570.75 representing erroneous payment of documentary
stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby
partially granted. Accordingly, respondent is hereby ORDERED to
REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in
favor of the petitioner in the reduced amount of ₱16,436,395.83 representing
erroneously paid documentary stamp tax for the months of September 1997
to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and
ruled that the electronic messages of HSBC’s investor-clients are subject to
DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as
regards their passive investments in the Philippines mainly involving shares
of stocks in domestic corporations. These investor-clients maintain
Philippine peso and/or foreign currency accounts with [HSBC]. Should they
desire to purchase shares of stock and other investments securities in the
Philippines, the investor-clients send their instructions and advises via
electronic messages from abroad to [HSBC] in the form of SWIFT MT 100,
MT 202, or MT 521 directing the latter to debit their local or foreign currency
account and to pay the purchase price upon receipt of the securities (CTA
Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC,
[HSBC] was thus required to pay [DST] based on its acceptance of these
electronic messages – which, as [HSBC] readily admits in its petition filed
before the [CTA], were essentially orders to pay the purchases of securities
made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST]
from [HSBC] considering that the said tax was levied against the acceptances
and payments by [HSBC] of the subject electronic messages/orders for
payment. The issue of whether such electronic messages may be equated as
a written document and thus be subject to tax is beside the point. As We
have already stressed, Section 181 of the law cited earlier imposes the [DST]
not on the bill of exchange or order for payment of money but on the
acceptance or payment of the said bill or order. The acceptance of a bill or
order is the signification by the drawee of its assent to the order of the
drawer to pay a given sum of money while payment implies not only the
assent to the said order of the drawer and a recognition of the drawer’s
obligation to pay such aforesaid sum, but also a compliance with such
obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693
[1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257
[1992]). What is vital to the valid imposition of the [DST] under Section 181
is the existence of the requirement of acceptance or payment by the drawee
(in this case, [HSBC]) of the order for payment of money from its investor-
clients and that the said order was drawn from a foreign country and
payable in the Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being
imposed in the case at bar. In Philippine Home Assurance Corporation vs.
Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST
is] levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments, independently of the legal
status of the transactions giving rise thereto. In the same case, the High
Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153
[1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction of
the business. It is an excise upon the facilities used in the transaction of the
business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment
made by [HSBC] pursuant to the order made by its client-investors as
embodied in the cited electronic messages, through which the herein parties’
privilege and opportunity to transact business respectively as drawee and
drawers was exercised, separate and apart from the circumstances and
conditions related to such acceptance and subsequent payment of the sum
of money authorized by the concerned drawers. Stated another way, the
[DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-
drawer relationship with its client-investor through the execution of a
specific instrument which, in the case at bar, is the acceptance of the order
for payment of money. The acceptance of a bill or order for payment may be
done in writing by the drawee in the bill or order itself, or in a separate
instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was veritably
‘done in writing in a separate instrument’ each time it debited the local or
foreign currency accounts of its client-investors pursuant to the latter’s
instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or
facilities covered by the tax – in this case, the acceptance by [HSBC] of the
order for payment of money sent by the client-investors through electronic
messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to
HSBC, in the absence of abuse or improvident exercise of authority, the
CTA’s ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the
review of tax cases. HSBC further argues that the Commissioner of Internal
Revenue had already settled the issue on the taxability of electronic
messages involved in these cases in BIR Ruling No. 132-99 and reiterated in
BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that
Section 181 of the 1997 Tax Code imposes DST on the acceptance or payment
of a bill of exchange or order for the payment of money. The DST under
Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege
which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with
prevailing law and long standing administrative practice, respondent is not
barred from questioning his own revenue ruling. Tax refunds like tax
exemptions are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax
Code is levied on the acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable in the Philippines"
and that "a bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer." A
bill of exchange is one of two general forms of negotiable instruments under
the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of
HSBC’s investor-clients containing instructions to debit their respective local
or foreign currency accounts in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction contemplated
under Section 181 of the Tax Code as such instructions are "parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank." The Court favorably adopts
the finding of the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred" and that the said electronic messages are "mere
memoranda" of the transaction consisting of the "actual debiting of the
[investor-client-payor’s] local or foreign currency account in the Philippines"
and "entered as such in the books of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic messages
that are subjected to DST in these cases are not negotiable instruments as
they do not comply with the requisites of negotiability under Section 1 of the
Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed
drawers of a bill of exchange; they do not contain an unconditional order to
pay a sum certain in money as the payment is supposed to come from a
specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund
for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim
for tax refund for DST paid during the period September to December 1997
and subject of G.R. No. 166018, is worded exactly the same as its counterpart
provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of any bill
of exchange or order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp
in payment of the tax upon such document in the same manner as is required
in this Act for the stamping of inland bills of exchange or promissory notes,
and no bill of exchange shall be paid nor negotiated until such stamp shall
have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right, or property incident thereto documentary
taxes for and in respect of the transaction so had or accomplished shall be
paid as hereinafter prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such act is done or
transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippine Islands, on each two hundred
pesos, or fractional part thereof, of the face value of any such bill of exchange
or order, or the Philippine equivalent of such value, if expressed in foreign
currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other
kinds of orders for the payment of money, payable at sight or on demand,
or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the
payment of money drawn in a foreign country but payable in this country
whether at sight or on demand or after a specified period after sight or from
a stated date, is presented for acceptance or payment, there must be affixed
upon acceptance or payment of documentary stamp equal to P0.02 for each
₱200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which
provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was worded
exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon
any acceptance or payment of any bill of exchange or order for the payment
of money purporting to be drawn in a foreign country but payable in the
Philippines, there shall be collected a documentary stamp tax of thirty
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years.1âwphi1 The identical
text and common history of Section 230 of the 1977 Tax Code, as amended,
and the 1997 Tax Code, as amended, show that the law imposes DST on
either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the
Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto.23 Under Section 173 of the
1997 Tax Code, the persons primarily liable for the payment of the DST are
those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of
such privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section
181 of the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the
payment of a foreign bill of exchange or order for the payment of money that
was drawn abroad but payable in the Philippines. In other words, it levies
DST as an excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn abroad
but payable in the Philippines, and on the corresponding privilege of the
drawer to have acceptance of or payment for the bill of exchange or order
for the payment of money which it has drawn abroad but payable in the
Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of
exchange has a very definite meaning in law.27 In particular, Section 132 of
the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill
[of exchange28] is the signification by the drawee of his assent to the order of
the drawer. The acceptance must be in writing and signed by the drawee. It
must not express that the drawee will perform his promise by any other
means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee’s
consent to the drawer’s order to pay money and the expression of the
drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed
to him and it contemplates an engagement or promise to pay."29 Once the
drawee accepts, he becomes an acceptor.30 As acceptor, he engages to pay
the bill of exchange according to the tenor of his acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24
hours after such presentment.32Presentment for acceptance is the production
or exhibition of the bill of exchange to the drawee for the purpose of
obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law
requires it.34 In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to
presentment for payment.
Presentment for payment is the presentation of the instrument to the person taxable instruments under the said provision. Thus, HSBC erroneously paid
primarily liable for the purpose of demanding and obtaining payment DST on the said electronic messages for which it is entitled to a tax refund.
thereof.35
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated
Thus, whether it be presentment for acceptance or presentment for payment, May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A
the negotiable instrument has to be produced and shown to the drawee for Case No. 5951 of the Court of Tax Appeals are REINSTATED.
acceptance or to the acceptor for payment.
SO ORDERED.
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
SECOND DIVISION
G.R. No. 158262 July 21, 2008
SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,
vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002
Decision1 and May 15, 2003 Resolution2 of the Court of Appeals (CA) in CA-
G.R. CV No. 48489 entitled BA Finance Corporation, Plaintiff-Appellee v.
Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-
Appellants v. Avelino Violago, Third Party Defendant-Appellant.
Petitioners-spouses Pedro and Florencia Violago pray for the reversal of the
appellate court’s ruling which held them liable to respondent BA Finance
Corporation (BA Finance) under a promissory note and a chattel mortgage.
Petitioners likewise pray that respondent Avelino Violago be adjudged
directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales
Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and
the latter’s wife, Florencia. Avelino explained that he needed to sell a vehicle
to increase the sales quota of VMSC, and that the spouses would just have
to pay a down payment of PhP 60,500 while the balance would be financed
by respondent BA Finance. The spouses would pay the monthly installments
to BA Finance while Avelino would take care of the documentation and
approval of financing of the car. Under these terms, the spouses then agreed
to purchase a Toyota Cressida Model 1983 from VMSC.3
On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of
VMSC the amount of PhP 209,601 in 36 monthly 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 Loan/Credit Transportation
which showed the net purchase price of the vehicle, down payment, balance,
and finance charges. VMSC then issued a sales invoice in favor of the
spouses with a detailed description of the Toyota Cressida car. In turn, the
spouses executed a chattel mortgage over the car in favor of VMSC as
security for the amount of PhP 209,601. VMSC, through Avelino, endorsed
the promissory note to BA Finance without recourse. After receiving the
amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights
and interests under the promissory note and chattel mortgage in favor of BA
Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to
VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-
Baliwag Branch, which issued Certificate of Registration No. 0137032 in the
name of Pedro on August 8, 1983. The spouses were unaware that the same
car had already been sold in 1982 to Esmeraldo Violago, another cousin of
Avelino, and registered in Esmeraldo’s name by the LTO-San Rafael Branch.
Despite the spouses’ demand for the car and Avelino’s repeated assurances,
there was no delivery of the vehicle. Since VMSC failed to deliver the car,
Pedro did not pay any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC),
Branch 116 in Pasay City a complaint for Replevin with Damages against the
spouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the
delivery of the vehicle in favor of BA Finance or, if delivery cannot be
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per
month from February 15, 1984 until fully paid. BA Finance also asked for the
payment of attorney’s fees, liquidated damages, replevin bond premium,
expenses in the seizure of the vehicle, and costs of suit. The RTC issued an
Order of Replevin on March 28, 1984. The Violago spouses, as defendants a
quo, were declared in default for failing to file an answer. Eventually, the
RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ
of execution was thereafter issued on January 11, 1985, followed by an alias
writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was
then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City
Branch on April 29, 1985. On May 8, 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
RTC’s 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.
Avelino’s 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 RTC’s
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 attorney’s 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.1awphil
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 attorney’s 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 was the sale and delivery of the
vehicle. The spouses also alleged that BA Finance was not a holder in due
course of the note since it knew, through its Cebu City branch, that the car
was never delivered to the spouses.10 On the other hand, Avelino prayed for
the dismissal of the complaint against him because he was not a party to the
transaction, and for an order to the spouses to pay him moral damages and
costs of suit.
The appellate court ruled that the promissory note was a negotiable
instrument and that BA Finance was a holder in due course, applying Secs.
8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead
VMSC, the seller of the vehicle and creditor in the promissory note, as a
party in their Third Party Complaint. Citing Salas v. Court of Appeals,11 the
appellate court reasoned that since VMSC is an 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 Party
Complaint "null and void, not only as to the absent party but also to the
present parties, namely the Defendants-Appellants (petitioners herein) and
the Third-Party-Defendant-Appellant (Avelino Violago)." The CA set aside
the trial court’s order holding Avelino liable for damages to the spouses
without prejudice to the action of the spouses against VMSC and Avelino in
a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-
Appellants is DISMISSED. The appeal of the Third-Party-Defendant-
Appellant is GRANTED. The Decision of the Court a quo is AFFIRMED,
with the modification that the Third-Party Complaint against the Third-
Party-Defendant-appellant is DISMISSED, without prejudice. The
counterclaims of the Third-Party Defendant Appellant against the
Defendants-Appellants are DISMISSED, also without prejudice.13
The spouses Violago sought but were denied reconsideration by the CA per
its Resolution of May 15, 2003.
The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID
NEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED A
HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE
CONSIDERED VALID DESPITE VITIATION OF CONSENT OF,
AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY
AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE
INVOKED AND SUSTAINED DESPITE THE FRAUD AND
DECEPTION OF AVELINO
The Court’s Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby
effectively absolving Avelino from any liability under the third party
complaint.
In addressing the threshold issue of whether BA Finance is a holder in due
course of the promissory note, we must determine whether the note is a
negotiable instrument and, hence, covered by the NIL. In their appeal to the
CA, petitioners argued that the promissory note is a negotiable instrument
and that the provisions of the NIL, not the Civil Code, should be applied. In
the present petition, however, petitioners claim that Article 1318 of the Civil
Code14should be applied since their consent was vitiated by fraud, and, thus,
the promissory note does not carry any legal effect despite its negotiation.
Either way, the petitioners’ arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL
provides:
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; 763 Constancia St., Sampaloc, Manila same
(Address) (Address)
(b) Must contain an unconditional promise or order to pay a sum
certain in money; (Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(c) Must be payable on demand, or at a fixed or determinable future
time; (WITNESS) (WITNESS)

(d) Must be payable to order or to bearer; and PAY TO THE ORDER OF BA FINANCE CORPORATION

(e) Where the instrument is addressed to a drawee, he must be WITHOUT RECOURSE

named or otherwise indicated therein with reasonable certainty.
VIOLAGO MOTOR SALES CORPORATION
The promissory note signed by petitioners reads:
By: (Sgd.)
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983 AVELINO A. VIOLAGO, Pres. 15

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.
The promissory note clearly satisfies the 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:

xxxx 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:
Notice of demand, presentment, dishonor and protest are hereby waived.
(a) That it is complete and regular upon its face;
(Sgd.) (Sgd.)
(b) That he became the holder of it before it was overdue, and
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
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.
The law presumes that a holder of a negotiable instrument is a holder thereof
in due course. 16 In this case, the CA is correct in finding that BA Finance
meets all the foregoing requisites:
In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A",
is complete and regular; (b) the "Promissory Note" was endorsed by the
VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note,
acted in good faith and for value; (d) the Appellee was never informed,
before and at the time the "Promissory Note" was endorsed to the Appellee,
that the vehicle sold to the Defendants-Appellants was not 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 Avelino’s 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.
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 CA’s 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.

The fact that VMSC was not included as defendant in petitioners’ third party
complaint does not preclude recovery by petitioners from Avelino; neither
would such non-inclusion constitute a bar to the application of the piercing-
of-the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of
Appeals, an appellate proceeding involving petitioner Arcilla’s bid to avoid
the adverse CA decision on the argument that he is not personally liable for
the amount adjudged since the same constitutes a corporate liability which
nevertheless cannot even be enforced against the corporation which has not
been impleaded as a party below. In that case, the Court found as well-taken
the CA’s act of disregarding the separate juridical personality of the
corporation and holding its president, Arcilla, liable for the obligations
incurred in the name of the corporation although it was not a party to the
collection suit before the trial court. An excerpt from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was

incurred in the name of the corporation, the petitioner [Arcilla] would still
be personally liable therefor because for all legal intents and purposes, he
and the corporation are one and the same. Csar Marine Resources, Inc. is
nothing more than his business conduit and alter ego. The fiction of separate
juridical personality conferred upon such corporation by law should be
disregarded. Significantly, petitioner does not seriously challenge the [CA’s]
THIRD DIVISION 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
G.R. No. 76788 January 22, 1990 of San Fernando, Pampanga.

JUANITA SALAS, petitioner, In its decision dated September 10, 1982, the trial court held, thus:
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING WHEREFORE, and in view of all the foregoing, judgment is hereby
CORPORATION, respondents. rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2,
Arsenio C. Villalon, Jr. for petitioner. 1980 until the said sum is fully paid; and the further amount of
Labaguis, Loyola, Angara & Associates for private respondent. P1,000.00 as attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant. 1

FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court
of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
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.
Both petitioner and private respondent appealed the aforesaid decision to
the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having
delivered a different vehicle to petitioner, the latter prayed for a reversal of
the trial court's decision so that she may be absolved from the obligation
under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the
pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading
are conclusive as against the pleader. A party cannot subsequently
take a position contradictory 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 the diminishing balance, the said principal sum, to be payable,
Acceptance Corp., 6 this Court had the occasion to clearly distinguish between without need of notice or demand, in installments of the amounts
a negotiable and a non-negotiable instrument. following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st
Among others, the instrument in order to be considered negotiable must day of each month starting March 21, 1980 thru and inclusive of
contain the so-called "words of negotiability — i.e., must be payable to February 21, 1983. P_________ monthly for ______ months due and
"order" or "bearer"". Under Section 8 of the Negotiable Instruments Law, payable on the ______ day of each month starting _____198__ thru
there are only two ways by which an instrument may be made payable to and inclusive of _____, 198________ provided that interest at 14% per
order. There must always be a specified person named in the instrument and annum shall be added on each unpaid installment from maturity
the bill or note is to be paid to the person designated in the instrument or to hereof until fully paid.
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 xxx xxx xxx
person designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a Maker; Co-Maker:
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 (SIGNED) JUANITA SALAS _________________
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 Address:
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 WITNESSES
bears all the earmarks of negotiability.
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
The pertinent portion of the note reads: TAN # TAN #

PROMISSORY NOTE PAY TO THE ORDER OF

(MONTHLY) FILINVEST FINANCE AND LEASING CORPORATION

P58,138.20 VIOLAGO MOTOR SALES CORPORATION

San Fernando, Pampanga, Philippines BY: (SIGNED) GENEVEVA V. BALTAZAR
Feb. 11, 1980 Cash Manager 8

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
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
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.

Under the circumstances, there appears to be no question that Filinvest is a SO ORDERED.

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.

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
FIRST DIVISION 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
G.R. No. 88866 February 18, 1991 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
METROPOLITAN BANK & TRUST COMPANY, petitioner, the principal office of Metrobank, which forwarded them to the Bureau of
vs. Treasury for special clearing.2
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION,
INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA More than two weeks after the deposits, Gloria Castillo went to the Calapan
CASTILLO, respondents. branch several times to ask whether the warrants had been cleared. She was
told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw
Angara, Abello, Concepcion, Regala & Cruz for petitioner. from his account. Later, however, "exasperated" over Gloria's repeated
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia inquiries and also as an accommodation for a "valued client," the petitioner
Castillo. says it finally decided to allow Golden Savings to withdraw from the
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan proceeds of the
Association, Inc. 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
CRUZ, J.: P968.000.00.4

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
In turn, Golden Savings subsequently allowed Gomez to make withdrawals
from his own account, eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19, 1979,
and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro.5 After trial, judgment was rendered in
favor of Golden Savings, which, however, filed a motion for reconsideration
even as Metrobank filed its notice of appeal. On November 4, 1986, the lower
court modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

 1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate and
credit to such account such amount existing before the debit was
made including the amount of P812,033.37 in favor of defendant
Golden Savings and Loan Association, Inc. and thereafter, to allow
defendant Golden Savings and Loan Association, Inc. to withdraw
the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney's fees and expenses of litigation in the
amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno
Castillo and Lucia Castillo attorney's fees and expenses of litigation
in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously
credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are forged or
unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot be
held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already
dishonored, thereby perpetuating the fraud committed by Eduardo
Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that, consequently, it was
safe to allow Gomez to withdraw the proceeds thereof from his account with
it. Without such assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason not to allow the
withdrawal. Indeed, Golden Savings might even have incurred liability for
its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he
saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden
Savings deposited them to its account with Metrobank. Golden Savings had
no clearing facilities of its own. It relied on Metrobank to determine the
validity of the warrants through its own services. The proceeds of the
warrants were withheld from Gomez until Metrobank allowed Golden
Savings itself to withdraw them from its own deposit.7 It was only when
Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised
more care in checking the personal circumstances of Gomez before accepting
his deposit does not hold water. It was Gomez who was entrusting the
warrants, not Golden Savings that was extending him a loan; and moreover,
the treasury warrants were subject to clearing, pending which the depositor
could not withdraw its proceeds. There was no question of Gomez's identity
or of the genuineness of his signature as checked by Golden Savings. In fact,
the treasury warrants were dishonored allegedly because of the forgery of
the signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and
diligence and cannot be faulted for the withdrawals it allowed Gomez to
make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling — more than one and a half million pesos (and this
was 1979). There was no reason why it should not have waited until the
treasury warrants had been cleared; it would not have lost a single centavo
by waiting. Yet, despite the lack of such clearance — and notwithstanding
that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses — it allowed Golden Savings to
withdraw — not once, not twice, but thrice — from the uncleared treasury
warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to "accommodate" a valued
client. It "presumed" that the warrants had been cleared simply because of
"the lapse of one week."8 For a bank with its long experience, this
explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which the
treasury warrants were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only
as the depositor's collecting agent, assuming no responsibility beyond care
in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge
back to the depositor's account any amount previously credited, whether or
not such item is returned. This also applies to checks drawn on local banks
and bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft
or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting
only as a collecting agent for Golden Savings and give it the right to "charge
back to the depositor's account any amount previously credited, whether or
not such item is returned. This also applies to checks ". . . which are unpaid
due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria Castillo,
as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank
unilaterally, without the consent of the depositor. Indeed, it could be argued
that the depositor, in signing the deposit slip, does so only to identify himself
and not to agree to the conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter at this time. At any
rate, the Court feels that even if the deposit slip were considered a contract,
the petitioner could still not validly disclaim responsibility thereunder in the
light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings,
Metrobank seems to be suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary, Article 1909 of the
Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the
courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat for
emphasis, it was the clearance given by it that assured Golden Savings it was
already safe to allow Gomez to withdraw the proceeds of the treasury
warrants he had deposited Metrobank misled Golden Savings. There may
have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied
from its allowing Golden Savings to withdraw from its account not only
once or even twice but three times. The total withdrawal was in excess of its
original balance before the treasury warrants were deposited, which only
added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason does not
mean no reason at all. Otherwise, there would have been no need at all for
Golden Savings to deposit the treasury warrants with it for clearance. There
would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if
interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar
when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in
giving express or at least implied clearance to the treasury warrants and
allowing payments therefrom to Golden Savings. But that is not all. On top
of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation,
has not been established.9 This was the finding of the lower courts which we
see no reason to disturb. And as we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA
238). It must be established by clear, positive and convincing
evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped on
their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to
wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with —
(a) An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay "not unconditional"
and the warrants themselves non-negotiable. There should be no question
that the exception on Section 3 of the Negotiable Instruments Law is
applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith and for value
of a negotiable instrument and is entitled to the rights and privileges
of a holder in due course, free from defenses. But this treasury
warrant is not within the scope of the negotiable instrument law. For
one thing, the document bearing on its face the words "payable from
the appropriation for food administration, is actually an Order for
payment out of "a particular fund," and is not unconditional and
does not fulfill one of the essential requirements of a negotiable
instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable
Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were "genuine and in all respects what
they purport to be," in accordance with Section 66 of the Negotiable
Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants
but merely to deposit them with Metrobank for clearing. It was in fact
Metrobank that made the guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the
Philippine Islands,12 but we feel this case is inapplicable to the present
controversy.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 the amount outstanding thereon, if
any, after the debit.
SO ORDERED.
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.
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
accommodations1 with respondent Republic Bank (the Bank), later known
as Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962, granting it a
credit line of P900,000.002 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 QGLC's 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 QGLC's
obligation after the proceeds of the 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 Bank's 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 Incorporated9 covering the purchase of a tractor10 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 P64,000.0016 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, attorney's 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 attorney's fees at ten percent of the total amount
due18 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;20that
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 Answer24 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 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 attorney's 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 plaintiff's 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 plaintiff's complaint.
As regards the ninth cause of action, the Court is baffled why
plaintiff extended to defendants another loan when defendants
according to plaintiff's 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 xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the trial
court by Decision27 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 Bank's]
documentary evidence [the trial court having ruled on the basis of
prescription of the Bank's 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
court's 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 of their
properties, thus, the trial court's 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 court's award of attorney's 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 ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon 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 Bank's 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 Bank's 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.
Coming now to the second issue, petitioners seek to evade liability under
the Bank's 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 Bank's
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 thereof. The promissory notes, however, appear to be
45
negotiable as they meet the requirements of Section 146 of the Negotiable
Instruments Law. Such being the case, the notes are prima faciedeemed 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 1448 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 court's dismissal
of the Bank's 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 Bank's action for
deficiency is barred by prescription, nothing irregular attended the
foreclosure proceedings to warrant the reconveyance of the properties
covered thereby.

As for petitioners' prayer for moral and exemplary damages, it not having
been raised as issue before the courts below, it can not now be considered.
Neither can the award of attorney's fees for lack of legal basis.

WHEREFORE, the CA Decision is hereby AFFIRMED with

MODIFICATION.

Republic Bank's Complaint with respect to its first to sixth causes of action
is hereby DISMISSED. Its complaint with respect to its seventh to ninth
causes of action is REMANDED to the court of origin, the Manila Regional
Trial Court, Branch 36, for it to determine the amounts due the Bank
thereunder.

SO ORDERED.
THIRD DIVISION
[G.R. NO. 161756 December 16, 2005]
VICTORIA J. ILANO represented by her Attorney-in-fact, MILO
ANTONIO C. ILANO, Petitioners, v. HON. DOLORES L. ESPAÑOL, in
her capacity as Executive Judge, RTC of Imus, Cavite, Br. 90, and, AMELIA
ALONZO, EDITH CALILAP, DANILO CAMACLANG, ESTELA
CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN
REYES, JANE BACAREL, CHERRY CAMACLANG, FLORA CABRERA,
ESTELITA LEGASPI, CARMENCITA GONZALES, NEMIA CASTRO,
GLORIA DOMINGUEZ, ANNILYN C. SABALE and several JOHN
DOES, Respondents.
DECISION
CARPIO MORALES, J.:
The Court of Appeals having affirmed the dismissal by Branch 20 of the
Regional Trial Court (RTC) of Cavite at Imus, for lack of cause of action, Civil
Case No. 2079-00, the complaint filed by herein petitioner Victoria J. Ilano
for Revocation/Cancellation of Promissory Notes and Bills of
Exchange (Checks) with Damages and Prayer for Preliminary Injunction or
Temporary Restraining Order (TRO),1 against herein respondents 15 named
defendants (and several John Does), a recital of the pertinent allegations in
the complaint, quoted verbatim as follows, is in order:
xxx
3. That defendant AMELIA O. ALONZO, is a trusted employee of
[petitioner]. She has been with them for several years already, and through
the years, defendant ALONZO was able to gain the trust and confidence of
[petitioner] and her family;
4. That due to these trust and confidence reposed upon defendant ALONZO
by [petitioner], there were occasions when defendant ALONZO was
entrusted with [petitioner's] METROBANK Check Book containing either
signed or unsigned blank checks, especially in those times when [petitioner]
left for the United States for medical check-up;
5. Sometime during the second week of December 1999, or thereabouts,
defendant ALONZO by means of deceit and abuse of confidence
succeeded in procuring Promissory Notes and signed blank checks from
[petitioner] who was then recuperating from illness;
6. That as stated, aside from the said blank checks, defendant ALONZO
likewise succeeded in inducing [petitioner] to sign the Promissory Notes
antedated June 8, 1999 in the amount of PESOS: ONE MILLION FOUR
HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED SEVENTY
TWO (Php 1,428,272.00) payable to defendants EDITH CALILAP and
DANILO CALILAP, and another Promissory Noted dated March 1999 in
the amount of PESOS: ONE MILLION (Php 1,000,000.00) payable to the
same defendants EDITH CALILAP and DANILO CALILAP, copies of said
Promissory Notes are hereto attached as Annexes "A" and "A-1" hereof;
7. That another Promissory Note antedated October 1, 1999 thru the
machination of defendant ALONZO, was signed by [petitioner] in the
amount of PESOS: THREE MILLION FORTY SIX THOUSAND FOUR
HUNDRED ONE (Php 3,046,401.00) excluding interest, in favor of her co-
defendants ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA
REYES, EDWIN REYES, JANE BACAREL and CHERRY CAMACLANG, a
copy of said Promissory Note is hereto attached as Annex "B" hereof;
8. That the Promissory Notes and blank checks were procured thru fraud
and deceit. The consent of the [petitioner] in the issuance of the two (2)
aforementioned Promissory Notes was vitiated. Furthermore, the same
were issued for want of consideration, hence, the same should be cancelled,
revoked or declared null and void;
9. That as clearly shown heretofore, defendant ALONZO in collusion with
her co-defendants, ESTELA CAMACLANG, ALLAN CAMACLANG and
ESTELITA LEGASPI likewise was able to induce plaintiff to sign several
undated blank checks,among which are:
'Metrobank Check No. 0111544
'Metrobank Check No. 0111545 Copy attached as Annexes "D", "D-1", "D-2", "D-3", "D-4", "D-5", "D-6", "D-7",
"D-8", "D-9" and "D-10", respectively;
'Metrobank Check No. 0111546
Furthermore, defendant ALONZO colluded and conspired with defendant
'Metrobank Check No. 0111547 NEMIA CASTO in procuring the signature of [petitioner] in documents
denominated as "Malayang Salaysay" dated July 22, 1999in the amount of
'Metrobank Check No. 0111515 PESOS: ONE HUNDRED FIFTY THOUSAND (Php 150,000.00) and another
"Malayang Salaysay" dated November 22, 1999 in the amount of PESOS:
all in the total amount of Php 3,031,600.00, copies of said checks are hereto ONE HUNDRED THOUSAND (Php 100,000.00) Annexes "D-11" and "D-12"
attached as Annexes "C", "C-1", "C-2", "C-3" and "C-4", respectively; hereof;

10. That aside from the checks mentioned heretofore, defendant 11. That said defendants took undue advantage of the signature of
ALONZO, confederated and conspired with the following co-defendants, [petitioner] in the said blank checks and furthermore forged and or
FLORA CABRERA, NEMIA CASTRO, EDITH CALILAP, DANILO falsified the signature of [petitioner] in other unsigned checks and as it
CALILAP, GLORIA DOMINGUEZ, CARMENCITA GONZALES and was made to appear that said [petitioner] is under the obligation to pay
ANNILYN C. SABALE and took advantage of the signature of [petitioner] them several amounts of money, when in truth and in fact, said
in said blank checks which were later on completed by them indicated [petitioner] does not owe any of said defendant any single amount;
opposite their respective names and the respective amount thereof, as
follows: 12. That the issuance of the aforementioned checks or Promissory Notes or
the aforementioned "Malayang Salaysay" to herein defendants were
NAME AMOUNT METROBANK tainted with fraud and deceit, and defendants conspired with one another
to defraud herein [petitioner] as the aforementioned documents were
Check No.
issued for want of consideration;
Flora Cabrera Php 337,584.58 0111460
Flora Cabrera 98,000.00 0111514 13. That the aforesaid defendants conspiring and confederating together
Nemia Castro 100,000.00 0111542 and helping one another committed acts of falsification and defraudation
Nemia Castro 150,000.00 0084078 which they should be held accountable under law;
Edith Calilap/Danilo Calilap 490,000.00 0111513
14. The foregoing acts, and transactions, perpetrated by herein defendants
Edith Calilap/Danilo Calilap 790,272.00 0111512
in all bad faith and malice, with malevolence and selfish intent
Edith Calilap/Danilo Calilap 1,220,000.00 0111462 are causing anxiety, tension, sleepless nights, wounded feelings, and
Gloria Dominguez/ 1,046,040.00 0111543 embarrassment to [petitioner]entitling her to moral damages of at least in
the amount of PESOS: FIVE HUNDRED THOUSAND (Php 500,000.00);
Carmencita Gonzales
Annilyn C. Sable 150,000.00 0085134 15. That to avoid repetition of similar acts and as a correction for the public
Annilyn C. Sable 250,000.00 0085149 good, the defendants should be held liable to [petitioner] for exemplary
Annilyn C. Sable 186,000.00 0085112 damages in the sum of not less than the amount of PESOS: TWO HUNDRED
THOUSAND (Php 200,000.00);
16. That to protect the rights and interest of the [petitioner] in the illegal
actuations of the defendants, she was forced to engage the services of
counsel for which she was obliged to pay the sum of PESOS: ONE
HUNDRED THOUSAND (Php 100,000.00) by way of Attorney's fees plus
the amount of PESOS: THREE THOUSAND (Php 3,000.00) per appearance
in court;
x x x (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ
The named defendants-herein respondents filed their respective Answers
invoking, among other grounds for dismissal, lack of cause of action, for
while the checks subject of the complaint had been issued on account and
for value, some had been dishonored due to "ACCOUNT CLOSED;" and the
allegations in the complaint are bare and general.
By Order2 dated October 12, 2000, the trial court dismissed petitioner's
complaint for failure "to allege the ultimate facts"-bases of petitioners claim
that her right was violated and that she suffered damages thereby.
On appeal to the Court of Appeals, petitioner contended that the trial court:
A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND
LAW ON WHICH THE APPEALED ORDER WAS BASED, THEREBY
RENDERING SAID ORDER NULL AND VOID.
B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO
ALLEGE ULTIMATE FACTS ON WHICH [PETITIONER] RELIES ON HER
CLAIM THEREBY DISMISSING THE CASE FOR LACK OF CAUSE OF
ACTION.
C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION TO DISMISS
THAT CONTAINED A FAULTY NOTICE OF HEARING AS THE SAME IS
MERELY ADDRESSED TO THE BRANCH CLERK OF COURT.3
In its Decision4 of March 21, 2003 affirming the dismissal order of the trial
court, the appellate court held that the elements of a cause of action are
absent in the case:
xxx
Such allegations in the complaint are only general averments of fraud, deceit
and bad faith. There were no allegations of facts showing that the acts
complained of were done in the manner alleged. The complaint did not
clearly ascribe the extent of the liability of each of [respondents]. Neither did
it state any right or cause of action on the part of [petitioner] to show that
she is indeed entitled to the relief prayed for. In the first place, the record
shows that subject checks which she sought to cancel or revoke had already
been dishonored and stamped "ACCOUNT CLOSED." In fact, there were
already criminal charges for violation of Batas Pambansa Blg. 22 filed against
[petitioner] previous to the filing of the civil case for
revocation/cancellation. Such being the case, there was actually nothing
more to cancel or revoke. The subject checks could no longer be negotiated.
Thus, [petitioner's] allegation that the [respondents] were secretly
negotiating with third persons for their delivery and/or assignment, is
untenable.
In the second place, we find nothing on the face of the complaint to show
that [petitioner] denied the genuineness or authenticity of her signature on
the subject promissory notes and the allegedly signed blank checks. She
merely alleged abuse of trust and confidence on the part of [Alonzo]. Even
assuming arguendo that such allegations were true, then [petitioner] cannot
be held totally blameless for her predicament as it was by her own
negligence that subject instruments/signed blank checks fell into the hands
of third persons. Contrary to [petitioner's] allegations, the promissory notes
show that some of the [respondents] were actually creditors of [petitioner]
and who were issued the subject checks as securities for the loan/obligation
incurred. Having taken the instrument in good faith and for value, the
[respondents] are therefore considered holders thereof in due course and
entitled to payment.
x x x (Underscoring supplied)ςrαlαωlιbrαrÿ
Hence, the present Petition for Review on Certiorari , petitioner faulting the
appellate court:
1. . . . in sustaining the dismissal of the complaint upon the ground of failure
to state a cause of action when there are other several causes of action which
ventilate such causes of action in the complaint;
2. . . . in finding that a requirement that a Decision which should express
therein clearly and distinctly the facts and the law on which it is based does
not include cases which had not reached pre-trial or trial stage;
3. . . . in not finding that a notice of hearing which was addressed to the Clerk
of Court is totally defective and that subsequent action of the court did not
cure the flaw.5
In issue then is whether petitioner's complaint failed to state a cause of
action.
A cause of action has three elements: (1) the legal right of the plaintiff, (2)
the correlative obligation of the defendant, and (3) the act or omission of the
defendant in violation of said legal right. In determining the presence of
these elements, inquiry is confined to the four corners of the
complaint6 including its annexes, they being parts thereof.7 If these elements
are absent, the complaint becomes vulnerable to a motion to dismiss on the
ground of failure to state a cause of action.8
As reflected in the above-quoted allegations in petitioner's complaint,
petitioner is seeking twin reliefs, one for revocation/cancellation of
promissory notes and checks, and the other for damages.
Thus, petitioner alleged, among other things, that respondents, through
"deceit," "abuse of confidence" "machination," "fraud," "falsification,"
"forgery," "defraudation," and "bad faith," and "with malice, malevolence
and selfish intent," succeeded in inducing her to sign antedated promissory
notes and some blank checks, and "[by taking] undue advantage" of her
signature on some other blank checks, succeeded in procuring them, even if
there was no consideration for all of these instruments on account of which
she suffered "anxiety, tension, sleepless nights, wounded feelings and
embarrassment."
While some of the allegations may lack particulars, and are in the form of
conclusions of law, the elements of a cause of action are present. For even if
some are not stated with particularity, petitioner alleged 1) her legal right
not to be bound by the instruments which were bereft of consideration and
to which her consent was vitiated; 2) the correlative obligation on the part of
the defendants-respondents to respect said right; and 3) the act of the
defendants-respondents in procuring her signature on the instruments
through "deceit," "abuse of confidence" "machination," "fraud,"
"falsification," "forgery," "defraudation," and "bad faith," and "with malice,
malevolence and selfish intent."
Where the allegations of a complaint are vague, indefinite, or in the form of
conclusions, its dismissal is not proper for the defendant may ask for more
particulars.9
With respect to the checks subject of the complaint, it is gathered that, except
for Check No. 0084078,10 they were drawn all against petitioner's Metrobank
Account No. 00703-955536-7.
Annex "D-8"11 of the complaint, a photocopy of Check No. 0085134, shows
that it was dishonored on January 12, 2000due to "ACCOUNT CLOSED."
When petitioner then filed her complaint on March 28, 2000, all the checks
subject hereof which were drawn against the same closed account were
already rendered valueless or non-negotiable, hence, petitioner had, with
respect to them, no cause of action.
With respect to above-said Check No. 0084078, however, which was drawn
against another account of petitioner, albeit the date of issue bears only the
year − 1999, its validity and negotiable character at the time the complaint
was filed on March 28, 2000 was not affected. For Section 6 of the Negotiable
Instruments Law provides:
Section 6. Omission; seal; particular money. 'The validity and negotiable
character of an instrument are not affected by the fact that -
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been given
therefor; or

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

(d) Bears a seal; or

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

made.

x x x (Emphasis supplied)ςrαlαωlιbrαrÿ

However, even if the holder of Check No. 0084078 would have filled up
the month and day of issue thereon to be "December" and "31," respectively,
it would have, as it did, become stale six (6) months or 180 days thereafter,
following current banking practice.12

It is, however, with respect to the questioned promissory notes that the
present petition assumes merit. For, petitioner's allegations in the complaint
relative thereto, even if lacking particularity, does not as priorly stated call
for the dismissal of the complaint.

WHEREFORE, the petition is PARTLY GRANTED.

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

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

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

SO ORDERED.
THIRD DIVISION The Facts

PHILIPPINE NATIONAL BANK, G.R. No. 170325 The facts as borne by the records are as follows:
Petitioner,
Present:
YNARES-SANTIAGO, J., Respondents-Spouses Erlando and Norma Rodriguez were clients of
Chairper petitioner Philippine National Bank (PNB), Amelia Avenue
son, Branch, Cebu City. They maintained savings and demand/checking
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO, accounts, namely, PNBig Demand Deposits (Checking/Current Account
NACHURA, and No. 810624-6 under the account name Erlando and/or Norma Rodriguez),
REYES, JJ. and PNBig Demand Deposit (Checking/Current Account No. 810480-4

ERLANDO T. RODRIGUEZ Promulgated: under the account name Erlando T. Rodriguez).

and NORMA RODRIGUEZ,
Respondents. September 26, 2008 The spouses were engaged in the informal lending business. In line
x--------------------------------------------------x
with their business, they had a discounting[3] arrangement with the
DECISION Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a client

REYES, R.T., J.: of PNB Amelia Avenue Branch. The association maintained current and
savings accounts with petitioner bank.

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]
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- pushed through and the contractor even
threatened to file a case against the
defendants PEMSLA and the MCP, praying that in the event that judgment plaintiffs;
is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay. (b) Moral damages in the amount
of P1,000,000.00;

After trial, the RTC rendered judgment in favor of spouses (c) Exemplary damages in the amount
Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the of P500,000.00;
value of the checks. All counterclaims and cross-claims were dismissed. The
(d) Attorneys fees in the amount
dispositive portion of the RTC decision reads: of P150,000.00 considering that this case
does not involve very complicated issues;
WHEREFORE, in view of the foregoing, the Court and for the
hereby renders judgment, as follows:
(e) Costs of suit.
1. Defendant is hereby ordered to pay the plaintiffs the total
amount of P2,345,804.00 or reinstate or restore the 3. Other claims and counterclaims are hereby dismissed.[6]
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 CA Disposition
No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be
PNB appealed the decision of the trial court to the CA on the
computed from the filing of this complaint until fully
paid; principal ground that the disputed checks should be considered as payable
to bearer and not to order.
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 In a Decision[7] dated July 22, 2004, the CA reversed and set aside
plaintiffs being sugarcane planters, realtors, the RTC disposition. The CA concluded that the checks were obviously
residential subdivision owners, and other businesses: meant by the spouses to be really paid to PEMSLA. The court a quo declared:

(a) Consequential damages, unearned income

in the amount of P4,000,000.00, as a result We are not swayed by the contention of the plaintiffs-
of their having incurred great dificulty appellees (Spouses Rodriguez) that their cause of action arose
(sic) especially in the residential from the alleged breach of contract by the defendant-
subdivision business, which was not appellant (PNB) when it paid the value of the checks to
 PEMSLA despite the checks being payable to order. Rather,
we are more convinced by the strong and credible evidence for the
defendant-appellant with regard to the plaintiffs-appellees and
PEMSLAs business arrangement that the value of the rediscounted
checks of the plaintiffs-appellees would be deposited in PEMSLAs
account for payment of the loans it has approved in exchange for
PEMSLAs checks with the full value of the said loans. This is the
only obvious explanation as to why all the disputed sixty-
nine (69) checks were in the possession of PEMSLAs errand
boy for presentment to the defendant-appellant that led to
this present controversy. It also appears that the teller who
accepted the said checks was PEMSLAs officer, and that such
was a regular practice by the parties until the defendant-
appellant discovered the scam. The logical conclusion, therefore,
is that the checks were never meant to be paid to order, but instead,
to PEMSLA. We thus find no breach of contract on the part of
the defendant-appellant.
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:

According to plaintiff-appellee Erlando Rodriguez

testimony, PEMSLA allegedly issued post-dated checks to its In sum, we rule that the defendant-appellant PNB is
qualified members who had applied for loans. However, liable to the plaintiffs-appellees Sps. Rodriguez for the
because of PEMSLAs insufficiency of funds, PEMSLA following:
approached the plaintiffs-appellees for the latter to issue
rediscounted checks in favor of said applicant 1. Actual damages in the amount
members. Based on the investigation of the defendant- of P2,345,804 with interest at 6% per
appellant, meanwhile, this arrangement allowed the annum from 14 May 1999 until fully paid;
plaintiffs-appellees to make a profit by issuing rediscounted
checks, while the officers of PEMSLA and other members 2. Moral damages in the amount
would be able to claim their loans, despite the fact that they of P200,000;
were disqualified for one reason or another. They were able
to achieve this conspiracy by using other members who had 3. Attorneys fees in the amount
loaned lesser amounts of money or had not applied at all. x x of P100,000; and
x.[8] (Emphasis added)
4. Costs of suit.

WHEREFORE, in view of the foregoing premises,

The CA found that the checks were bearer instruments, thus they do not judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil
require indorsement for negotiation; and that spouses Rodriguez and
 Case No. 99-10892, as set forth in the immediately next
preceding paragraph hereof, and SETTING ASIDE Our
original decision promulgated in this case on 22 July 2004.
SO ORDERED.[9]
The CA ruled that the checks were payable to order. According to
the appellate court, PNB failed to present sufficient proof to defeat the claim
of the spouses Rodriguez that they really intended the checks to be received
by the specified payees. Thus, PNB is liable for the value of the checks which
it paid to PEMSLA without indorsements from the named payees. The
award for damages was deemed appropriate in view of the failure of PNB
to treat the Rodriguez account with the highest degree of care considering
the fiduciary nature of their relationship, which constrained respondents
to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the
disputed checks, they did not intend for the named payees to receive the
proceeds. Thus, they are bearer instruments that could be validly negotiated
by mere delivery. Further, testimonial and documentary evidence
presented during trial amply proved that spouses Rodriguez and the officers
of PEMSLA conspired with each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent parties. A
court discovering an erroneous judgment before it becomes final may, motu
proprio or upon motion of the parties, correct its judgment with the singular
objective of achieving justice for the litigants.[10]
However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless disposition
of cases by courts of justice. The highest degree of diligence must go into the
study of every controversy submitted for decision by litigants. Every issue
and factual detail must be closely scrutinized and analyzed, and all the
applicable laws judiciously studied, before the promulgation of every
judgment by the court. Only in this manner will errors in judgments be
avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer instrument. A
check is a bill of exchange drawn on a bank payable on demand.[11] It is either
an order or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn
payable to the order of
(a) A payee who is not maker, drawer, or drawee; or
 (b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty.
SEC. 9. When payable to bearer. The instrument is
payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or
non-existing person, and such fact is known to
the person making it so payable; or
(d) When the name of the payee does not purport
to be the name of any person; or
(e) Where the only or last indorsement is an
indorsement in blank.[12] (Underscoring
supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order instrument
requires an indorsement from the payee or holder before it may be validly
negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by mere delivery. The
provision reads:
SEC. 30. What constitutes negotiation. An instrument is
negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder completed by delivery.
A check that is payable to a specified payee is an order
instrument. However, under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer instrument if it
is payable to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus, checks issued to Prinsipe
Abante or Si Malakas at si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments because the named payees are
fictitious and non-existent.
We have yet to discuss a broader meaning of the term fictitious as
used in the NIL. It is for this reason that We look elsewhere for
guidance. Court rulings in the United States are a logical starting point since
our law on negotiable instruments was directly lifted from the Uniform
Negotiable Instruments Law of the United States.[13]
A review of US jurisprudence yields that an actual, existing, and
living payee may also be fictitious if the maker of the check did not intend
for the payee to in fact receive the proceeds of the check. This usually occurs
when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity.[14] Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended recipient of the
proceeds of the check, the payee is considered a fictitious payee and the
check is a bearer instrument.
 In a fictitious-payee situation, the drawee bank is absolved from
liability and the drawer bears the loss. When faced with a check payable to
a fictitious payee, it is treated as a bearer instrument that can be negotiated
by delivery. The underlying theory is that one cannot expect a fictitious
payee to negotiate the check by placing his indorsement thereon. And since
the maker knew this limitation, he must have intended for the instrument to
be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the check to
always deny the validity of the indorsement. This despite the fact that the
fictitious payee was purposely named without any intention that the payee
should receive the proceeds of the check.[15]
The fictitious-payee rule is best illustrated in Mueller & Martin v.
Liberty Insurance Bank.[16] In the said case, the corporation Mueller & Martin
was defrauded by George L. Martin, one of its authorized signatories.Martin
drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the
corporation without authority from the latter. Martin was also an officer of
the GSFCBA but did not have signing authority. At the back of the checks,
Martin placed the rubber stamp of the GSFCBA and signed his own name
as indorsement. He then successfully drew the funds from Liberty Insurance
Bank for his own personal profit. When the corporation filed an action
against the bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making
the check so payable did not intend for the specified payee to have any part
in the transactions, the payee is considered as a fictitious payee. The check
is then considered as a bearer instrument to be validly negotiated by mere
delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as
drawee, was authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine or not.[17]
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.[18] upheld the fictitious-payee rule. The rule
protects the depositary bank and assigns the loss to the drawer of the check
who was in a better position to prevent the loss in the first place. Due care is
not even required from the drawee or depositary bank in accepting and
paying the checks. The effect is that a showing of negligence on the part of
the depositary bank will not defeat the protection that is derived from this
rule.
However, there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the part of
the drawee bank, or any transferee of the check for that matter, will work
to strip it of this defense. The exception will cause it to bear the
loss. Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme. Said the US Supreme
Court in Getty:
Consequently, a 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 Verily, the subject checks are presumed order instruments. This is
an obligation to act with honesty in fact. x x x[19] (Emphasis
added) because, as found by both lower courts, PNB failed to present sufficient
evidence to defeat the claim of respondents-spouses that the named payees

Getty also laid the principle that the fictitious-payee rule extends protection were the intended recipients of the checks proceeds. The bank failed to

even to non-bank transferees of the checks. satisfy a requisite condition of a fictitious-payee situation that the maker of
the check intended for the payee to have no interest in the transaction.

In the case under review, the Rodriguez checks were payable to

specified payees. It is unrefuted that the 69 checks were payable to specific Because of a failure to show that the payees were fictitious in its

persons. Likewise, it is uncontroverted that the payees were actual, existing, broader sense, the fictitious-payee rule does not apply. Thus, the checks are

and living persons who were members of PEMSLA that had a rediscounting to be deemed payable to order. Consequently, the drawee bank bears the

arrangement with spouses Rodriguez. loss.[20]

What remains to be determined is if the payees, though existing PNB was remiss in its duty as the drawee bank. It does not dispute

persons, were fictitious in its broader context. 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

For the fictitious-payee rule to be available as a defense, PNB must bears stressing that order instruments can only be negotiated with a valid

show that the makers did not intend for the named payees to be part of the indorsement.

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 A bank that regularly processes checks that are neither payable to the

knowledge on the part of the payees, however, was not tantamount to a customer nor duly indorsed by the payee is apparently grossly negligent in

lack of intention on the part of respondents-spouses that the payees would its operations.[21] This Court has recognized the unique public interest

not receive the checks proceeds. Considering that respondents-spouses possessed by the banking industry and the need for the people to have full

were transacting with PEMSLA and not the individual payees, it is trust and confidence in their banks.[22] For this reason, banks are minded to

understandable that they relied on the information given by the officers of treat their customers accounts with utmost care, confidence, and honesty.[23]

PEMSLA that the payees would be receiving the checks.

In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawers instructions, i.e., to the named payee in the
check. It should charge to the drawers accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to
the drawers account.[24]
In the case at bar, respondents-spouses were the banks depositors.
The checks were drawn against respondents-spouses accounts. PNB, as the
drawee bank, had the responsibility to ascertain the regularity of the
indorsements, and the genuineness of the signatures on the checks before
accepting them for deposit. Lastly, PNB was obligated to pay the checks in
strict accordance with the instructions of the drawers. Petitioner miserably
failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The facts
clearly show that the bank did not pay the checks in strict accordance with
the instructions of the drawers, respondents-spouses. Instead, it paid the
values of the checks not to the named payees or their order, but to PEMSLA,
a third party to the transaction between the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable to
maintain the stability of the banking industry. Thus, banks are enjoined to
be extra vigilant in the management and supervision of their
employees. In Bank of the Philippine Islands v. Court of Appeals,[25] this Court
cautioned thus:
Banks handle daily transactions involving millions of
pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their
employees and officials is far greater
than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree
of diligence in the selection and supervision of their
employees.[26]
PNBs tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. Indeed,
when it is the gross negligence of the bank employees that caused the loss,
the bank should be held liable.[27]
PNBs argument that there is no loss to compensate since no demand
for payment has been made by the payees must also fail. Damage was
caused to respondents-spouses when the PEMSLA checks they deposited
were returned for the reason Account Closed. These PEMSLA checks were
the corresponding payments to the Rodriguez checks. Since they could not
encash the PEMSLA checks, respondents-spouses were unable to collect
payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences
of its negligence. Being issued to named payees, PNB was duty-bound by
law and by banking rules and procedure to require that the checks be
properly indorsed before accepting them for deposit and payment. In
fine, PNB should be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNBs cross-
claim against its co-defendants PEMSLA and MPC. The records are bereft of
any pleading filed by these two defendants in answer to the complaint of
respondents-spouses and cross-claim of PNB. The Rules expressly provide
that failure to file an answer is a ground for a declaration that defendant
is in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA
and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs
cross-claim has no basis. Thus, this judgment shall be without prejudice to
whatever action the bank might take against its co-defendants in the trial
court.

To PNBs credit, it became involved in the controversial transaction not of its

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

WHEREFORE, the appealed Amended Decision is AFFIRMED

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

SO ORDERED.