Section 8

SALAS V. CA
181 SCRA 296
 

FACTS:

Petitioner  bought  a  car  from  Viologo  Motor  Sales  Company,  which  was
secured  by  a  promissory  note,  which  was  later  on  indorsed to  Filinvest
Finance,  which  financed  the  transaction.    Petitioner  later  on  defaulted  in
her  installment  payments,  allegedly  due  to  the  fraud  imputed  by  VMS 
in
selling her a different vehicle from what was agreed upon.  This default in
payment  prompted  Filinvest  Finance  to  initiate  a  case  against  petitioner. 
The  trial  court  decided  in  favor  of  Filinvest,  to  which  the  appellate  court
upheld by increasing the amount to be paid.

It is the contention of petitioner that since the agreement between her and the 
motor  company  was  inexistent,  none  had  been  assigned  in  favor  of
private respondent.  
 

HELD:

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.
 
The  instrument  to  be  negotiable  must  contain  the  so-called  words  of
negotiability.    There  are  only  2  ways  for  an  instrument  to  be  payable 
to order.  There must always be a specified person named in the instrument
and the bill or note is to be paid to the person designated in the instrument or 
to  any  person  to  whom  he  has  indorsed  and  delivered  the  same. 
Without the words “or order” or “to the order of”, the instrument is payable
only  to  the  person  designated  therein  and  is  thus  non-negotiable.    Any
subsequent  purchaser  thereof  will  not  enjoy  the  advantages  of  being  a
holder  in  due  course  but  will  merely  step  into  the  shoes  of  the  person
designated  in  the  instrument  and  will  thus  be  open  to  the  defenses
available against the latter.  
 
In  the  case  at  bar,  the  promissory  notes  is  earmarked  with  negotiability
and Filinvest is a holder in due course.   

Salas vs CA
G.R. No. 76788 January 22, 1990

JUANITA SALAS, vs. HON. COURT OF APPEALS and FIRST FINANCE &
LEASING CORPORATION

Facts: Juanita Salas (Petitioner) bought a motor vehicle from the Violago
Motor Sales Corporation (VMS) for as evidenced by a promissory note. This
note was subsequently endorsed to Filinvest Finance & Leasing Corporation
(private respondent) which financed the purchase.

Petitioner defaulted in her installments 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.

This failure to pay prompted private respondent to initiate an action for a sum
of money against petitioner before the Regional Trial Court.

Issue: WON private respondent is a holder in due course?

Held: YES. The PN was negotiated by indorsement in writing on the

instrument itself payable to the Order of Filinvest Finance and Leasing
Corporation and it is an indorsement of the entire instrument.

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

holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the
holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d]
when it was negotiated to Filinvest, the latter had no notice of any infirmity in
the instrument or defect in the title of VMS Corporation.
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.  This being so, petitioner cannot set up against respondent
the defense of nullity of the contract of sale between her and VMS.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76788               January 22, 1990

JUANITA SALAS, petitioner,
vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING
CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

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.

This failure to pay prompted private respondent to initiate Civil Case No.
5915 for a sum of money against petitioner before the Regional Trial Court
of San Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby rendered
ordering the defendant (Salas) to pay the plaintiff(filinvest) the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2, 1980
until the said sum is fully paid; and the further amount of P1,000.00 as
attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant.  1

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(salas), 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(salas) 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(salas) 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   which she alleges is applicable here, no contract ever existed between her
4

and VMS and therefore none had been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead
VMS as a party to the case before it can be made to answer for damages because VMS
was earlier sued by her for "breach of contract with damages" before the Regional
Trial Court of Olongapo City, Branch LXXII, docketed as Civil Case No. 2916-0. She
cites as authority the decision therein where the court originally ordered petitioner to pay
the remaining balance of the motor vehicle installments in the amount of P31,644.30
representing the difference between the agreed consideration of P49,000.00 as shown in
the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly evidenced
by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70.
Parenthetically, said decision is still pending consideration by the First Civil Case
Division of the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No.
02922. 5

Private respondent in its comment, prays for the dismissal of the petition and counters
that the issues raised and the allegations adduced therein are a mere rehash of those
presented and already passed upon in the court below, and that the judgment in the
"breach of contract" suit cannot be invoked as an authority as the same is still pending
determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of the
petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of
which she never denied under oath is, under the foregoing factual milieu, as inevitable as
it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as
petitioner would have it appear, where the assignee merely steps into the shoes of, is
open to all defenses available against and can enforce payment only to the same extent
as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and

Acceptance Corp.,   this Court had the occasion to clearly distinguish between a
6

negotiable and a non-negotiable instrument.

Among others, the instrument in order to be considered negotiable must contain the
so-called "words of negotiability — i.e., must be payable to "order" or "bearer"". Under
Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be a specified person
named in the instrument and the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the same. Without
the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a negotiable
instrument, but will merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against the latter. Such being
the situation in the above-cited case, it was held that therein private respondent is not a
holder in due course but a mere assignee against whom all defenses available to the
assignor may be raised.  7

In the case at bar, however, the situation is different. Indubitably, the basis of private
respondent's claim against petitioner is a promissory note which bears all the
earmarks of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY
EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY
(P58,138.20) Philippine currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said principal sum, to be payable, without
need of notice or demand, in installments of the amounts following and at the dates
hereinafter set forth, to wit: P1,614.95 monthly for "36" months due and payable on the
21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983.
P_________ monthly for ______ months due and payable on the ______ day of each
month starting _____198__ thru and inclusive of _____, 198________ provided that
interest at 14% per annum shall be added on each unpaid installment from maturity
hereof until fully paid.

x x x           x x x          x x x

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager  8

A careful study of the questioned promissory note shows that it is a negotiable

instrument, having complied with the requisites under the law as follows: [a] it is in writing
and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay
the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is
"P1,614.95 monthly for 36 months due and payable on the 21 st day of each month
starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated
with certainty.  9

It was negotiated by indorsement in writing on the instrument itself payable to the Order
of Filinvest Finance and Leasing Corporation   and it is an indorsement of the entire
10

instrument. 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due
course, having taken the instrument under the following conditions: [a] it is complete and
regular upon its face; [b] it became the holder thereof before it was overdue, and without
notice that it had previously been dishonored; [c] it took the same in good faith and for
value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity
in the instrument or defect in the title of VMS Corporation. 
12

Accordingly, respondent corporation holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties among themselves, and
may enforce payment of the instrument for the full amount thereof.   This being so,
13

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 since it is not a party in this case. To even discuss the
issue as to whether or not the Violago Motor Sales Corporation is liable in the transaction
in question would amount, to denial of due process, hence, improper and
unconstitutional. She should have impleaded Violago Motor Sales. 14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs
against petitioner.

SO ORDERED.

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

Footnotes

1 Rollo, p. 21.

2 Rollo, pp. 23-24.

3 Rollo, pp. 57-59.

4 Art. 1481, New Civil Code.

5 Rollo, p. 10.

6 149 SCRA 459 (1987).

7 Ibid.

8 Ex. "7 "; Folder of Exhibits.

9 Section 1, Negotiable Instruments Law, emphasis supplied.

10 Section 31, NIL.

11 Section 32, NIL.

12 Section 52, NIL.

13 Section 57, Negotiable Instruments Law; Consolidated Plywood Industries, Inc.

v. IFC Leasing and Acceptance Corporation, (supra).

14 Rollo, pp. 22-23.

CONSOLIDATED PLYWOOD V. IFC

149 SCRA 448
 

FACTS:

Petitioner bought from Atlantic Gulf and Pacific Company, through its sister
company Industrial Products Marketing, two used tractors.  Petitioner was
issued  a  sales  invoice  for  the  two  used  tractors.    At  the  same  time, 
the deed  of  sale  with  chattel  mortgage  with  promissory  note  was 
issued.  
Simultaneously, the seller assigned the deed of sale with chattel mortgage
and promissory note to respondent.  The used tractors were then delivered
but  barely  14  days  after,  the  tractors  broke  down.    The  seller  sent
mechanics but the tractors were not repaired accordingly as they were no
longer serviceable.  Petitioner would delay the payments on the promissory
notes until the seller completes its obligation under the warranty.
Thereafter, a collection suit was filed against petitioner for the payment of the
promissory note.  
 

HELD:

It is patent that the seller is liable for the breach in warranty against the
petitioner.    This  liability  as  a  general  rule  extends  to  the  corporation  to
whom it assigned its rights and interests unless the assignee is a holder in
due  course  of  the  promissory  note  in  question,  assuming  the  note  is
negotiable,  in  which  case,  the  latter’s  rights  are  based  on  a  negotiable
instrument  and  assuming  further  that    the  petitioner’s  defense  may  not
prevail against it.
 
The  promissory  note  in  question  is  not  a  negotiable  instrument.    The
promissory note in question lacks the so-called words of negotiability.  And as
such, it follows that the respondent can never be a holder in due course but 
remains  merely  an  assignee  of  the  note  in  question.    Thus,  the
petitioner  may  raise  against  the  respondents  all  defenses  available  to  it
against the seller. 

Consolidated Plywood, et. al.

vs. IFC Leasing , G.R. No.
72593, April 30, 1987 
Full Text

Facts: Consolidated Plywood Industries Inc. (CPII) is a corporation

engaged in the logging business. It had for its program of logging
activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its
logging concession area at Baganga, Manay, and Caraga, Davao
Oriental.

For this purpose, it needed 2 additional units of tractors. Cognizant

of CPII’s need and purpose, Atlantic Gulf & Pacific Company of
Manila, through its sister company and marketing arm, Industrial
Products Marketing (IPM), a corporation dealing in tractors and other
heavy equipment business, offered to sell to CPII 2 “Used” Allis
Crawler Tractors, 1 an HD-21-B and the other an HD-16-B. After
conducting said inspection, IPM assured CPII that the “Used” Allis
Crawler Tractors which were being offered were fit for the job, and
gave the corresponding warranty of 90 days performance of the
machines and availability of parts. With said assurance and
warranty, and relying on the IPM’s skill and judgment, CPII through
Henry Wee and Rodolfo T. Vergara, president and vice-president,
respectively, agreed to purchase on installment said 2 units of
“Used” Allis Crawler Tractors. It also paid the down payment of
P210,000.00. On 5 April 1978, IPM issued the sales invoice for the 2
units of tractors. At the same time, the deed of sale with chattel
mortgage with promissory note was executed.

Barely 14 days had elapsed after their delivery when one of the
tractors broke down and after another 9 days, the other tractor
likewise broke down. IPM sent to the jobsite its mechanics to
conduct the necessary repairs, but the tractors did not come out to
be what they should be after the repairs were undertaken because
the units were no longer serviceable. Because of the breaking down
of the tractors, the road building and simultaneous logging
operations of CPII were delayed and Vergara advised IPM that the
payments of the installments as listed in the promissory note would
likewise be delayed until IPM completely fulfills its obligation under
its warranty.

Since the tractors were no longer serviceable, on 7 April 1979, Wee

asked IPM to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to
IFC Leasing and the excess, if any, to be divided between IPM and
CPII which offered to bear 1/2 of the reconditioning cost. No
response to this letter was received by CPII and despite several
follow-up calls, IPM did nothing with regard to the request, until the
complaint in the case was filed by IFC Leasing against CPII, Wee,
and Vergara. The complaint was filed by IFC Leasing against CPII, et
al. for the recovery of the principal sum of P1,093,789.71, accrued
interest of P151,618.86 as of 15 August 1979, accruing interest
there after at the rate of 12% per annum, attorney’s fees of
P249,081.71 and costs of suit.

CPII, et al. filed their amended answer praying for the dismissal of
the complaint. In a decision dated 20 April 1981, the trial court
rendered judgment, ordering CPII, et al. to pay jointly and severally
in their official and personal capacities

On 17 July 1985, the Intermediate Appellate Court issued the

decision affirming in toto the decision of the trial court.

Issue: Whether the promissory note in question is a negotiable

instrument.
Held: No. The pertinent portion of the note provides that “”FOR
VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of P1,093,789.71,
Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid.” Considering that paragraph (d),
Section 1 of the Negotiable Instruments Law requires that a
promissory note “must be payable to order or bearer,” it cannot be
denied that the promissory note in question is not a negotiable
instrument.

The instrument in order to be considered negotiable must contain

the so called “words of negotiability” — i.e., must be payable to
“order” or “bearer.” These words serve as an expression of consent
that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non- negotiable one. Without
the words “or order” or “to the order of,” the instrument is payable
only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument, but will
merely “step into the shoes” of the person designated in the
instrument and will thus be open to all defenses available against
the latter.

Therefore, considering that the subject promissory note is not a

negotiable instrument, it follows that IFC Leasing can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, CPII may raise against IFC Leasing all defenses
available to it as against IPM. This being so, there was no need for
CPII to implead IPM when it was sued by IFC Leasing because CPII’s
defenses apply to both or either of them.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and

RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court in
AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific

Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors
and other heavy equipment business, offered to sell to petitioner-corporation
two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an
HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be

exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the
"Used" tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the job site. After conducting said inspection,
the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's

skill and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice- president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the
down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of
assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of

"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of the
machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5,"

the seller-assignor sent to the job site its mechanics to conduct the necessary
repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May
28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of
the installments as listed in the promissory note would likewise be
delayed until the seller-assignor completely fulfills its obligation under its
warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner

Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided
between the seller-assignor and petitioner-corporation which offered to
bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-

corporation and despite several follow-up calls, the seller-assignor did nothing
with regard to the request, until the complaint in this case was filed by
the respondent against the petitioners, the corporation, Wee, and
Vergara.

The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate
of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and

personal capacities the principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of
August 15, 1979 and accruing interest thereafter at the rate of 12% per
annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent

to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and

assigned therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-
APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS

A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER
SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the

challenged decision affirming in toto the decision of the trial court.
The pertinent portions of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are
of the considered opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there
is an implied warranty, the defense of breach of warranty, if there is any, as
in this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the same
in due course. Warranty lies in this case only between Industrial
Products Marketing and Consolidated Plywood Industries, Inc. The
plaintiff-appellant herein upon application by appellant corporation granted
financing for the purchase of the questioned units of Fiat-Allis
Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to
appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case (Art. 1567,
New Civil Code). We now come to the issue as to whether the plaintiff-
appellee is a holder in due course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing

corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a

negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker; it contains
an unconditional promise to pay a certain sum of money payable at a fixed or
determinable future time; it is payable to order (Sec. 1, NIL); the
promissory note was negotiated when it was transferred and delivered by IPM
to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in
the conditions that the note was complete and regular upon its face before
the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of
any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held 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 against all parties liable thereon (Sec. 57, NIL); the appellants
engaged that they would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note,

We opine that the same is legally and conclusively enforceable against the
defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and

evidence, We find the appeal without merit and thus affirm the decision in
toto. With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on October
21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE
TO ORDER NOR TO BEARER.

II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A
MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND

THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE

LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-

ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR

IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN

ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the
court of origin.

On the other hand, the respondent corporation in its comment to the petition
filed on February 20, 1986, contended that the petition was filed out of time;
that the promissory note is a negotiable instrument and respondent a holder
in due course; that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant

petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a warranty
not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden
defects which the thing sold may have, should they render it unfit for the use
for which it is intended, or should they diminish its fitness for such use to
such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible, or for those
which are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to

the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller

the particular purpose for which the goods are acquired, and it appears that
the buyer relies on the sellers skill or judge judgment (whether he be
the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a

particular purpose may be annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold.
(Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's rights are based on
the negotiable instrument and assuming further that the petitioner's defenses
may not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke

down, the petitioner-corporation notified the seller-assignor's sister company,
AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However,
due to the seller-assignor's delay and its failure to comply with its
warranty, the tractors became totally unserviceable and useless for
the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its

contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent
upon him.

The injured party may choose between the fulfillment and the rescission of
the obligation with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding a
proportionate reduction of the price, with damages in either case. (Emphasis
supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with

the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of the
rescission.

In the case of the University of the Philippines v. De los Angeles  (35 SCRA

102) we held:

In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But  the law definitely does not require
that the contracting party who believes itself injured must first file suit and
wait for adjudgement before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit
and watch its damages accumulate during the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to be payable in
24 monthly installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable

Instruments Law requires that a promissory note "must be payable to
order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain

the so-called 'words of negotiable, must be payable to 'order' or 'bearer'.
These words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater risk
under a negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

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. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is
payable only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not enjoy the advantages
of being a holder of a negotiable instrument but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to
it as against the seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a
mere assignee of the promissory note in question, to wit:
ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of
Sale with Chattel Mortgage with the promissory note which is as testified to
by the witness was indorsed? (Counsel for Plaintiff nodding his head.) Then
we have no further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm
that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between

two persons; what is assigned are rights, the rights of the mortgagee were
assigned to the IFC Leasing & Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were

assigned; . . . you want to make a distinction, one is an assignment of
mortgage right and the other one is indorsement of the promissory note.
What counsel for defendants wants is that you stipulate that it is contained in
one single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13,

1980).

Secondly, even conceding for purposes of discussion that the promissory note
in question is a negotiable instrument, the respondent cannot be a holder in
due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the
right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction
shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein
petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is
the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual
knowledge of the fact that the seller-assignor's right to collect the
purchase price was conditional, and that it was subject to the condition
that the tractors -sold were not defective. The respondent knew that when
the tractors turned out to be defective, it would be subject to the defense of
failure of consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same with
actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such,
the respondent is subject to all defenses which the petitioners may raise
against the seller-assignor. Any other interpretation would be most inequitous
to the unfortunate buyer who is not only saddled with two useless tractors
but must also face a lawsuit from the assignee for the entire purchase price
and all its incidents without being able to raise valid defenses available as
against the assignor.

Lastly, the respondent failed to present any evidence to prove that it

had no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that:

negotiating it.

xxx xxx xxx

SEC. 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:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity
in the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of

an infirmity in the instrument or defect in the title of the person negotiating
the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his
action in taking the instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is

not a holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to
cover the purchase price. Many times, in pursuance of a previous
arrangement with the seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of installment buying in
this country, it is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will , the finance
company will be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the argument that such
a rule would seriously affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies. We
think the buyer-Mr. & Mrs. General Public-should have some protection
somewhere along the line. We believe the finance company is better able to
bear the risk of the dealer's insolvency than the buyer and in a far better
position to protect his interests against unscrupulous and insolvent
dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent

argument in favor of a rule which win afford public protection to the general
buying public against unscrupulous dealers in personal property. . . . (Mutual
Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine

Works  (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in this
case are subject to all defenses that the petitioners have against the seller-
assignor, Industrial Products Marketing. For Section 58 of the Negotiable
Instruments Law provides that "in the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses
as if it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we
find that both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a ruling does not only
violate the law and applicable jurisprudence, but would result in
unjust enrichment on the part of both the assigner- assignor and
respondent assignee at the expense of the petitioner-corporation
which rightfully rescinded an inequitable contract. We note, however, that
since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent

appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.
SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

PECO vs. Soriano

Philippine Education Co. vs. Soriano

L-22405          June 30, 1971

Dizon, J.:

Facts:
            Enrique Montinola sought to purchase from Manila Post Office ten money
orders of 200php each payable to E. P. Montinola. Montinola offered to pay with the
money orders with a private check. Private check were not generally accepted in
payment of money orders, the teller advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola managed to leave the building without
the knowledge of the teller. Upon the disappearance of the unpaid money order, a
message was sent to instruct all banks that it must not pay for the money order stolen
upon presentment. The Bank of America received a copy of said notice. However,
The Bank of America received the money order and deposited it to the appellant’s
account upon clearance. Mauricio Soriano, Chief of the Money Order Division
notified the Bank of America that the money order deposited had been found to have
been irregularly issued and that, the amount it represented had been deducted from the
bank’s clearing account. The Bank of America debited appellant’s account with the
same account and give notice by mean of debit memo.

Issue:
            Whether or not the postal money order in question is a negotiable instrument
           

Held:
No. It is not disputed that the Philippine postal statutes were patterned after
similar statutes in force in United States. The Weight of authority in the United States
is that postal money orders are not negotiable instruments, the reason being that in
establishing and operating a postal money order system, the government is not
engaged in commercial transactions but merely exercises a governmental power for
the public benefit. Moreover, some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide for not more than
one endorsement; payment of money orders may be withheld under a variety of
circumstances.

PECO V. SORIANO
39 SCRA 587
 
FACTS:
Montinola  purchased  money  orders  from  the  postal  office.    He  issued  a
personal check to pay for the money orders and since it is irregular to have
checks as payments, he was advised to see the Chief of the Money Order
Division.  He didn’t do so but left the office with the money orders and the
check.  A notice was thereafter issued to all post offices as well as the Bank of
America, about the irregularly issued money orders and the order not to
accept such orders.
 
Plaintiff  was  one  of  those  who  received  the  subject  money  orders  and
encashed it with the Bank of America.  At first, it was given the money but
later  on,  his  account  was  debited  in  pursuance  of  the  letter  given by 
the Chief.
 

HELD:
Postal  money  orders  are  not  negotiable  instruments.    In  establishing 
and operating a postal money order system, the government is not engaged
in commercial  transactions  but  merely  exercises  a  governmental  power 
for the public benefit.  Moreover, some restrictions imposed money orders by
postal   laws   and   regulations   are   inconsistent   with   the   character   of
negotiable instruments.   

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

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

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

Marcial Esposo for plaintiff-appellant.

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

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing

the complaint filed by the Philippine Education Co., Inc. against Mauricio A.
Soriano, Enrico Palomar and Rafael Contreras.

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

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

On April 23, 1958 one of the above-mentioned money orders numbered

124688 was received by appellant as part of its sales receipts. The
following day it deposited the same with the Bank of America, and one
day thereafter the latter cleared it with the Bureau of Posts and
received from the latter its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money

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

On October 12, 1961 appellant requested the Postmaster General to

reconsider the action taken by his office deducting the sum of P200.00 from
the clearing account of the Bank of America, but his request was denied. So
was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to
the Secretary of Public Works and Communications, but the latter sustained
the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with
theft in the Court of First Instance of Manila (Criminal Case No. 43866)
but after trial he was acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the

Municipal Court of Manila praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September

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

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

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

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

WHEREFORE, judgment is hereby rendered, ordering the defendants to

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

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

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

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

It is to be noted in this connection that some of the restrictions imposed upon

money orders by postal laws and regulations are inconsistent with the
character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money
orders may be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the

conditions laid down in the letter of the Director of Posts of October 26, 1948
(Exhibit 3) to the Bank of America for the redemption of postal money orders
received by it from its depositors. Among others, the condition is imposed
that "in cases of adverse claim, the money order or money orders involved
will be returned to you (the bank) and the, corresponding amount will have to
be refunded to the Postmaster, Manila, who reserves the right to deduct the
value thereof from any amount due you if such step is deemed necessary."
The conditions thus imposed in order to enable the bank to continue enjoying
the facilities theretofore enjoyed by its depositors, were accepted by the Bank
of America. The latter is therefore bound by them. That it is so is clearly
referred from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its
clearing account with the Manila Post Office, it did not file any protest against
such action.

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

In view of the foregoing, We do not find it necessary to resolve the issues

raised in the third and fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is
hereby affirmed with costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee,

Barredo and Villamor, JJ., concur.
Castro and Makasiar, JJ., took no part.

EQUITABLE BANKING V. IAC

161 SCRA 518
 

FACTS:

Nell Company issued a check to help Casals and Casville Enterprises obtain
a  letter  of  credit  from  Equitable  Banking  in  connection  with  equipment, 
a garrett  skidder,  which  Casals  and  Casville  were  buying  from  Nell.   
Nell indicated  the  payee  as  follows  “EQUITABLE  BANKING 
CORPORATION  A/C
CASVILLE ENTERPRISES INC.”
 
Casals deposited the check with the bank and the bank teller accepted the
same  and  in  accordance  with  customary  bank  practice,  stamped  in  the
check  the  words  “non-negotiable”.    The  amount  was  withdrawn  after  the
deposit.
 
This  prompted  Nell  to  file  a  case  against  the  bank,  Casals  and 
Casville.  While  the  instant  case  was  being  tried,  Casals  and  Casville 
assigned  the garrett skidder to plaintiff which credited in favor of
defendants the amount of P450,000, as partial satisfaction of its claim
against them.   
 

HELD:

Equitable is not liable to Nell.  Nell should bear the loss as it was through its
own acts, which put it into the power of Casals and Casville Enterprises to
perpetuate the fraud against it.  
 
The  check  wasn’t  initially  non-negotiable.    Neither  was  it  cross-checked. 
The rubber-stamping transversally on the face of the check was only made
the bank teller in accordance with customary bank practice, and not by Nell
as  the  drawer  of  the  check,  and  simply  meant  that  thereafter  the  same
check could no longer be negotiated.
 
The payee was not indicated with reasonable certainty in contravention of
Section 8.  As worded, it could be accepted as deposit to the account of the
party named therein after the symbols  of A/C, or payable to the bank as
trustee,  or  as  an  agent,  for  Casville  with  the  latter  being  the  ultimate
beneficiary. 

Equitable Bank vs IAC 1988

161 SCRA 518 – Mercantile Law – Negotiable Instruments Law –
Negotiable Instruments in General – Certainty of Payee

In 1975, Liberato Casals, majority stockholder of Casville

Enterprises, went to buy two garrett skidders (bulldozers) from
Edward J. Nell Company amounting to P970,000.00. To pay the
bulldozers, Casals agreed to open a letter of credit with the
Equitable Banking Corporation. Pursuant to this, Nell Company
shipped one of the bulldozers to Casville. Meanwile, Casville
advised Nell Company that in order for the letter of credit to
be opened, Casville needs to deposit P427,300.00 with Equitable
Bank, and that since
Casville is a little short, it requested Nell Company to pay
the deposit in the meantime.
Nell Company agreed and so it eventually sent a check in the
amount of P427,300.00. The check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.
Nell Company sent the check to Casville so that it would be the
latter who could send it to Equitable Bank
to cover the deposit in lieu of the letter of credit. Casals received
the check, he went to Equitable Bank,
and the teller received the check. The teller, instead of applying
the amount as deposit in lieu of the letter
of credit, credited the check to Casville’s account with
Equitable Bank. Casals later withdrew all the
P427,300.00 and appropriated it to himself.
ISSUE: Whether or not Equitable Bank is liable to cover for the loss.
HELD: No. The subject check was equivocal and patently
ambiguous. Reading on the wordings of the
check, the payee thereon ceased to be indicated with reasonable
certainty in contravention of Section 8
of the Negotiable Instruments Law. As worded, it could be accepted
as deposit to the account of the party
named after the symbols “A/C,” or payable to the Bank as trustee,
or as an agent, for Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That
ambiguity is to be
taken contra proferentem that is, construed against Nell
Company who caused the ambiguity and could
have also avoided it by the exercise of a little more care.
Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who
caused the obscurity.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 74451 May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner,

vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and THE
EDWARD J. NELL CO., respondents.

William R. Veto for petitioner.

Pelaez, Adriano & Gregorio for respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse judgment against it
rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying
petitioner's Motion for Reconsideration, 2 be annulled and set aside.

The facts pertinent to this Petition, as summarized by the Trial Court and adopted by
reference by Respondent Appellate Court, emanated from the case entitled "Edward J.
Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and Equitable Banking
Corporation" of the Court of First Instance of Rizal (Civil Case No. 25112), and read:

From the evidence submitted by the parties, the Court finds that sometime in 1975
defendant Liberato Casals went to plaintiff Edward J. Nell Company and told its senior
sales engineer, Amado Claustro that he was interested in buying one of the plaintiff's
garrett skidders. Plaintiff was a dealer of machineries, equipment and supplies.
Defendant Casals represented himself as the majority stockholder, president and general
manager of Casville Enterprises, Inc., a firm engaged in the large scale production,
procurement and processing of logs and lumber products, which had a plywood plant in
Sta. Ana, Metro Manila.

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs
executive vice-president, Apolonio Javier, for negotiation in connection with the manner
of payment. When Javier asked for cash payment for the skidders, defendant Casals
informed him that his corporation, defendant Casville Enterprises, Inc., had a
credit line with defendant Equitable Banking Corporation. Apparently, impressed
with this assertion, Javier agreed to have the skidders paid by way of a domestic letter
of credit which defendant Casals promised to open in plaintiffs favor, in lieu of cash
payment. Accordingly, on December 22, 1975, defendant Casville, through its president,
defendant Casals, ordered from plaintiff two units of garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and dated December 22,
1975 (Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described in the
bulletin

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE

EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be opened
within ninety (90) days after date of shipment. at first installment will be due one hundred
eighty (180) days after date of shipment. Interest-14% per annum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff
the delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de
Oro, on or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the
information that an irrevocable Domestic Letter of Credit would be opened in
plaintiff's favor on or before June 30, 1976 under the terms and conditions agreed
upon (Exhibit "B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff

shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the
amount of P10,640.00 because of the verbal assurance of defendant Casville that it
would be covered by the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of
P300,000.00 postdated August 4, 1976, which was followed by another check of same
date. Plaintiff considered these checks either as partial payment for the skidder that was
already delivered to Cagayan de Oro or as reimbursement for the marginal deposit that
plaintiff was supposed to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the
plaintiff that their application for a letter of credit for the payment of the Garrett
skidders had been approved by the Equitable Banking Corporation. However, the
defendants said that they would need the sum of P300,000.00 to stand as collateral or
marginal deposit in favor of Equitable Banking Corporation and an additional amount of
P100,000.00, also in favor of Equitable Banking Corporation, to clear the title of the
Estrada property belonging to defendant Casals which had been approved as security
for the trust receipts to be issued by the bank, covering the above-mentioned
equipment.

Although the marginal deposit was supposed to be produced by defendant Casville

Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate
the transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of
P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable
to the order of Equitable Banking Corporation and with the following notation or
memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in
favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher
(Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening of L/C for account of
Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were
presented to Severino Santos, executive vice president of defendant bank, Santos did
not accept them because the terms and conditions required by the bank for the opening
of the letter of credit had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to
cover its purchase from plaintiff of two Garrett skidders, under the following terms and
conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for
P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to
secure the Trust Receipts; e) We shall chattel mortgage the equipments purchased even
after payment of the first L/C as additional security for the balance of the second L/C and
f) Other conditions you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was
ready to open the letters of credit upon defendant's compliance of the following terms
and conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust
Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and
conditions that our bank may impose.

Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three
postdated checks. In said letter, plaintiff was informed of the requirements imposed by
the defendant bank pointing out that the "cash marginal required under paragraph (c) is
30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada
property or a total of P427,300.00" and that the check covering said amount should be
made payable "to the Order of EQUITABLE BANKING CORPORATION for the account
of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed
postdated checks were intended as replacement of the checks that were previously
issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to
defendant bank for the account of defendant Casville. All the new checks were postdated
November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00
(Exhibit "G") and P100,000.00 (Exhibit "H").

On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the
Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal
covering two pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a

representative of defendant Casville, went to see Severino Santos to find out the status
of the credit line being sought by defendant Casville. Santos assured Umali that the
letters of credit would be opened as soon as the requirements imposed by defendant
bank in its letter dated August 11, 1976 had been complied with by defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of
EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and
drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the
notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance
of said notation was reproduced in a covering letter dated August 16,1976 that went with
the check (Exhibit "E"). Both the check and the covering letter were sent to defendant
<äre||anº•1àw> 

bank through defendant Casals. Plaintiff entrusted the delivery of the check and the
latter to defendant Casals because it believed that no one, including defendant
Casals, could encash the same as it was made payable to the defendant bank
alone. Besides, defendant Casals was known to the bank as the one following up the
application for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals
immediately deposited it with the defendant bank and the bank teller accepted the
same for deposit in defendant Casville's checking account. After depositing said
check, defendant Casville, acting through defendant Casals, then withdrew all the
amount deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three
checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by
defendant Casville as collateral were all dishonored for having been drawn against a
closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed
the mortgage executed by defendant Casville on the Estrada property which was sold in
a public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit
knowing that it took time to process the same. However, when the three checks issued
to it by defendant Casville were dishonored, plaintiff became apprehensive and
sent Umali on November 29, 1976, to inquire about the status of the application for
the letters of credit. When plaintiff was informed that no letters of credit were opened by
the defendant bank in its favor and then discovered that defendant Casville had in the
meanwhile withdrawn the entire amount of P427,300.00, without paying its
obligation to the bank plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals and Casville assigned
the garrett skidder to plaintiff which credited in favor of defendants the amount of
P450,000.00, as partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they
show lack of interest in disputing plaintiff's claim by not appearing in most of the
hearings, but they also assigned to plaintiff the garrett skidder which is an action of clear
recognition of their liability.

What is left for the Court to determine, therefore, is only the liability of defendant
bank to plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court
in toto, the pertinent portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are
ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the
amount of plaintiff's check which defendant bank erroneously credited to the account
of defendant Casville and which defendants Casal and Casville misappropriated,
with 12% interest thereon from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the
sum of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation
(briefly, the Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for
the value of the second check issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE

ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously
credited to the Casville account; held the Bank liable for the mistake of its employees;
and ordered the Bank to pay NELL the value of the check in the sum of P427,300.00,
with legal interest. Explained the Trial Court:

The Court finds that the check in question was payable only to the defendant bank and to
no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear
on the face of the check after or under the name of defendant bank, the payee was still
the latter. The addition of said words did not in any way make Casville Enterprises, Inc.
the Payee of the instrument for the words merely indicated for whose account or in
connection with what account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not
negotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee's
Account Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE
BANKING CORPORATION.

But said teller should have exercised more prudence in the handling of Id check because
it was not made out in the usual manner. The addition of the words A/C OF CASVILLE
ENTERPRISES INC." should have placed the teller on guard and he should have
clarified the matter with his superiors. Instead of doing so, however, the teller decided to
rely on his own judgment and at the risk of making a wrong decision, credited the
entire amount in the name of defendant Casville although the latter was not the payee
named in the check. Such mistake was crucial and was, without doubt, the proximate
cause of plaintiffs defraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of
Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant
bank to apply the value of the check as payment for the letter of credit which Casville
Enterprises, Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5).
The issuance of the subject check was precisely to meet the bank's prior requirement of
payment before issuing the letter of credit previously applied for by Casville Enterprises
in favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE

ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of

Section 8 of the Negotiable Instruments Law.   As worded, it could be accepted as
3

deposit to the account of the party named after the symbols "A/C," or payable to the Bank
as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary. That ambiguity is to be taken contra proferentem that is, construed
against NELL who caused the ambiguity and could have also avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially,
not non-negotiable (NEGOTIABLE ORIGINALLY). Neither was it a crossed check. The
rubber-stamping transversall on the face of the subject check of the words "Non-
negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-
negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by the
Bank teller in accordance with customary bank practice, and not by NELL as the
drawer of the check, and simply meant that thereafter the same check could no longer
be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery
of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the
proximate cause of its own defraudation: (a) The original check of 5 August 1976,
Exhibit "2," was payable to the order solely of "Equitable Banking Corporation."
NELL changed the payee in the subject check, Exhibit "E", however, to "Equitable
Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL
also eliminated both the cash disbursement voucher accompanying the check which
read:

Payment for marginal deposit and other expense re opening of L/C for account of
Casville Enterprises.

and the memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada
Property to be used as security for trust receipt for opening L/C of Garrett Skidders in
favor of the Edward Ashville J Nell Co.

Evidencing the real nature of the transaction was merely a separate covering letter, dated
16 August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and
teller.
(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who,
obviously, had his own antagonistic interests to promote. Thus it was that Casals did
not purposely present the subject check to the Executive Vice-President of the
Bank, who was aware of the negotiations regarding the Letter of Credit, and who
had rejected the previous check, Exhibit "2," including its three documents because
the terms and conditions required by the Bank for the opening of the Letter of Credit had
not yet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales
transaction, NELL even advanced the marginal deposit for the garrett skidder. It is,
indeed, abnormal for the seller of goods, the price of which is to be covered by a letter
of credit, to advance the marginal deposit for the same.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from
Casvine to secure the subject check and had accepted the deposit with it of two (2) titles
of real properties as collateral for said postdated checks. Thus, NELL was erroneously
confident that its interests were sufficiently protected. Never had it suspected that
those postdated checks would be dishonored, nor that the subject check would be
utilized by Casals for a purpose other than for opening the letter of credit.

In the last analysis, it was NELL's own acts, which put it into the power of Casals and
Casville Enterprises to perpetuate the fraud against it and, consequently, it must bear the
loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and
Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs.
Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).

... As between two innocent persons, one of whom must suffer the consequence of a
breach of trust, the one who made it possible by his act of confidence must bear the loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court,
dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying
petitioner's Motion for Reconsideration, are hereby SET ASIDE. The Decision of the then
Court of First Instance of Rizal, Branch XI. is modified in that petitioner Equitable Banking
Corporation is absolved from any and all liabilities to the private respondent, Edward J.
Nell Company, and the Amended Complaint against petitioner bank is hereby ordered
dismissed. No costs.

SO ORDERED.

Yap, C.J., Paras and Sarmiento, J.J., concur.

Padilla, J., took no part.

Footnotes

1 Penned by, Justice Crisolito Pascual and concurred in by Justices Jose C. Campos,
Jr., Serafin Ashville E Camilon, and Desiderio P. Jurado.

2 With Justice Desiderio P. Jurado, dissenting

3 Section 8. ...
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

SECTION 9

PHILIPPINE NATIONAL BANK, Petitioner,

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

DECISION

REYES, R.T., J.:

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

These questions seek answers in this petition for review on certiorari of the Amended
Decision1 of the Court of Appeals (CA) which affirmed with modification that of the
Regional Trial Court (RTC).2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner

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

The spouses were engaged in the informal lending business. In line with their
business, they had a discounting3 arrangement with the Philnabank Employees
Savings and Loan Association (PEMSLA), an association of PNB employees.
Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The
association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would

rediscount the postdated checks issued to members whenever the
association was short of funds. As was customary, the spouses would replace the
postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme
to obtain additional loans despite their outstanding loan accounts. They took out
loans in the names of unknowing members, without the knowledge or
consent of the latter. The PEMSLA checks issued for these loans were then
given to the spouses for rediscounting. The officers carried this out by forging the
indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of
the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks,
on the other hand, were deposited by the spouses to their account.

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

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

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

RTC Disposition

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

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

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

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

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

1. Defendant is hereby ordered to pay the plaintiffs the total amount

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

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

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a

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

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

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

(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed. 6

CA Disposition

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

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

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

that their cause of action arose from the alleged breach of contract by the
defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite
the checks being payable to order. Rather, we are more convinced by the strong
and credible evidence for the defendant-appellant with regard to the plaintiffs-
appellees’ and PEMSLA’s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s
account for payment of the loans it has approved in exchange for PEMSLA’s checks
with the full value of the said loans. This is the only obvious explanation as to why all
the disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for
presentment to the defendant-appellant that led to this present controversy. It also
appears that the teller who accepted the said checks was PEMSLA’s officer,
and that such was a regular practice by the parties until the defendant-appellant
discovered the scam. The logical conclusion, therefore, is that the checks were
never meant to be paid to order, but instead, to PEMSLA. We thus find no
breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued

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

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

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

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

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

Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from
14 May 1999 until fully paid;

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

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

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us

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

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court,
PNB failed to present sufficient proof to defeat the claim of the spouses
Rodriguez that they really intended the checks to be received by the
specified payees. Thus, PNB is liable for the value of the checks which it paid
to PEMSLA without indorsements from the named payees. The award for damages
was deemed appropriate in view of the failure of PNB to treat the Rodriguez
account with the highest degree of care considering the fiduciary nature of their
relationship, which constrained respondents to seek legal action.
Hence, the present recourse under Rule 45.

Issues

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

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

Our Ruling

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

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

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

Now to the core of the petition.

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

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

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

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

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

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

Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

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

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

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

(c) When it is payable to the order of a fictitious or non-existing person, and such fact
is known to the person making it so payable; or

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

(e) Where the only or last indorsement is an indorsement in blank. 12 (Underscoring

supplied)

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

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

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

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

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

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

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

In a fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere delivery. Thus, in
case of controversy, the drawer of the check will bear the loss. This rule is justified for
otherwise, it will be most convenient for the maker who desires to escape payment of
the check to always deny the validity of the indorsement. This despite the fact that
the fictitious payee was purposely named without any intention that the payee should
receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L.
Martin, one of its authorized signatories. Martin drew seven checks payable to the
German Savings Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority from the latter.
Martin was also an officer of the GSFCBA but did not have signing authority. At the
back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own
name as indorsement. He then successfully drew the funds from Liberty Insurance
Bank for his own personal profit. When the corporation filed an action against the
bank to recover the amount of the checks, the claim was denied.

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

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

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

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

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious

circumstances which might have well induced a prudent banker to investigate and
other permutations of negligence are not relevant considerations under Section 3-405
x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable
when the transferee "acts dishonestly – where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a
fraudulent scheme. x x x Such a test finds support in the text of the Code, which
omits a standard of care requirement from UCC 3-405 but imposes on all parties an
obligation to act with "honesty in fact." x x x19 (Emphasis added)

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

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

What remains to be determined is if the payees, though existing persons,

were "fictitious" in its broader context.

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

Verily, the subject checks are presumed order instruments. This is because, as found
by both lower courts, PNB failed to present sufficient evidence to defeat the
claim of respondents-spouses that the named payees were the intended
recipients of the checks’ proceeds. The bank failed to satisfy a requisite condition
of a fictitious-payee situation – that the maker of the check intended for the
payee to have no interest in the transaction.

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

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

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

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

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

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

Moreover, PNB was negligent in the selection and supervision of its

employees. The trustworthiness of bank employees is indispensable to maintain the
stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the
management and supervision of their employees. In Bank of the Philippine Islands v.
Court of Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary clerks and employees. For
obvious reasons, the banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees.26

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

PNB’s argument that there is no loss to compensate since no demand for

payment has been made by the payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they deposited were returned for the
reason "Account Closed." These PEMSLA checks were the corresponding payments to
the Rodriguez checks. Since they could not encash the PEMSLA checks, respondents-
spouses were unable to collect payments for the amounts they had advanced.

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

One Last Note

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

To PNB’s credit, it became involved in the controversial transaction not of its own
volition but due to the actions of some of its employees. Considering that moral
damages must be understood to be in concept of grants, not punitive or corrective in
nature, We resolve to reduce the award of moral damages to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION

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

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
 MA. ALICIA AUSTRIA-
MINITA V. CHICO-NAZARIO
MARTINEZ
Associate Justice
Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

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

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairpersonp

CERTIFICATION

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

REYNATO S. PUNO
Chief Justice

Ang Tek Lian vs. CA

Ang Tek Lian vs. Court of Appeals
L-2516                        September, 1950
Bengzon, J.:

Facts:
            Ang Tek Lian knowing that he had no funds therefor, drew a check upon
China Banking Corporation payable to the order of “cash”. He delivered it toLee Hua
Hong in exchange for money. The check was presented by Lee Hua hong to the
drawee bank for payment, but it w3as dishonored for insufficiency of funds. With
this, Ang Tek Lian was convicted of estafa.

Issue:
            Whether or not the check issued by Ang Tek Lian that is payable to the order
to “cash” and not have been indorsed by Ang Tek Lian, making him not guilty for the
crime of estafa.

Held:
            No.Under Sec. 9 of NIL a check drawn payable to the order of “cash” is a
check payable to bearer and the bank may pay it to the person presenting it for
payment without the drawer’s indorsement. However, if the bank is not sure of the
bearer’s identity or financial solvency, it has the right to demand identification or
assurance against possible complication, such as forgery of drawer’s signature, loss of
the check by the rightful owner, raising of the amount payable, etc. But where the
bank is satisfied of the identity or economic standing of the bearer who tenders the
check for collection, it will pay the instrument without further question; and it would
incur no liability to the drawer in thus acting.

ANG TEK LIAN V. CA  

87 PHIL 383
 

FACTS:
Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000, payable  to  cash.   
This  was  given  to  Lee  Hua  Hong  in  exchange  for  cash.  Upon  presentment  of  the  check, 
it  was dishonored  for  having  insufficient funds.  It is argued that the check, being payable to
cash, wasn’t indorsed by the defendant, and thus, isn’t guilty of the crime charged.
 

HELD:
A  check  drawn  to  the  order  of  “cash”  is  payable  to  bearer,  and  the  bank may  pay  it  to 
the  person  presenting  it  for  payment  without  the  drawer’s indorsement.  Of course, if the bank
is not sure of the bearer’s identity or financial  solvency,  it  has  the  right  to  demand  for 
identification  and/or
assurance  against  possible  complications—for  instance,  forgery  of  the drawer’s  signature, 
loss  of  the  check  by  the  rightful  owner,  raising  the amount payable, etc.  The bank therefore,
requires for its protection that the  indorsement  of  the  drawer—or  some  other  persons  known 
to  it—be obtained.    A  check  payable  to  bearer  is  authority  for  payment  to  the holder. 
Where a check is in the ordinary form and is payable to bearer so that  no  indorsement  is 
required,  a  bank  to  which  it  is  presented  for payment need not have the holder identified, and
is not negligent in failing to do so.  

SECTION 9

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

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

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

BENGZON, J.:

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

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

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

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

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

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

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

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A)

from the appellant, he did so with full knowledge that it would be
dishonored upon presentment. In that sense, the appellant could not be
said to have acted fraudulently because the complainant, in so accepting
the check as it was drawn, must be considered, by every rational
consideration, to have done so fully aware of the risk he was running
thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are too,
where no such requirement had been made . It depends upon the
circumstances of each transaction.

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

A check payable to the order of cash is a bearer instrument.

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

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

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

A check payable to bearer is authority for payment to holder. Where a check

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

. . . Consequently, a drawee bank to which a bearer check is presented for

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

Although a bank is entitled to pay the amount of a bearer check without

further inquiry, it is entirely reasonable for the bank to insist that holder give
satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A
was totally unconnected with its dishonor. The Court of Appeals declared
that it was returned unsatisfied because the drawer had insufficient
funds — not because the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty

imposed on the appellant, the writ of certiorari is denied and the decision of
the Court of Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

Section 10

JIMENEZ V. BUCOY
103 PHIL 40
 

FACTS:
In  the  intestate  of  the  estate  of  spouses  Young,  Jimenez  presents  a promissory  note 
signed  by  Pacita  Young  for  different  amounts  totaling P21,000.    The  administrator  is  willing 
to  pay  the  promissory  note  on  the premise that the amount be adjusted.  Claimant assails the
adjustment and
hence, she instituted a case for collection of sum of money.  
 
*Note: “6 months after the war”

HELD:
The  administrator  calls  attention  to  the  fact  that  the  notes  contained  no express  promise 
to  pay  for  a  certain  amount.    This  is  without  merit.    An acknowledge  may  become  a 
promise  to  pay  by  the  addition  of  words  by which  a  promise  of  payment  is  naturally 
implied,  such  as  “payable”,
“payable” on a given date, “payable on demand”, “paid…when called for”.
 
To  constitute  a  good  promissory  note,  no  precise  words  of  contract  are necessary, provided
they amount, in legal effect, a promise to pay.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-10221             February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA
JIMENEZ, petitioner-appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.

E. A. Beltran for appellant.

BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and
1952 respectively, Pacifica Jimenez presented for payment four
promissory notes signed by Pacita for different amounts totalling twenty-
one thousand pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the

currency then prevailing, the administrator manifested willingness to
pay provided adjustment of the sums be made in line with the
Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in

accordance with the notes.

Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales,
Judge, held that the notes should be paid in the currency prevailing
after the war, and that consequently plaintiff was entitled to recover
P21,000 plus attorneys fees for the sum of P2,000.

Hence this appeal.

Executed in the month of August 1944, the first promissory note read as
follows:

Received from Miss Pacifica Jimenez the total amount of P10,000) ten
thousand pesos payable six months after the war, without interest.

The other three notes were couched in the same terms, except as to amounts
and dates.

There can be no serious question that the notes were promises to pay "six
months after the war," the amounts mentioned.

But the important question, which obviously compelled the administrator to

appeal, is whether the amounts should be paid, peso for peso, or
whether a reduction should be made in accordance with the well-
known Ballantyne schedule.

This matter of payment of loans contracted during the Japanese occupation

has received our attention in many litigations after the liberation. The gist of
our adjudications, in so far as material here, is that if the loan should be paid
during the Japanese occupation, the Ballantyne schedule should apply
with corresponding reduction of the amount. 1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable after
those dates, no reduction could be effected, and peso-for-peso payment shall be
ordered in Philippine currency.2

The Ballantyne Conversion Table does not apply where the monetary obligation,
under the contract, was not payable during the Japanese occupation but until after one
year counted for the date of ratification of the Treaty of Peace concluding the Greater
East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be

discharged after the war, the payment should be made in Philippine Currency. (Kare et
al. vs. Imperial et al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after the
war," peso for peso payment is indicated.

The Ang Lam3 case cited by appellant is not controlling, because the loan therein given
could have been repaid during the Japanese occupation. Dated December 26, 1944,
it was payable within one year. Payment could therefore have been made during January
1945. The notes here in question were payable only after the war.

The appellant administrator calls attention to the fact that the notes contained no express
promise to pay a specified amount. We declare the point to be without merit. In
accordance with doctrines on the matter, the note herein-above quoted amounted in
effect to "a promise to pay ten thousand pesos six months after the war, without
interest." And so of the other notes.

"An acknowledgment may become a promise by the addition of words by which a

promise of payment is naturally implied, such as, "payable," "payable" on a given day,
"payable on demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum p.
523.)

"To constitute a good promissory note, no precise words of contract are

necessary, provided they amount, in legal effect, to a promise to pay. In other words, if
over and above the mere acknowledgment of the debt there may be collected from
the words used a promise to pay it, the instrument may be regarded as a promissory
note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A.
B. $325, payable on demand," or, "I acknowledge myself to be indebted to A in $109, to
be paid on demand, for value received," or, "I O. U. $85 to be paid on May 5th," are held
to be promissory notes, significance being given to words of payment as indicating a
promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.)
13 Pacific Reporter 700, 703.)

Another argument of appellant is that as the deceased Luther Young did not sign these
notes, his estate is not liable for the same. This defense, however, was not
interposed in the lower court. There the only issue related to the amount to be amount,
considering that the money had been received in Japanese money. It is now unfair to put
up this new defense, because had it been raised in the court below, appellees could have
proved, what they now alleged that Pacita contracted the obligation to support and
maintain herself, her son and her husband (then concentrated at Santo Tomas
University) during the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

In order that a question may be raised on appeal, it is essential that it be within the
issues made by the parties in their pleadings. Consequently, when a party deliberately
adopts a certain theory, and the case is tried and decided upon that theory in the
court below, he will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. (Rules of Court by Moran-1957
Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express
Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480;
Toribio vs. Dacasa, 55 Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no
reason for making this and exception to the general rule that attorney's fees are not
recoverable in the absence of stipulation.

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in
this case if defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's
plainly valid, just and demandable claim" or "where the court deems it just and equitable
that attorney's fees be recovered" (Article 2208 Civil Code). These are — if applicable —
some of the exceptions to the general rule that in the absence of stipulation no attorney's
fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees. Needless to say, it
is desirable that the decision should state the reason why such award is made bearing in
mind that it must necessarily rest on an exceptional situation. Unless of course the text of
the decision plainly shows the case to fall into one of the exceptions, for instance "in
actions for legal support," when exemplary damages are awarded," etc. In the case at
bar, defendant could not obviously be held to have acted in gross and evident bad faith."
He did not deny the debt, and merely pleaded for adjustment, invoking decisions
he thought to be controlling. If the trial judge considered it "just and equitable" to
require payment of attorney's fees because the defense — adjustment under Ballantyne
schedule — proved to be untenable in view of this Court's applicable rulings, it would be
error to uphold his view. Otherwise, every time a defendant loses, attorney's fees would
follow as a matter of course. Under the article above cited, even a clearly untenable
defense would be no ground for awarding attorney's fees unless it amounted to "gross
and evident bad faith."

Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to
accept her offer, before the suit, to take P5,000 in full settlement of her claim. We do not
think this is tenable, defendant's attitude being merely a consequence of his line of
defense, which though erroneous does not amount to "gross and evident bad faith." For
one thing, there is a point raised by defendant, which so far as we are informed, has not
been directly passed upon in this jurisdiction: the notes contained no express promise to
pay a definite amount.

There being no circumstance making it reasonable and just to require defendant to pay
attorney's fees, the last assignment of error must be upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is affirmed,

except as to the attorney's fees which are hereby disapproved. So ordered.

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia
and Felix, JJ., concur.

Footnotes

 Asis vs. Agdamag, 90 Phil., 249; Soriano vs. Abalos, 84 Phil., 206; 47 Off. Gaz., 168;

1

Ang Lam vs. Perigrina, 92 Phil 506.

 Roño vs. Gomez, 83 Phil., 890, 49 Off. Gaz., p. 339; Gomez vs. Tabia, 84 Phil., 269; 47
2

Off. Gaz., p. 6414; Garcia vs. De los Santos. 93 Phil., 683, 49 Off. Gaz., [ll], 4830;
Arevalo vs. Barretto, 89 Phil., 633.

3
 92 Phil., 506.