Chapter 1 Concepts: Sec 1 NIL Violago v.

BA Finance
SECOND DIVISION [G.R. No. 158262, July 21, 2008] SPS. PEDRO AND FLORENCIA VIOLAGO, PETITIONERS, VS. BA FINANCE CORPORATION AND AVELINO VIOLAGO, RESPONDENTS. DECISION
VELASCO JR., J.: This is a Petition for Review on Certiorari of the August 20, 2002 Decision[1] and May 15, 2003 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitledBA Finance Corporation, PlaintiffAppellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for the reversal of the appellate court's ruling which held them liable to respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to BA Finance. The Facts Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latter's wife, Florencia. Avelino explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the spouses would just have to pay a down payment of PhP 60,500 while the balance would be financed by respondent BA Finance. The spouses would pay the monthly installments to BA Finance while Avelino would take care of the documentation and approval of financing of the car. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.[3] On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation which showed the net purchase price of the vehicle, down payment, balance, and finance charges. VMSC then issued a sales invoice in favor of the spouses with a detailed description of the Toyota Cressida car. In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for the amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse. After receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests under the promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.[4] The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldo's name by the LTO-San Rafael Branch. Despite the spouses' demand for the car and Avelino's repeated assurances, there was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance. [5] On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a

complaint for Replevin with Damages against the spouses. The complaint, docketed as Civil Case No. 1628P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 until fully paid. BA Finance also asked for the payment of attorney's fees, liquidated damages, replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo, were declared in default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985, followed by an alias writ of execution.[6] In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan covered by a promissory note in the amount of PhP 260,664. This promissory note was later endorsed to BA Finance, Cebu City branch.[7] On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash Writ of Execution on the basis of lack of a valid service of summons on them, among other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTC's order. This CA decision became final and executory. On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance was not a holder in due course under Section 59 of theNegotiable Instruments Law (NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995, the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino praying that he be held liable to them in the event that they be held liable to BA Finance, as well as for damages. VMSC was not impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino contended that he was not a party to the transaction personally, but VMSC. Avelino's motion was denied and the third party complaint against him was entertained by the trial court. Subsequently, the spouses belabored to prove that they affixed their signatures on the promissory note and chattel mortgage in favor of VMSC in blank.[8] The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The dispositive portion of the RTC's decision reads: WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R02854117, and with Serial No. RX60-804614, covered by the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty [thereon] at three percent (3%) a month, from March 1, 1984, until the amount is fully paid. In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees, and another amount also equivalent to twenty five percent (25%) of the said unpaid balance, as liquidated damages. The defendantthird party-plaintiffs are also required to shoulder the litigation expenses and costs. As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle; or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06, together with the penalty thereon at three (3%) a month from March 1, 1984, until the amount is entirely paid. In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a sum

equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees, and another sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated damages. Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as moral damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and costs of the suit. The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed.[9] The Ruling of the CA Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note is a negotiable instrument; hence, the trial court should have applied the NIL and not the Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle at the time of sale, the sale was null and void for the failure in the "cause or consideration" of the promissory note, which in this case was the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not a holder in due course of the note since it knew, through its Cebu City branch, that the car was never delivered to the spouses.[10] On the other hand, Avelino prayed for the dismissal of the complaint against him because he was not a party to the transaction, and for an order to the spouses to pay him moral damages and costs of suit. The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of Appeals,[11] the appellate court reasoned that since VMSC is an indispensable party, any judgment will not bind it or be enforced against it. The absence of VMSC rendered the proceedings in the RTC and the judgment in the Third Party Complaint "null and void, not only as to the absent party but also to the present parties, namely the Defendants-Appellants (petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago)." The CA set aside the trial court's order holding Avelino liable for damages to the spouses without prejudice to the action of the spouses against VMSC and Avelino in a separate action.[12] The dispositive portion of the August 20, 2002 CA Decision reads: IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a quo is AFFIRMED, with the modification that the Third-Party Complaint against the Third-Party-Defendant-appellant is DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also without prejudice.[13] The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May 15, 2003. The Issues Petitioners raise the following issues: WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE COURSE WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO The Court's Ruling The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party complaint of petitioners against Avelino thereby effectively absolving Avelino from any liability under the

third party complaint. In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory note, we must determine whether the note is a negotiable instrument and, hence, covered by the NIL. In their appeal to the CA, petitioners argued that the promissory note is a negotiable instrument and that the provisions of the NIL, not the Civil Code, should be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil Code[14] should be applied since their consent was vitiated by fraud, and, thus, the promissory note does not carry any legal effect despite its negotiation. Either way, the petitioners' arguments deserve no merit. The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of a negotiable instrument present. The NIL provides: Section 1. Form of Negotiable Instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The promissory note signed by petitioners reads: 209,601.00 Makati, Metro Manila, Philippines, August 4, 1983 For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest at the rate stipulated herein below, in installments as follows: Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-16-83, and the succeeding monthly installments on the 16th day of each and every succeeding month thereafter until the account is fully paid, provided that the penalty charge of three (3%) per cent per month or a fraction thereof shall be added on each unpaid installment from maturity thereof until fully paid. xxxx Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.) PEDRO F. VIOLAGO 763 Constancia St., Sampaloc, Manila (Address) (Sgd.) Marivic Avaria (WITNESS) PAY TO THE ORDER OF BA FINANCE CORPORATION WITHOUT RECOURSE VIOLAGO MOTOR SALES CORPORATION (Sgd.) FLORENCIA R. VIOLAGO same (Address) (Sgd.) Jesus Tuazon (WITNESS)

By: (Sgd.) AVELINO A. VIOLAGO, Pres.

[15]

The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is in writing; signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates in the future which could be determined from the terms of the note; made payable to the order of VMSC; and names the drawees with certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and regular. The more important issue now is whether or not BA Finance is a holder in due course. The resolution of this issue will determine whether petitioners' defense of fraud and nullity of the sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides: Section 52. What constitutes a holder in due course.--A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The law presumes that a holder of a negotiable instrument is a holder thereof in due course. [16] In this case, the CA is correct in finding that BA Finance meets all the foregoing requisites: In the present recourse, on its face, (a) the "Promissory Note",Exhibit "A", is complete and regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee was never informed, before and at the time the "Promissory Note" was endorsed to the Appellee, that the vehicle sold to the DefendantsAppellants was not delivered to the latter and that VMSC had already previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned its rights over the "Chattel Mortgage" by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.[17] In the hands of one other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.[18] A holder in due course, however, holds the instrument free from any defect of title of prior parties and from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof.[19] Since BA Finance is a holder in due course, petitioners cannot raise the defense of non-delivery of the object and nullity of the sale against the corporation. The NIL considers every negotiable instrument prima facie to have been issued for a valuable consideration.[20] In Salas, we held that a party holding an instrument may enforce payment of the instrument for the full amount thereof. As such, the maker cannot set up the defense of nullity of the contract of sale.[21] Thus, petitioners are liable to respondent corporation for the payment of the amount stated in the instrument. From the third party complaint to the present petition, however, petitioners pray that the veil of corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners likewise pray for damages for the fraud committed upon them. In Concept Builders, Inc. v. NLRC, we held: It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct

personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. xxxx The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiffs legal rights; and The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[22]

2.

3.

This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously sold to Avelino's other cousin, Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he merely insisted that he cannot be held liable because he was not a party to the transaction. The fact that Avelino and Pedro are cousins, and that Avelino claimed to have a need to increase the sales quota, was likely among the factors which motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle was already sold, and with abuse of his relationship with the spouses, still proceeded with the sale and collected the down payment from petitioners. The trial court found that the vehicle was not delivered to the spouses. Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners' loss. He cannot now hide behind the separate corporate personality of VMSC to escape from liability for the amount adjudged by the trial court in favor of petitioners. The fact that VMSC was not included as defendant in petitioners' third party complaint does not preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an appellate proceeding involving petitioner Arcilla's bid to avoid the adverse CA decision on the argument that he is not personally liable for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot even be enforced against the corporation which has not been impleaded as a party below. In that case, the Court found as well-taken the CA's act of disregarding the separate juridical personality of the corporation and holding its president, Arcilla, liable for the obligations incurred in the name of the corporation although it was not a party to the collection suit before the trial court. An excerpt from Arcilla: x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of separate juridical personality conferred upon such corporation by law should be disregarded. Significantly, petitioner does not seriously challenge the [CA's] application of the doctrine which permits the piercing of the corporate veil and the disregarding of the fiction of a separate juridical personality; this is because he knows only too well that from the beginning, he merely used the corporation for his personal purposes.[23] WHEREFORE, the CA's August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third party complaint of petitioners-spouses

Pedro and Florencia Violago against respondent Avelino Violago. The March 5, 1994 Decision of the RTC is REINSTATEDand AFFIRMED. Costs against Avelino Violago. SO ORDERED. Quisumbing, (Chairperson), Ynares-Santiago, Carpio Morales, and Tinga, JJ., concur.

Non negotiable instruments and negotiable documents: drafts and L/Cs, Prudential Bank v. IAC
Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 74886 December 8, 1992 PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.: Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi. The facts which gave rise to the instant controversy are summarized by the public respondent as follows: On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-

1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76). Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13). At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid. Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is premature. Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees. With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4 In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made. Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his obligation. 5 Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues: I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER

MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT; II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C); III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT; IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED; V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115; VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C); VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with. As We see it, the issues may be reduced as follows: 1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties. Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts

concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads: Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15 The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills ought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides: Sec. 7. When payable on demand. An instrument is payable on demand (a) When so it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment in expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied) Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus: Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus: By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract. As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts: . . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ." It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for

the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls underfraud. We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads: In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or nonfulfillment in any respect of the undertaking of the aforesaid: PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid: before making demand on me/us. ( S g d . ) A n a c l e t o

R . C h i A N A C L E T O R . C H I
2 6

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary. In holding otherwise, the public respondent ratiocinates as follows: With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendantappellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendantappellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29 Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads: Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees

or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon. The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity either as surety or as guarantor because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides: Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. Simply stated, there is as yet no cause of action against Chi. We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated: 4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. There was then nothing procedurally objectionable in impleading private respondent Chi as a codefendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads: Sec. 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being

embarrassed or put to expense in connection with any proceedings in which he may have no interest. This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35 However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37 In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner. Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees. In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered: 1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs. 2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied. Costs against private respondents.

SO ORDERED. Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Republic v. PNB
Republic of the Philippines SUPREME COURT Manila EN BANC DECISION December 30, 1961 G.R. No. L-16106 REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK, ET AL., defendants. THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee. Office of the Solicitor General for plaintiff-appellant. , J.: The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of Act No. 3936 against several banks, among them the First National City Bank of New York. It is alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the Philippines a statement under oath of their respective managing officials of all the credits and deposits held by them in favor of persons known to be dead or who have not made further deposits or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and deposits be escheated to the Republic of the Philippines by ordering defendant banks to deposit them to its credit with the Treasurer of the Philippines. In its answer the First National City Bank of New York claims that, while it admits that various savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which remained dormant for 10 years or more, are subject to escheat however, it has inadvertently included in said report certain items amounting to P18,589.89 which, properly speaking, are not credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not included in the claim of plaintiff. After hearing the court a quo rendered judgment holding that cashiers is or managers checks and demand drafts as those which defendant wants excluded from the complaint come within the purview

of Act No. 3936, but not the telegraphic transfer payment which orders are of different category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to reconsider was filed by defendant, the court a quo changed its view and held that even said demand drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff has appealed. Section 1, Act No. 3936, provides: Section 1. Unclaimed balances within the meaning of this Act shall include credits or deposits of money, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a period of ten years or more. Such unclaimed balances, together with the increase and proceeds thereof, shall be deposited with the Insular Treasure to the credit of the Government of the Philippine Islands to be as the Philippine Legislature may direct. It would appear that the term unclaimed balances that are subject to escheat include credits or deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term credit in its usual meaning is a sum credited on the books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the correlative to debt or indebtedness, and that which is due to any person, a distinguished from that which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term deposits in banks where the relationship created between the depositor and the bank is that of creditor and debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., et al., 65 Phil. 443). The questions that now arise are: Do demand draft and telegraphic orders come within the meaning of the term credits or deposits employed in the law? Can their import be considered as a sum credited on the books of the bank to a person who appears to be entitled to it? Do they create a creditor-debtor relationship between drawee and the payee? The answers to these questions require a digression the legal meaning of said banking terminologies. To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an open letter of request from, and an order by, one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future time therein specified (13 Words and Phrases, 371). As a matter of fact, the term draft is often used, and is the common term, for all bills of exchange. And the words draft and bill of exchange are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No. 2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it. This is the clear import of Section 127. It says: A bill of exchange of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the drawee is not liable on the bill unless and until he accepts the same. In other words, in order that a drawee may be liable on the draft and then become obligated to the payee it is necessary that he first accepts the same. In fact, our law requires that with regard to drafts or bills of exchange there is need that they be presented either for acceptance or for payment within a reasonable time after their issuance or after their last negotiation thereof as the case may be (Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Section 186, Ibid.) Since it is admitted that the demand drafts herein involved have not been presented either for acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law. But a demand draft is very different from a cashiers or managers cheek, contrary to appellants pretense, for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. Thus, a cashiers check has been clearly characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows: A cashiers check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable demand. It is an order upon a third party purporting to drawn upon a deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A cashiers check is of a very different character. It is the primary obligation of the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W. 734). The following definitions cited by appellant also confirm this view: A cashiers check is a check of the banks cashier on his or another bank. It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409). A cashiers check issued on request of a depositor is the substantial equivalent of a certified check and the deposit represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552). A cashiers check, being merely a bill of exchange drawn by a bank on itself, and accepted in advance by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashiers check which should come within the purview of the law. The case, however, is different with regard to telegraphic payment order. It is said that as the transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned the contract is executory until the credit is established (Ibid.) We agree with the following comment the Solicitor General: This is so because the drawer bank was already paid the value of the telegraphic transfer payment order. In the particular cases under consideration it appears in the books of the defendant bank that the amounts represented by the telegraphic payment orders appear in the names of the respective payees. If the latter choose to demand payment of their telegraphic transfers at the time the same was (were) received by the defendant bank, there could be no question that this bank would have to pay them. Now, the question is, if the payees decide to have their money remain for sometime in the defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now with the drawer bank? The latter was already paid the value of the telegraphic payment orders otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say that the drawer banks are still the owners of said telegraphic payment orders. WHEREFORE, the decision of the trial court is hereby modified in the sense that the items specifically referred to and listed under paragraph 3 of appellee banks answer representing telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines. No costs. Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur. Bengzon, C.J., Padilla, Labrador and Concepcion, JJ., took no part.

Certificate of deposit International Exchange Bank v. CIR Document of Title (NCC 1507- 1520) Warehouse Receipts Gonzales v. Gotton Bill of Lading Certificates of Stock Capco v. Macasaet Bonds and Debentures Non negotiability, exception BDO v. Equitable Bank

Application of the NIL, Sec 196 Legal Tender; Payment NCC1249, RA 7653 Sec 52 Villanueva v. Santos Citibank v. Sabeniano Kinds of Negotiable Instruments: Promissory Note, Sec 184 Bill of Exchange, Sec 126 Check, Sec 185 Bank of Commerce v. Aruego BPI v. CIR Parties, Sec 191 in relation to secs 126 and 184 Liabilities, Sec 192 Primarily Liable (maker and acceptor) Secondarily liable (drawer and endorser)

Chapter II A. Kinds of Parties B. Requisites of Contract and Capacity to Contract (NCC 1319, 1327, 1381, 1390, 1403, 11409) a. Exceptions with respect to negotiable instruments: i. Incapacity Sec 22 NIL ii. Illegality, Sec 38 and 39 iii. Forgery, Sec 18 and 23 iv. Duress, Sec 55 and NCC 1335