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A.M. No.

133-J May 31, 1982


BERNARDITA R. MACARIOLA, complainant, vs. HONORABLE ELIAS B. ASUNCION,
Judge of the Court of First Instance of Leyte, respondent.
MAKASIAR, J:

In a verified complaint dated August 6, 1968 Bernardita R. Macariola charged respondent
Judge Elias B. Asuncion of the Court of First Instance of Leyte, now Associate Justice of the
Court of Appeals, with "acts unbecoming a judge."
The factual setting of the case is stated in the report dated May 27, 1971 of then Associate
Justice Cecilia Muoz Palma of the Court of Appeals now retired Associate Justice of the
Supreme Court, to whom this case was referred on October 28, 1968 for investigation, thus:
Civil Case No. 3010 of the Court of First Instance of Leyte was a complaint for
partition filed by Sinforosa R. Bales, Luz R. Bakunawa, Anacorita Reyes, Ruperto
Reyes, Adela Reyes, and Priscilla Reyes, plaintiffs, against Bernardita R. Macariola,
defendant, concerning the properties left by the deceased Francisco Reyes, the
common father of the plaintiff and defendant.
In her defenses to the complaint for partition, Mrs. Macariola alleged among other
things that; a) plaintiff Sinforosa R. Bales was not a daughter of the deceased
Francisco Reyes; b) the only legal heirs of the deceased were defendant Macariola,
she being the only offspring of the first marriage of Francisco Reyes with Felisa
Espiras, and the remaining plaintiffs who were the children of the deceased by his
second marriage with Irene Ondez; c) the properties left by the deceased were all
the conjugal properties of the latter and his first wife, Felisa Espiras, and no
properties were acquired by the deceased during his second marriage; d) if there
was any partition to be made, those conjugal properties should first be partitioned
into two parts, and one part is to be adjudicated solely to defendant it being the share
of the latter's deceased mother, Felisa Espiras, and the other half which is the share
of the deceased Francisco Reyes was to be divided equally among his children by
his two marriages.
On June 8, 1963, a decision was rendered by respondent Judge Asuncion in Civil
Case 3010, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court, upon a
preponderance of evidence, finds and so holds, and hereby renders
judgment (1) Declaring the plaintiffs Luz R. Bakunawa, Anacorita Reyes,
Ruperto Reyes, Adela Reyes and Priscilla Reyes as the only children
legitimated by the subsequent marriage of Francisco Reyes Diaz to Irene
Ondez; (2) Declaring the plaintiff Sinforosa R. Bales to have been an
illegitimate child of Francisco Reyes Diaz; (3) Declaring Lots Nos. 4474,
4475, 4892, 5265, 4803, 4581, 4506 and 1/4 of Lot 1145 as belonging to the
conjugal partnership of the spouses Francisco Reyes Diaz and Felisa
Espiras; (4) Declaring Lot No. 2304 and 1/4 of Lot No. 3416 as belonging to
the spouses Francisco Reyes Diaz and Irene Ondez in common partnership;
(5) Declaring that 1/2 of Lot No. 1184 as belonging exclusively to the
deceased Francisco Reyes Diaz; (6) Declaring the defendant Bernardita R.
Macariola, being the only legal and forced heir of her mother Felisa Espiras,
as the exclusive owner of one-half of each of Lots Nos. 4474, 4475, 4892,
5265, 4803, 4581, 4506; and the remaining one-half (1/2) of each of said
Lots Nos. 4474, 4475, 4892, 5265, 4803, 4581, 4506 and one-half (1/2) of
one-fourth (1/4) of Lot No. 1154 as belonging to the estate of Francisco
Reyes Diaz; (7) Declaring Irene Ondez to be the exclusive owner of one-half
(1/2) of Lot No. 2304 and one-half (1/2) of one-fourth (1/4) of Lot No. 3416;
the remaining one-half (1/2) of Lot 2304 and the remaining one-half (1/2) of
one-fourth (1/4) of Lot No. 3416 as belonging to the estate of Francisco
Reyes Diaz; (8) Directing the division or partition of the estate of Francisco
Reyes Diaz in such a manner as to give or grant to Irene Ondez, as
surviving widow of Francisco Reyes Diaz, a hereditary share of. one-twelfth
(1/12) of the whole estate of Francisco Reyes Diaz (Art. 996 in relation to
Art. 892, par 2, New Civil Code), and the remaining portion of the estate to
be divided among the plaintiffs Sinforosa R. Bales, Luz R. Bakunawa,
Anacorita Reyes, Ruperto Reyes, Adela Reyes, Priscilla Reyes and
defendant Bernardita R. Macariola, in such a way that the extent of the total
share of plaintiff Sinforosa R. Bales in the hereditary estate shall not exceed
the equivalent of two-fifth (2/5) of the total share of any or each of the other
plaintiffs and the defendant (Art. 983, New Civil Code), each of the latter to
receive equal shares from the hereditary estate, (Ramirez vs. Bautista, 14
Phil. 528; Diancin vs. Bishop of Jaro, O.G. [3rd Ed.] p. 33); (9) Directing the
parties, within thirty days after this judgment shall have become final to
submit to this court, for approval a project of partition of the hereditary estate
in the proportion above indicated, and in such manner as the parties may, by
agreement, deemed convenient and equitable to them taking into
consideration the location, kind, quality, nature and value of the properties
involved; (10) Directing the plaintiff Sinforosa R. Bales and defendant
Bernardita R. Macariola to pay the costs of this suit, in the proportion of one-
third (1/3) by the first named and two-thirds (2/3) by the second named; and
(I 1) Dismissing all other claims of the parties [pp 27-29 of Exh. C].
The decision in civil case 3010 became final for lack of an appeal, and on October
16, 1963, a project of partition was submitted to Judge Asuncion which is marked
Exh. A. Notwithstanding the fact that the project of partition was not signed by the
parties themselves but only by the respective counsel of plaintiffs and defendant,
Judge Asuncion approved it in his Order dated October 23, 1963, which for
convenience is quoted hereunder in full:
The parties, through their respective counsels, presented to this Court for
approval the following project of partition:
COMES NOW, the plaintiffs and the defendant in the above-entitled case, to
this Honorable Court respectfully submit the following Project of Partition:
l. The whole of Lots Nos. 1154, 2304 and 4506 shall belong exclusively to
Bernardita Reyes Macariola;
2. A portion of Lot No. 3416 consisting of 2,373.49 square meters along the
eastern part of the lot shall be awarded likewise to Bernardita R. Macariola;
3. Lots Nos. 4803, 4892 and 5265 shall be awarded to Sinforosa Reyes
Bales;
4. A portion of Lot No. 3416 consisting of 1,834.55 square meters along the
western part of the lot shall likewise be awarded to Sinforosa Reyes-Bales;
5. Lots Nos. 4474 and 4475 shall be divided equally among Luz Reyes
Bakunawa, Anacorita Reyes, Ruperto Reyes, Adela Reyes and Priscilla
Reyes in equal shares;
6. Lot No. 1184 and the remaining portion of Lot No. 3416 after taking the
portions awarded under item (2) and (4) above shall be awarded to Luz
Reyes Bakunawa, Anacorita Reyes, Ruperto Reyes, Adela Reyes and
Priscilla Reyes in equal shares, provided, however that the remaining portion
of Lot No. 3416 shall belong exclusively to Priscilla Reyes.
WHEREFORE, it is respectfully prayed that the Project of Partition indicated
above which is made in accordance with the decision of the Honorable Court
be approved.
Tacloban City, October 16, 1963.
(SGD) BONIFACIO RAMO Atty. for the Defendant Tacloban City
(SGD) ZOTICO A. TOLETE Atty. for the Plaintiff Tacloban City
While the Court thought it more desirable for all the parties to have signed this
Project of Partition, nevertheless, upon assurance of both counsels of the
respective parties to this Court that the Project of Partition, as above- quoted,
had been made after a conference and agreement of the plaintiffs and the
defendant approving the above Project of Partition, and that both lawyers had
represented to the Court that they are given full authority to sign by
themselves the Project of Partition, the Court, therefore, finding the above-
quoted Project of Partition to be in accordance with law, hereby approves the
same. The parties, therefore, are directed to execute such papers, documents
or instrument sufficient in form and substance for the vesting of the rights,
interests and participations which were adjudicated to the respective parties,
as outlined in the Project of Partition and the delivery of the respective
properties adjudicated to each one in view of said Project of Partition, and to
perform such other acts as are legal and necessary to effectuate the said
Project of Partition.
SO ORDERED.
Given in Tacloban City, this 23rd day of October, 1963.
(SGD) ELIAS B. ASUNCION Judge
EXH. B.
The above Order of October 23, 1963, was amended on November 11, 1963, only
for the purpose of giving authority to the Register of Deeds of the Province of Leyte
to issue the corresponding transfer certificates of title to the respective adjudicatees
in conformity with the project of partition (see Exh. U).
One of the properties mentioned in the project of partition was Lot 1184 or rather
one-half thereof with an area of 15,162.5 sq. meters. This lot, which according to the
decision was the exclusive property of the deceased Francisco Reyes, was
adjudicated in said project of partition to the plaintiffs Luz, Anacorita Ruperto, Adela,
and Priscilla all surnamed Reyes in equal shares, and when the project of partition
was approved by the trial court the adjudicatees caused Lot 1184 to be subdivided
into five lots denominated as Lot 1184-A to 1184-E inclusive (Exh. V).
Lot 1184-D was conveyed to Enriqueta D. Anota, a stenographer in Judge
Asuncion's court (Exhs. F, F-1 and V-1), while Lot 1184-E which had an area of
2,172.5556 sq. meters was sold on July 31, 1964 to Dr. Arcadio Galapon (Exh. 2)
who was issued transfer certificate of title No. 2338 of the Register of Deeds of the
city of Tacloban (Exh. 12).
On March 6, 1965, Dr. Arcadio Galapon and his wife Sold a portion of Lot 1184-E
with an area of around 1,306 sq. meters to Judge Asuncion and his wife, Victoria S.
Asuncion (Exh. 11), which particular portion was declared by the latter for taxation
purposes (Exh. F).
On August 31, 1966, spouses Asuncion and spouses Galapon conveyed their
respective shares and interest in Lot 1184-E to "The Traders Manufacturing and
Fishing Industries Inc." (Exit 15 & 16). At the time of said sale the stockholders of the
corporation were Dominador Arigpa Tan, Humilia Jalandoni Tan, Jaime Arigpa Tan,
Judge Asuncion, and the latter's wife, Victoria S. Asuncion, with Judge Asuncion as
the President and Mrs. Asuncion as the secretary (Exhs. E-4 to E-7). The Articles of
Incorporation of "The Traders Manufacturing and Fishing Industries, Inc." which we
shall henceforth refer to as "TRADERS" were registered with the Securities and
Exchange Commission only on January 9, 1967 (Exh. E) [pp. 378-385, rec.].
Complainant Bernardita R. Macariola filed on August 9, 1968 the instant complaint dated
August 6, 1968 alleging four causes of action, to wit: [1] that respondent Judge Asuncion
violated Article 1491, paragraph 5, of the New Civil Code in acquiring by purchase a portion
of Lot No. 1184-E which was one of those properties involved in Civil Case No. 3010 decided
by him; [2] that he likewise violated Article 14, paragraphs I and 5 of the Code of Commerce,
Section 3, paragraph H, of R.A. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act, Section 12, Rule XVIII of the Civil Service Rules, and Canon 25 of the Canons
of Judicial Ethics, by associating himself with the Traders Manufacturing and Fishing
Industries, Inc., as a stockholder and a ranking officer while he was a judge of the Court of
First Instance of Leyte; [3] that respondent was guilty of coddling an impostor and acted in
disregard of judicial decorum by closely fraternizing with a certain Dominador Arigpa Tan who
openly and publicly advertised himself as a practising attorney when in truth and in fact his
name does not appear in the Rolls of Attorneys and is not a member of the Philippine Bar;
and [4] that there was a culpable defiance of the law and utter disregard for ethics by
respondent Judge (pp. 1-7, rec.).
Respondent Judge Asuncion filed on September 24, 1968 his answer to which a reply was
filed on October 16, 1968 by herein complainant. In Our resolution of October 28, 1968, We
referred this case to then Justice Cecilia Muoz Palma of the Court of Appeals, for
investigation, report and recommendation. After hearing, the said Investigating Justice
submitted her report dated May 27, 1971 recommending that respondent Judge should be
reprimanded or warned in connection with the first cause of action alleged in the complaint,
and for the second cause of action, respondent should be warned in case of a finding that he
is prohibited under the law to engage in business. On the third and fourth causes of action,
Justice Palma recommended that respondent Judge be exonerated.
The records also reveal that on or about November 9 or 11, 1968 (pp. 481, 477, rec.),
complainant herein instituted an action before the Court of First Instance of Leyte, entitled
"Bernardita R. Macariola, plaintiff, versus Sinforosa R. Bales, et al., defendants," which was
docketed as Civil Case No. 4235, seeking the annulment of the project of partition made
pursuant to the decision in Civil Case No. 3010 and the two orders issued by respondent
Judge approving the same, as well as the partition of the estate and the subsequent
conveyances with damages. It appears, however, that some defendants were dropped from
the civil case. For one, the case against Dr. Arcadio Galapon was dismissed because he was
no longer a real party in interest when Civil Case No. 4234 was filed, having already
conveyed on March 6, 1965 a portion of lot 1184-E to respondent Judge and on August 31,
1966 the remainder was sold to the Traders Manufacturing and Fishing Industries, Inc.
Similarly, the case against defendant Victoria Asuncion was dismissed on the ground that
she was no longer a real party in interest at the time the aforesaid Civil Case No. 4234 was
filed as the portion of Lot 1184 acquired by her and respondent Judge from Dr. Arcadio
Galapon was already sold on August 31, 1966 to the Traders Manufacturing and Fishing
industries, Inc. Likewise, the cases against defendants Serafin P. Ramento, Catalina Cabus,
Ben Barraza Go, Jesus Perez, Traders Manufacturing and Fishing Industries, Inc., Alfredo R.
Celestial and Pilar P. Celestial, Leopoldo Petilla and Remedios Petilla, Salvador Anota and
Enriqueta Anota and Atty. Zotico A. Tolete were dismissed with the conformity of complainant
herein, plaintiff therein, and her counsel.
On November 2, 1970, Judge Jose D. Nepomuceno of the Court of First Instance of Leyte,
who was directed and authorized on June 2, 1969 by the then Secretary (now Minister) of
Justice and now Minister of National Defense Juan Ponce Enrile to hear and decide Civil
Case No. 4234, rendered a decision, the dispositive portion of which reads as follows:
A. IN THE CASE AGAINST JUDGE ELIAS B. ASUNCION
(1) declaring that only Branch IV of the Court of First Instance of Leyte has
jurisdiction to take cognizance of the issue of the legality and validity of the
Project of Partition [Exhibit "B"] and the two Orders [Exhibits "C" and "C- 3"]
approving the partition;
(2) dismissing the complaint against Judge Elias B. Asuncion;
(3) adjudging the plaintiff, Mrs. Bernardita R. Macariola to pay defendant
Judge Elias B. Asuncion,
(a) the sum of FOUR HUNDRED THOUSAND PESOS
[P400,000.00] for moral damages;
(b) the sum of TWO HUNDRED THOUSAND PESOS
[P200,000.001 for exemplary damages;
(c) the sum of FIFTY THOUSAND PESOS [P50,000.00] for
nominal damages; and
(d) he sum of TEN THOUSAND PESOS [PI0,000.00] for
Attorney's Fees.
B. IN THE CASE AGAINST THE DEFENDANT MARIQUITA
VILLASIN, FOR HERSELF AND FOR THE HEIRS OF THE
DECEASED GERARDO VILLASIN
(1) Dismissing the complaint against the defendants Mariquita Villasin and
the heirs of the deceased Gerardo Villasin;
(2) Directing the plaintiff to pay the defendants Mariquita Villasin and the
heirs of Gerardo Villasin the cost of the suit.
C. IN THE CASE AGAINST THE DEFENDANT
SINFOROSA R. BALES, ET AL., WHO WERE PLAINTIFFS
IN CIVIL CASE NO. 3010
(1) Dismissing the complaint against defendants Sinforosa R. Bales, Adela
R. Herrer, Priscilla R. Solis, Luz R. Bakunawa, Anacorita R. Eng and
Ruperto O. Reyes.
D. IN THE CASE AGAINST DEFENDANT BONIFACIO
RAMO
(1) Dismissing the complaint against Bonifacio Ramo;
(2) Directing the plaintiff to pay the defendant Bonifacio Ramo the cost of the
suit.
SO ORDERED [pp. 531-533, rec.]
It is further disclosed by the record that the aforesaid decision was elevated to the Court of
Appeals upon perfection of the appeal on February 22, 1971.
I
WE find that there is no merit in the contention of complainant Bernardita R. Macariola, under
her first cause of action, that respondent Judge Elias B. Asuncion violated Article 1491,
paragraph 5, of the New Civil Code in acquiring by purchase a portion of Lot No. 1184-E
which was one of those properties involved in Civil Case No. 3010. 'That Article provides:
Article 1491. The following persons cannot acquire by purchase, even at a
public or judicial action, either in person or through the mediation of another:
xxx xxx xxx
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior
courts, and other officers and employees connected with the administration
of justice, the property and rights in litigation or levied upon an execution
before the court within whose jurisdiction or territory they exercise their
respective functions; this prohibition includes the act of acquiring by
assignment and shall apply to lawyers, with respect to the property and
rights which may be the object of any litigation in which they may take part
by virtue of their profession [emphasis supplied].
The prohibition in the aforesaid Article applies only to the sale or assignment of the property
which is the subject of litigation to the persons disqualified therein. WE have already ruled
that "... for the prohibition to operate, the sale or assignment of the property must take
place during the pendency of the litigation involving the property" (The Director of Lands vs.
Ababa et al., 88 SCRA 513, 519 [1979], Rosario vda. de Laig vs. Court of Appeals, 86 SCRA
641, 646 [1978]).
In the case at bar, when the respondent Judge purchased on March 6, 1965 a portion of Lot
1184-E, the decision in Civil Case No. 3010 which he rendered on June 8, 1963 was already
final because none of the parties therein filed an appeal within the reglementary period;
hence, the lot in question was no longer subject of the litigation. Moreover, at the time of the
sale on March 6, 1965, respondent's order dated October 23, 1963 and the amended order
dated November 11, 1963 approving the October 16, 1963 project of partition made pursuant
to the June 8, 1963 decision, had long become final for there was no appeal from said
orders.
Furthermore, respondent Judge did not buy the lot in question on March 6, 1965 directly from
the plaintiffs in Civil Case No. 3010 but from Dr. Arcadio Galapon who earlier purchased
on July 31, 1964 Lot 1184-E from three of the plaintiffs, namely, Priscilla Reyes, Adela
Reyes, and Luz R. Bakunawa after the finality of the decision in Civil Case No. 3010. It may
be recalled that Lot 1184 or more specifically one-half thereof was adjudicated in equal
shares to Priscilla Reyes, Adela Reyes, Luz Bakunawa, Ruperto Reyes and Anacorita Reyes
in the project of partition, and the same was subdivided into five lots denominated as Lot
1184-A to 1184-E. As aforestated, Lot 1184-E was sold on July 31, 1964 to Dr. Galapon for
which he was issued TCT No. 2338 by the Register of Deeds of Tacloban City, and on March
6, 1965 he sold a portion of said lot to respondent Judge and his wife who declared the same
for taxation purposes only. The subsequent sale on August 31, 1966 by spouses Asuncion
and spouses Galapon of their respective shares and interest in said Lot 1184-E to the
Traders Manufacturing and Fishing Industries, Inc., in which respondent was the president
and his wife was the secretary, took place long after the finality of the decision in Civil Case
No. 3010 and of the subsequent two aforesaid orders therein approving the project of
partition.
While it appears that complainant herein filed on or about November 9 or 11, 1968 an action
before the Court of First Instance of Leyte docketed as Civil Case No. 4234, seeking to annul
the project of partition and the two orders approving the same, as well as the partition of the
estate and the subsequent conveyances, the same, however, is of no moment.
The fact remains that respondent Judge purchased on March 6, 1965 a portion of Lot 1184-E
from Dr. Arcadio Galapon; hence, after the finality of the decision which he rendered on June
8, 1963 in Civil Case No. 3010 and his two questioned orders dated October 23, 1963 and
November 11, 1963. Therefore, the property was no longer subject of litigation.
The subsequent filing on November 9, or 11, 1968 of Civil Case No. 4234 can no longer alter,
change or affect the aforesaid facts that the questioned sale to respondent Judge, now
Court of Appeals Justice, was effected and consummated long after the finality of the
aforesaid decision or orders.
Consequently, the sale of a portion of Lot 1184-E to respondent Judge having taken place
over one year after the finality of the decision in Civil Case No. 3010 as well as the two
orders approving the project of partition, and not during the pendency of the litigation, there
was no violation of paragraph 5, Article 1491 of the New Civil Code.
It is also argued by complainant herein that the sale on July 31, 1964 of Lot 1184-E to Dr.
Arcadio Galapon by Priscilla Reyes, Adela Reyes and Luz R. Bakunawa was only a mere
scheme to conceal the illegal and unethical transfer of said lot to respondent Judge as a
consideration for the approval of the project of partition. In this connection, We agree with the
findings of the Investigating Justice thus:
And so we are now confronted with this all-important question whether or not
the acquisition by respondent of a portion of Lot 1184-E and the subsequent
transfer of the whole lot to "TRADERS" of which respondent was the
President and his wife the Secretary, was intimately related to the Order of
respondent approving the project of partition, Exh. A.
Respondent vehemently denies any interest or participation in the
transactions between the Reyeses and the Galapons concerning Lot 1184-
E, and he insists that there is no evidence whatsoever to show that Dr.
Galapon had acted, in the purchase of Lot 1184-E, in mediation for him and
his wife. (See p. 14 of Respondent's Memorandum).
xxx xxx xxx
On this point, I agree with respondent that there is no evidence in the record
showing that Dr. Arcadio Galapon acted as a mere "dummy" of respondent
in acquiring Lot 1184-E from the Reyeses. Dr. Galapon appeared to this
investigator as a respectable citizen, credible and sincere, and I believe him
when he testified that he bought Lot 1184-E in good faith and for valuable
consideration from the Reyeses without any intervention of, or previous
understanding with Judge Asuncion (pp. 391- 394, rec.).
On the contention of complainant herein that respondent Judge acted illegally in approving
the project of partition although it was not signed by the parties, We quote with approval the
findings of the Investigating Justice, as follows:
1. I agree with complainant that respondent should have required the
signature of the parties more particularly that of Mrs. Macariola on the
project of partition submitted to him for approval; however, whatever error
was committed by respondent in that respect was done in good faith as
according to Judge Asuncion he was assured by Atty. Bonifacio Ramo, the
counsel of record of Mrs. Macariola, That he was authorized by his client to
submit said project of partition, (See Exh. B and tsn p. 24, January 20,
1969). While it is true that such written authority if there was any, was not
presented by respondent in evidence, nor did Atty. Ramo appear to
corroborate the statement of respondent, his affidavit being the only one that
was presented as respondent's Exh. 10, certain actuations of Mrs. Macariola
lead this investigator to believe that she knew the contents of the project of
partition, Exh. A, and that she gave her conformity thereto. I refer to the
following documents:
1) Exh. 9 Certified true copy of OCT No. 19520 covering Lot 1154 of the
Tacloban Cadastral Survey in which the deceased Francisco Reyes holds a
"1/4 share" (Exh. 9-a). On tills certificate of title the Order dated November
11, 1963, (Exh. U) approving the project of partition was duly entered and
registered on November 26, 1963 (Exh. 9-D);
2) Exh. 7 Certified copy of a deed of absolute sale executed by Bernardita
Reyes Macariola onOctober 22, 1963, conveying to Dr. Hector Decena the
one-fourth share of the late Francisco Reyes-Diaz in Lot 1154. In this deed
of sale the vendee stated that she was the absolute owner of said one-fourth
share, the same having been adjudicated to her as her share in the estate of
her father Francisco Reyes Diaz as per decision of the Court of First
Instance of Leyte under case No. 3010 (Exh. 7-A). The deed of sale was
duly registered and annotated at the back of OCT 19520 on December 3,
1963 (see Exh. 9-e).
In connection with the abovementioned documents it is to be noted that in
the project of partition dated October 16, 1963, which was approved by
respondent on October 23, 1963, followed by an amending Order on
November 11, 1963, Lot 1154 or rather 1/4 thereof was adjudicated to Mrs.
Macariola. It is this 1/4 share in Lot 1154 which complainant sold to Dr.
Decena on October 22, 1963, several days after the preparation of the
project of partition.
Counsel for complainant stresses the view, however, that the latter sold her
one-fourth share in Lot 1154 by virtue of the decision in Civil Case 3010 and
not because of the project of partition, Exh. A. Such contention is absurd
because from the decision, Exh. C, it is clear that one-half of one- fourth of
Lot 1154 belonged to the estate of Francisco Reyes Diaz while the other half
of said one-fourth was the share of complainant's mother, Felisa Espiras; in
other words, the decision did not adjudicate the whole of the one-fourth of
Lot 1154 to the herein complainant (see Exhs. C-3 & C-4). Complainant
became the owner of the entire one-fourth of Lot 1154 only by means of the
project of partition, Exh. A. Therefore, if Mrs. Macariola sold Lot 1154 on
October 22, 1963, it was for no other reason than that she was wen aware of
the distribution of the properties of her deceased father as per Exhs. A and
B. It is also significant at this point to state that Mrs. Macariola admitted
during the cross-examination that she went to Tacloban City in connection
with the sale of Lot 1154 to Dr. Decena (tsn p. 92, November 28, 1968) from
which we can deduce that she could not have been kept ignorant of the
proceedings in civil case 3010 relative to the project of partition.
Complainant also assails the project of partition because according to her
the properties adjudicated to her were insignificant lots and the least
valuable. Complainant, however, did not present any direct and positive
evidence to prove the alleged gross inequalities in the choice and
distribution of the real properties when she could have easily done so by
presenting evidence on the area, location, kind, the assessed and market
value of said properties. Without such evidence there is nothing in the record
to show that there were inequalities in the distribution of the properties of
complainant's father (pp. 386389, rec.).
Finally, while it is. true that respondent Judge did not violate paragraph 5, Article 1491 of the
New Civil Code in acquiring by purchase a portion of Lot 1184-E which was in litigation in his
court, it was, however, improper for him to have acquired the same. He should be reminded
of Canon 3 of the Canons of Judicial Ethics which requires that: "A judge's official conduct
should be free from the appearance of impropriety, and his personal behavior, not only upon
the bench and in the performance of judicial duties, but also in his everyday life, should be
beyond reproach." And as aptly observed by the Investigating Justice: "... it was unwise and
indiscreet on the part of respondent to have purchased or acquired a portion of a piece of
property that was or had been in litigation in his court and caused it to be transferred to a
corporation of which he and his wife were ranking officers at the time of such transfer. One
who occupies an exalted position in the judiciary has the duty and responsibility of
maintaining the faith and trust of the citizenry in the courts of justice, so that not only must he
be truly honest and just, but his actuations must be such as not give cause for doubt and
mistrust in the uprightness of his administration of justice. In this particular case of
respondent, he cannot deny that the transactions over Lot 1184-E are damaging and render
his actuations open to suspicion and distrust. Even if respondent honestly believed that Lot
1184-E was no longer in litigation in his court and that he was purchasing it from a third
person and not from the parties to the litigation, he should nonetheless have refrained from
buying it for himself and transferring it to a corporation in which he and his wife were
financially involved, to avoid possible suspicion that his acquisition was related in one way or
another to his official actuations in civil case 3010. The conduct of respondent gave cause for
the litigants in civil case 3010, the lawyers practising in his court, and the public in general to
doubt the honesty and fairness of his actuations and the integrity of our courts of justice" (pp.
395396, rec.).
II
With respect to the second cause of action, the complainant alleged that respondent Judge
violated paragraphs 1 and 5, Article 14 of the Code of Commerce when he associated
himself with the Traders Manufacturing and Fishing Industries, Inc. as a stockholder and a
ranking officer, said corporation having been organized to engage in business. Said Article
provides that:
Article 14 The following cannot engage in commerce, either in person or
by proxy, nor can they hold any office or have any direct, administrative, or
financial intervention in commercial or industrial companies within the limits
of the districts, provinces, or towns in which they discharge their duties:
1. Justices of the Supreme Court, judges and officials of the department of
public prosecution in active service. This provision shall not be applicable to
mayors, municipal judges, and municipal prosecuting attorneys nor to those
who by chance are temporarily discharging the functions of judge or
prosecuting attorney.
xxx xxx xxx
5. Those who by virtue of laws or special provisions may not engage in
commerce in a determinate territory.
It is Our considered view that although the aforestated provision is incorporated in the Code
of Commerce which is part of the commercial laws of the Philippines, it, however, partakes of
the nature of a political law as it regulates the relationship between the government and
certain public officers and employees, like justices and judges.
Political Law has been defined as that branch of public law which deals with the organization
and operation of the governmental organs of the State and define the relations of the state
with the inhabitants of its territory (People vs. Perfecto, 43 Phil. 887, 897 [1922]). It may be
recalled that political law embraces constitutional law, law of public corporations,
administrative law including the law on public officers and elections. Specifically, Article 14 of
the Code of Commerce partakes more of the nature of an administrative law because it
regulates the conduct of certain public officers and employees with respect to engaging in
business: hence, political in essence.
It is significant to note that the present Code of Commerce is the Spanish Code of Commerce
of 1885, with some modifications made by the "Commission de Codificacion de las
Provincias de Ultramar," which was extended to the Philippines by the Royal Decree of
August 6, 1888, and took effect as law in this jurisdiction on December 1, 1888.
Upon the transfer of sovereignty from Spain to the United States and later on from the United
States to the Republic of the Philippines, Article 14 of this Code of Commerce must be
deemed to have been abrogated because where there is change of sovereignty, the political
laws of the former sovereign, whether compatible or not with those of the new sovereign, are
automatically abrogated, unless they are expressly re-enacted by affirmative act of the new
sovereign.
Thus, We held in Roa vs. Collector of Customs (23 Phil. 315, 330, 311 [1912]) that:
By well-settled public law, upon the cession of territory by one nation to
another, either following a conquest or otherwise, ... those laws which are
political in their nature and pertain to the prerogatives of the former
government immediately cease upon the transfer of sovereignty. (Opinion,
Atty. Gen., July 10, 1899).
While municipal laws of the newly acquired territory not in conflict with the,
laws of the new sovereign continue in force without the express assent or
affirmative act of the conqueror, the political laws do not. (Halleck's Int. Law,
chap. 34, par. 14). However, such political laws of the prior sovereignty as
are not in conflict with the constitution or institutions of the new sovereign,
may be continued in force if the conqueror shall so declare by affirmative act
of the commander-in-chief during the war, or by Congress in time of peace.
(Ely's Administrator vs. United States, 171 U.S. 220, 43 L. Ed. 142). In the
case of American and Ocean Ins. Cos. vs. 356 Bales of Cotton (1 Pet. [26
U.S.] 511, 542, 7 L. Ed. 242), Chief Justice Marshall said:
On such transfer (by cession) of territory, it has never been
held that the relations of the inhabitants with each other
undergo any change. Their relations with their former
sovereign are dissolved, and new relations are created
between them and the government which has acquired their
territory. The same act which transfers their country,
transfers the allegiance of those who remain in it; and the
law which may be denominated political, is necessarily
changed, although that which regulates the intercourse and
general conduct of individuals, remains in force, until altered
by the newly- created power of the State.
Likewise, in People vs. Perfecto (43 Phil. 887, 897 [1922]), this Court stated that: "It is a
general principle of the public law that on acquisition of territory the previous political relations
of the ceded region are totally abrogated. "
There appears no enabling or affirmative act that continued the effectivity of the aforestated
provision of the Code of Commerce after the change of sovereignty from Spain to the United
States and then to the Republic of the Philippines. Consequently, Article 14 of the Code of
Commerce has no legal and binding effect and cannot apply to the respondent, then Judge of
the Court of First Instance, now Associate Justice of the Court of Appeals.
It is also argued by complainant herein that respondent Judge violated paragraph H, Section
3 of Republic Act No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act,
which provides that:
Sec. 3. Corrupt practices of public officers. In addition to acts or
omissions of public officers already penalized by existing law, the following
shall constitute corrupt practices of any public officer and are hereby
declared to be unlawful:
xxx xxx xxx
(h) Directly or indirectly having financial or pecuniary
interest in any business, contract or transaction in
connection with which he intervenes or takes part in his
official capacity, or in which he is prohibited by the
Constitution or by any Iaw from having any interest.
Respondent Judge cannot be held liable under the aforestated paragraph because there is
no showing that respondent participated or intervened in his official capacity in the business
or transactions of the Traders Manufacturing and Fishing Industries, Inc. In the case at bar,
the business of the corporation in which respondent participated has obviously no relation or
connection with his judicial office. The business of said corporation is not that kind where
respondent intervenes or takes part in his capacity as Judge of the Court of First Instance. As
was held in one case involving the application of Article 216 of the Revised Penal Code
which has a similar prohibition on public officers against directly or indirectly becoming
interested in any contract or business in which it is his official duty to intervene, "(I)t is not
enough to be a public official to be subject to this crime; it is necessary that by reason of his
office, he has to intervene in said contracts or transactions; and, hence, the official who
intervenes in contracts or transactions which have no relation to his office cannot commit this
crime.' (People vs. Meneses, C.A. 40 O.G. 11th Supp. 134, cited by Justice Ramon C.
Aquino; Revised Penal Code, p. 1174, Vol. 11 [1976]).
It does not appear also from the records that the aforesaid corporation gained any undue
advantage in its business operations by reason of respondent's financial involvement in it, or
that the corporation benefited in one way or another in any case filed by or against it in court.
It is undisputed that there was no case filed in the different branches of the Court of First
Instance of Leyte in which the corporation was either party plaintiff or defendant except Civil
Case No. 4234 entitled "Bernardita R. Macariola, plaintiff, versus Sinforosa O. Bales, et
al.,"wherein the complainant herein sought to recover Lot 1184-E from the aforesaid
corporation. It must be noted, however, that Civil Case No. 4234 was filed only on November
9 or 11, 1968 and decided on November 2, 1970 by CFI Judge Jose D. Nepomuceno when
respondent Judge was no longer connected with the corporation, having disposed of his
interest therein on January 31, 1967.
Furthermore, respondent is not liable under the same paragraph because there is no
provision in both the 1935 and 1973 Constitutions of the Philippines, nor is there an existing
law expressly prohibiting members of the Judiciary from engaging or having interest in any
lawful business.
It may be pointed out that Republic Act No. 296, as amended, also known as the Judiciary
Act of 1948, does not contain any prohibition to that effect. As a matter of fact, under Section
77 of said law, municipal judges may engage in teaching or other vocation not involving the
practice of law after office hours but with the permission of the district judge concerned.
Likewise, Article 14 of the Code of Commerce which prohibits judges from engaging in
commerce is, as heretofore stated, deemed abrogated automatically upon the transfer of
sovereignty from Spain to America, because it is political in nature.
Moreover, the prohibition in paragraph 5, Article 1491 of the New Civil Code against the
purchase by judges of a property in litigation before the court within whose jurisdiction they
perform their duties, cannot apply to respondent Judge because the sale of the lot in question
to him took place after the finality of his decision in Civil Case No. 3010 as well as his two
orders approving the project of partition; hence, the property was no longer subject of
litigation.
In addition, although Section 12, Rule XVIII of the Civil Service Rules made pursuant to the
Civil Service Act of 1959 prohibits an officer or employee in the civil service from engaging in
any private business, vocation, or profession or be connected with any commercial, credit,
agricultural or industrial undertaking without a written permission from the head of
department, the same, however, may not fall within the purview of paragraph h, Section 3 of
the Anti-Graft and Corrupt Practices Act because the last portion of said paragraph speaks of
a prohibition by the Constitution or law on any public officer from having any interest in any
business and not by a mere administrative rule or regulation. Thus, a violation of the
aforesaid rule by any officer or employee in the civil service, that is, engaging in private
business without a written permission from the Department Head may not constitute graft and
corrupt practice as defined by law.
On the contention of complainant that respondent Judge violated Section 12, Rule XVIII of
the Civil Service Rules, We hold that the Civil Service Act of 1959 (R.A. No. 2260) and the
Civil Service Rules promulgated thereunder, particularly Section 12 of Rule XVIII, do not
apply to the members of the Judiciary. Under said Section 12: "No officer or employee shall
engage directly in any private business, vocation, or profession or be connected with any
commercial, credit, agricultural or industrial undertaking without a written permission from the
Head of Department ..."
It must be emphasized at the outset that respondent, being a member of the Judiciary, is
covered by Republic Act No. 296, as amended, otherwise known as the Judiciary Act of 1948
and by Section 7, Article X, 1973 Constitution.
Under Section 67 of said law, the power to remove or dismiss judges was then vested in the
President of the Philippines, not in the Commissioner of Civil Service, and only on two
grounds, namely, serious misconduct and inefficiency, and upon the recommendation of the
Supreme Court, which alone is authorized, upon its own motion, or upon information of the
Secretary (now Minister) of Justice to conduct the corresponding investigation. Clearly, the
aforesaid section defines the grounds and prescribes the special procedure for the discipline
of judges.
And under Sections 5, 6 and 7, Article X of the 1973 Constitution, only the Supreme Court
can discipline judges of inferior courts as well as other personnel of the Judiciary.
It is true that under Section 33 of the Civil Service Act of 1959: "The Commissioner may, for
... violation of the existing Civil Service Law and rules or of reasonable office regulations, or
in the interest of the service, remove any subordinate officer or employee from the service,
demote him in rank, suspend him for not more than one year without pay or fine him in an
amount not exceeding six months' salary." Thus, a violation of Section 12 of Rule XVIII is a
ground for disciplinary action against civil service officers and employees.
However, judges cannot be considered as subordinate civil service officers or employees
subject to the disciplinary authority of the Commissioner of Civil Service; for, certainly, the
Commissioner is not the head of the Judicial Department to which they belong. The Revised
Administrative Code (Section 89) and the Civil Service Law itself state that the Chief Justice
is the department head of the Supreme Court (Sec. 20, R.A. No. 2260) [1959]); and under
the 1973 Constitution, the Judiciary is the only other or second branch of the government
(Sec. 1, Art. X, 1973 Constitution). Besides, a violation of Section 12, Rule XVIII cannot be
considered as a ground for disciplinary action against judges because to recognize the same
as applicable to them, would be adding another ground for the discipline of judges and, as
aforestated, Section 67 of the Judiciary Act recognizes only two grounds for their removal,
namely, serious misconduct and inefficiency.
Moreover, under Section 16(i) of the Civil Service Act of 1959, it is the Commissioner of Civil
Service who has original and exclusive jurisdiction "(T)o decide, within one hundred twenty
days, after submission to it, all administrative cases against permanent officers and
employees in the competitive service, and, except as provided by law, to have final authority
to pass upon their removal, separation, and suspension and upon all matters relating to the
conduct, discipline, and efficiency of such officers and employees; and prescribe standards,
guidelines and regulations governing the administration of discipline" (emphasis supplied).
There is no question that a judge belong to the non-competitive or unclassified service of the
government as a Presidential appointee and is therefore not covered by the aforesaid
provision. WE have already ruled that "... in interpreting Section 16(i) of Republic Act No.
2260, we emphasized that only permanent officers and employees who belong to the
classified service come under the exclusive jurisdiction of the Commissioner of Civil Service"
(Villaluz vs. Zaldivar, 15 SCRA 710,713 [1965], Ang-Angco vs. Castillo, 9 SCRA 619 [1963]).
Although the actuation of respondent Judge in engaging in private business by joining the
Traders Manufacturing and Fishing Industries, Inc. as a stockholder and a ranking officer, is
not violative of the provissions of Article 14 of the Code of Commerce and Section 3(h) of the
Anti-Graft and Corrupt Practices Act as well as Section 12, Rule XVIII of the Civil Service
Rules promulgated pursuant to the Civil Service Act of 1959, the impropriety of the same is
clearly unquestionable because Canon 25 of the Canons of Judicial Ethics expressly
declares that:
A judge should abstain from making personal investments in enterprises
which are apt to be involved in litigation in his court; and, after his accession
to the bench, he should not retain such investments previously made, longer
than a period sufficient to enable him to dispose of them without serious
loss. It is desirable that he should, so far as reasonably possible, refrain from
all relations which would normally tend to arouse the suspicion that such
relations warp or bias his judgment, or prevent his impartial attitude of mind
in the administration of his judicial duties. ...
WE are not, however, unmindful of the fact that respondent Judge and his wife had
withdrawn on January 31, 1967 from the aforesaid corporation and sold their respective
shares to third parties, and it appears also that the aforesaid corporation did not in anyway
benefit in any case filed by or against it in court as there was no case filed in the different
branches of the Court of First Instance of Leyte from the time of the drafting of the Articles of
Incorporation of the corporation on March 12, 1966, up to its incorporation on January 9,
1967, and the eventual withdrawal of respondent on January 31, 1967 from said corporation.
Such disposal or sale by respondent and his wife of their shares in the corporation only 22
days after the incorporation of the corporation, indicates that respondent realized that early
that their interest in the corporation contravenes the aforesaid Canon 25. Respondent Judge
and his wife therefore deserve the commendation for their immediate withdrawal from the
firm after its incorporation and before it became involved in any court litigation
III
With respect to the third and fourth causes of action, complainant alleged that respondent
was guilty of coddling an impostor and acted in disregard of judicial decorum, and that there
was culpable defiance of the law and utter disregard for ethics. WE agree, however, with the
recommendation of the Investigating Justice that respondent Judge be exonerated because
the aforesaid causes of action are groundless, and WE quote the pertinent portion of her
report which reads as follows:
The basis for complainant's third cause of action is the claim that respondent
associated and closely fraternized with Dominador Arigpa Tan who openly
and publicly advertised himself as a practising attorney (see Exhs. I, I-1 and
J) when in truth and in fact said Dominador Arigpa Tan does not appear in
the Roll of Attorneys and is not a member of the Philippine Bar as certified to
in Exh. K.
The "respondent denies knowing that Dominador Arigpa Tan was an
"impostor" and claims that all the time he believed that the latter was a bona
fide member of the bar. I see no reason for disbelieving this assertion of
respondent. It has been shown by complainant that Dominador Arigpa Tan
represented himself publicly as an attorney-at-law to the extent of putting up
a signboard with his name and the words "Attorney-at Law" (Exh. I and 1- 1)
to indicate his office, and it was but natural for respondent and any person
for that matter to have accepted that statement on its face value. "Now with
respect to the allegation of complainant that respondent is guilty of
fraternizing with Dominador Arigpa Tan to the extent of permitting his wife to
be a godmother of Mr. Tan's child at baptism (Exh. M & M-1), that fact even
if true did not render respondent guilty of violating any canon of judicial
ethics as long as his friendly relations with Dominador A. Tan and family did
not influence his official actuations as a judge where said persons were
concerned. There is no tangible convincing proof that herein respondent
gave any undue privileges in his court to Dominador Arigpa Tan or that the
latter benefitted in his practice of law from his personal relations with
respondent, or that he used his influence, if he had any, on the Judges of the
other branches of the Court to favor said Dominador Tan.
Of course it is highly desirable for a member of the judiciary to refrain as
much as possible from maintaining close friendly relations with practising
attorneys and litigants in his court so as to avoid suspicion 'that his social or
business relations or friendship constitute an element in determining his
judicial course" (par. 30, Canons of Judicial Ethics), but if a Judge does have
social relations, that in itself would not constitute a ground for disciplinary
action unless it be clearly shown that his social relations be clouded his
official actuations with bias and partiality in favor of his friends (pp. 403-405,
rec.).
In conclusion, while respondent Judge Asuncion, now Associate Justice of the Court of
Appeals, did not violate any law in acquiring by purchase a parcel of land which was in
litigation in his court and in engaging in business by joining a private corporation during his
incumbency as judge of the Court of First Instance of Leyte, he should be reminded to be
more discreet in his private and business activities, because his conduct as a member of the
Judiciary must not only be characterized with propriety but must always be above suspicion.
WHEREFORE, THE RESPONDENT ASSOCIATE JUSTICE OF THE COURT OF APPEALS
IS HEREBY REMINDED TO BE MORE DISCREET IN HIS PRIVATE AND BUSINESS
ACTIVITIES.
SO ORDERED.




























A.M. No. MTJ-02-1443 July 31, 2002
JOSIE BERIN and MERLY ALORRO, complainants, vs. JUDGE FELIXBERTO P. BARTE,
Municipal Circuit Trial Court, Hamtic, Antique, respondent.
MENDOZA, J.:
This is a complaint for grave and serious misconduct filed by Josie Berin and Merly Alorro
against Judge Felixberto P. Barte, Presiding Judge of the Municipal Circuit Trial Court
(MCTC), Hamtic, Tobias Fornier and Anini-y, Antique.
Complainants Josie Berin and Merly Alorro are real estate agents. They allege that sometime
during the last week of January 2001, respondent judge invited them to his office and asked
them to look for a vendor of a lot for sale in Antique because the Manila Mission of the
Church of Jesus Christ of Latter Day Saints, Inc. wanted to buy a site for its church in
Antique. Complainants claim that they found a vendor, Eleanor M. Checa-Santos, who
owned a lot consisting of 4,000 square meters, known as Lot 5555-B, Psd-06-000304 and
located in Barrio Caridad, Municipality of Now, Hamtic, Antique, which she was willing to sell;
that they told respondent judge about the lot; that respondent judge informed them three
days later that the Church was willing to pay P2.3 million for the lot; that respondent judge
agreed that complainants would each receive a commission of P100,000.00 in case the sale
took place; and that respondent judge would receive the money from the vendee and then
deliver the share of each of the complainants. Complainants said they wanted to have the
agreement in writing, but respondent judge refused, saying, "Do you have no trust in your
Judge Barte?" This is the reason there is no written agreement of the transaction between
them.
Complainants alleged that the sale was consummated and respondent judge received the
purchase price, but, despite demands made by them for the payment of their commission,
respondent judge gave them onlyP10,000.00 each, telling them to "take it or leave it." Hence,
this complaint.
In his Comment, dated August 23, 2001, and Supplemental Comment, dated August 27,
2001, respondent judge denied the charges against him. He denied that he ever invited the
complainants to his office in January 2001 and told them of the desire of the Church to buy a
lot in Antique. According to him, as early as January 25, 2001, the Church had already
purchased the same land described in the complaint and the vendee had already paid 50%
of the sale price to the vendor, as evidenced by a Closing Certificate showing that the
payment took place at the Metrobank, San Jose, Antique Branch on said date. Complainants
said the Deed of Sale was notarized on February 12, 2001.
Respondent judge likewise denied that he agreed to pay complainants P100,000.00 each as
commission for the sale. But he said that, sometime in November 1999, complainant Merly
Alorro, whom he considered his friend, learned from complainant Josie Berin that the lot in
question was up for sale, and Alorro told him about it. Based on such information, respondent
judge said he was able to facilitate the sale of the land after almost two (2) years of hard
work. Since he was able to realize some amount from the sale, he decided to give
complainants a share for the information they gave him, although they never contributed to
the success of the transaction. He gave complainant Berin P7,000.00 and Merly
Alorro P12,000.00.
Respondent judge contended that he cannot be held liable in this administrative proceeding
since the act complained of does not pertain to the performance of his official function as
judge. He further contended that the case of Teofilo Gil v. Eufronio Son,
1
which involved the
dismissal of a judge for refusing to acknowledge and repay a loan of P15,000.00 which was
acquired in return for a favor for employment, is inapplicable to this case because his
transaction was an open and honest one, compared to the "secret deal" involved in
the Gil case.
The Office of the Court Administrator (OCA) agrees that respondent judge cannot be held
liable for refusing to honor his obligation under the alleged contract on the ground that the
same has no relation to his official duties as a judge and does not amount either to
maladministration or willful intentional neglect and failure to discharge the duties of a judge.
However, it believes that respondent is liable for violation of Canon 5, Rule 5.02 of the Code
of Judicial Conduct and recommends accordingly that he be fined P5,000.00.
The recommendation is on the main well taken.
The peoples confidence in the judicial system is founded not only on the competence and
diligence of the members of the bench, but also on their integrity and moral uprightness. He
must not only be honest but also appear to be so. He must not only be a "good judge," he
must also appear to be a "good person."
2

Whether the sale of the property was effected through the efforts of complainants making
them entitled to a commission is a matter that should be threshed out in a judicial proceeding.
Our concern in this case is whether respondent judge committed an impropriety in acting as a
broker in the sale of a real estate, for which he admits receiving a commission.
Article 14 of the Code of Commerce prohibits members of the judiciary and prosecutors from
engaging in commerce within their jurisdiction. It provides:
Art. 14. The following cannot engage in commerce, either in person or by proxy, nor
can they hold any office or have any direct, administrative, or financial intervention in
commercial or industrial companies within the limits of the districts, provinces, or
towns in which they discharge their duties:
1. Justices of the Supreme Court, judges and officials of the department of public
prosecution in active service. This provision shall not be applicable to mayors,
municipal judges, and municipal prosecuting attorneys nor those who by chance are
temporarily discharging the functions of judge or prosecuting attorney.
. . . .
5. Those who by virtue of laws or special provisions may not engage in commerce in
a determinate territory.
However, in Macaruta v. Asuncion,
3
it was held that Art. 14 is in the nature of political law and
since it was extended to this country by Spain it was necessarily abrogated upon the change
of sovereignty from Spain to the United States. Nevertheless, the Court admonished a judge
who had been found to have engaged in business "to be more discreet in his private and
business activities, because his conduct as a member of the Judiciary must not only be
characterized by propriety but must always be above suspicion."
4

After the decision in Macariola v. Asuncion, this Court adopted the Code of Judicial Conduct,
which took effect on October 20, 1989, the pertinent provision of which states:
Rule 5.02. A judge shall refrain from financial and business dealings that tend to
reflect adversely on the courts impartiality, interfere with the proper performance of
judicial activities, or increase involvement with lawyers or persons likely to come
before the court. A judge should so manage investments and other financial interests
as to minimize the number of cases giving grounds for disqualification.
This provision thus supplies the void left by the abrogation of Art. 14 of the Spanish Code of
Commerce. Indeed, it is not good for judges to engage in business except only to the extent
allowed by Rule 5.03 of the Code of Judicial Conduct which provides:
Subject to the provisions of the preceding rule, a judge may hold and manage
investments but should not serve as an officer, director, manager, advisor, or
employee of any business except as director of a family business of the judge.
As the OCA observed:
By allowing himself to act as agent in the sale of the subject property, respondent
judge has increased the possibility of his disqualification to act as an impartial judge
in the event that a dispute involving the said contract of sale arises. Also, the
possibility that the parties to the sale might plead before his court is not remote and
his business dealings with them might [not only] create suspicion as to his fairness
but also to [his ability to] render it in a manner that is free from any suspicion as to its
fairness and impartiality, and also as to the judges integrity (Martinez vs. Gironella,
65 SCRA 245). One who occupies an exalted position in the administration of justice
must pay a high price for the honor bestowed upon him, for his private as well as his
official conduct must at all times be free from the appearance of impropriety (Jugueta
vs. Boncaros, 60 SCRA 27).
A similar complaint is pending before this Court against respondent judge arising from the
sale, also to the Manila Mission Church of Jesus Christ of Latter Day Saints, Inc., of three
pieces of real estate in Antique, one of which is the property owned by Eleanor Checa-
Santos involved in this case. The complainant there is Editha O. Catbagan.
5
This case
appears to be the first offense of respondent judge. Since that case is still pending
investigation, it cannot be considered in fixing the penalty in this case.
WHEREFORE, respondent Judge Felixberto P. Barte is found GUILTY of violation of Canon
5.02 of the Code of Judicial Conduct and, considering this to be his first offense, is hereby
FINED in the amount of P2,000.00, with the ADMONITION to him to be more discreet and
prudent in his private dealings as in his judicial duties. A repetition of a similar infraction will
be sanctioned more severely.
SO ORDERED.




G.R. No. L-2880 December 4, 1906
FRANK S. BOURNS, plaintiff-appellee, vs. D. M. CARMAN, ET AL., defendants-appellants.
MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency,
balance due on a contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the
contract relating to the said work was entered into by the said Lo-Chim-Lim, acting as in his
own name with the plaintiff, and it appears that the said Lo-Chim-Lim personally agreed to
pay for the work himself. The plaintiff, however, has brought this action against Lo-Chim-Lim
and his codefendants jointly, alleging that, at the time the contract was made, they were
the joint proprietors and operators of the said lumber yard engaged in the purchase and sale
of lumber under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by
the words above italicized that the other defendants were the partners of Lo-Chim-Lim in the
said lumber-yard business.lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-
Tongco on the ground that they were not the partners of Lo-Chim-Lim, and rendered
judgment against the other defendants for the amount claimed in the complaint with the costs
of proceedings. Vicente Palanca and Go-Tauco only excepted to the said judgment, moved
for a new trial, and have brought the case to this court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim
had a certain lumber yard in Calle Lemery of the city of Manila, and that he was the manager
of the same, having ordered the plaintiff to do some work for him at his sawmill in the city of
Manila; and that Vicente Palanca was his partner, and had an interest in the said business as
well as in the profits and losses thereof . . .," and that Go-Tuaco received part of the earnings
of the lumber yard in the management of which he was interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a
lumber yard in Calle Lemmery of the city of Manila in the year 1904, and participated in the
profits and losses of business and that Lo-Chim-Lim was managing partner of the said
lumber yard." In other words, coparticipants with the said Lo-Chim-Lim in the business in
question.
Although the evidence upon this point as stated by the by the however, that is plainly and
manifestly in conflict with the above finding of that court. Such finding should therefore be
sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the
real legal nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard,
and consequently their liability toward the plaintiff, in connection with the transaction which
gave rise to the present suit.
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed
by verbal agreement only. At least there is no evidence tending to show that the said
agreement was reduced to writing, or that it was ever recorded in a public instrument.
Moreover, that partnership had no corporate name. The plaintiff himself alleges in his
complaint that the partnership was engaged in business under the name and style of Lo-
Chim-Lim only, which according to the evidence was the name of one of the defendants. On
the other hand, and this is very important, it does not appear that there was any mutual
agreement, between the parties, and if there were any, it has not been shown what the
agreement was. As far as the evidence shows it seems that the business was conducted by
Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been
shown with certainty. The contracts made with the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no evidence that the partnership over contracted in
any other form. Under such circumstances we find nothing upon which to consider this
partnership other than as a partnership of cuentas en participacion. It may be that, as a
matter of fact, it is something different, but a simple business and scant evidence introduced
by the partnership We see nothing, according to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons
interested in the profits and losses of the business nowhere appearing. A partnership
constituted in such a manner, the existence of which was only known to those who had an
interest in the same, being no mutual agreements between the partners and without a
corporate name indicating to the public in some way that there were other people besides the
one who ostensibly managed and conducted the business, is exactly the accidental
partnership of cuentas en participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership
of cuentas en participacion is conducted, shall have only a right of action against such person
and not against the other persons interested, and the latter, on the other hand, shall have no
right of action against the third person who contracted with the manager unless such
manager formally transfers his right to them. (Art 242 of the code Of Commerce.) It follows,
therefore that the plaintiff has no right to demand from the appellants the payment of the
amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with him.
the action of the plaintiff lacks, therefore, a legal foundation and should be accordingly
dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the
complaint without express provisions as to the costs of both instances. After the expiration of
twenty days let judgment be entered in accordance herewith, and ten days thereafter the
cause be remanded to the court below for execution. So ordered.































































G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners, vs. COURT OF APPEALS, INTER-RESIN
INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE
DOE, respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to
court as adversaries in seeking a definition of their respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail
an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner
as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing
and transmitting, along with the bank's communication, the latter of credit. Upon receipt of the
letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America
to have the letter of credit confirmed. The bank did not. Reynaldo Dueas, bank employee in
charge of letters of credit, however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been transmitted if it were not
genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the
letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000
bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the
corresponding packing list, export declaration and bill of lading. Finally, after being satisfied
that Inter-Resin's documents conformed with the conditions expressed in the letter of credit,
Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the
Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the
costs for documentary stamps, postage and mail issuance." 1 The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America
wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for
the second availment under the same letter of credit consisting of a packing list, bill of lading,
invoices, export declaration and bills in set, evidencing the second shipment of goods.
Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand, requesting assistance in determining the
authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the
developments. Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were
sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who,
thereafter, were criminally charged for estafa through falsification of commercial documents.
The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found
no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of
the draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit.
On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20
on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: (a) Bank of America
made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex
declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay, but
even assuming that the letter of credit was fake, "the fault should be borne by the BA which
was careless and negligent" 5 for failing to utilize its modern means of communication to
verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in their favor the
presumption of regularity in the performance of official functions; and (d) Bank of America
failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in fact,
the complaint for estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by
petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the
genuineness and authenticity of the letter of credit and, corollarily, whether it has acted
merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually
shipped the ropes specified by the letter of credit; and (c) following the dishonor of the letter
of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin
under the draft executed in its partial availment of the letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the
issue of being only an advising bank; (b) the findings of the trial court that the ropes have
actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from
Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-
Resin.
If only to understand how the parties, in the first place, got themselves into the mess, it may
be well to start by recalling how, in its modern use, a letter of credit is employed in trade
transactions.
A letter of credit is a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of
credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents required by the letter of
credit. 10 The buyer and the seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or attesting to the shipment of
the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process
secures the required shipping documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the documents
submitted by the seller conform with what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the documents entitling him to the goods.
Under this arrangement, the seller gets paid only if he delivers the documents of title over the
goods, while the buyer acquires said documents and control over the goods only after
reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping
documents are presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter of credit only by
examining the shipping documents presented; it is precluded from determining whether the
main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit
and obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b)
the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the
draft and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be
utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which
will lend credence to the letter of credit issued by a lesser known issuing bank; or, of apaying
bank, 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of
going to the place of the issuing bank to claim payment, the buyer may approach another
bank, termed the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial instrument
transcends national boundaries, and it is thus not uncommon to find a dearth of national law
that can adequately provide for its governance. This country is no exception. Our own Code
of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof.
It is no wonder then why great reliance has been placed on commercial usage and practice,
which, in any case, can be justified by the universal acceptance of the autonomy of contract
rules. The rules were later developed into what is now known as the Uniform Customs and
Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are other
principles, which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent
of their pertinency, the application in our jurisdiction of this international commercial credit
regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses
that, in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. We have further
observed that there being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of the
U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely been advising
bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been
raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether
under the "letter of credit," Bank of America has incurred any liability to the "beneficiary"
thereof, an issue that largely is dependent on the bank's participation in that transaction; as a
mere advising or notifying bank, it would not be liable, but as a confirming bank, had this
been the case, it could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life Assurance
Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not
specifically presented, as long as the latter issues bear relevance and close relation to the
former and as long as they arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just as well. In brief,
in those cases where questions not particularly raised by the parties surface as necessary for
the complete adjudication of the rights and obligations of the parties, the interests of justice
dictate that the court should consider and resolve them. The rule that only issues or theories
raised in the initial proceedings may be taken up by a party thereto on appeal should only
refer to independent, not concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality
not existent on matters that are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only
been an advising, not confirming, bank, and this much is clearly evident, among other things,
by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request
for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That
Bank of America has asked Inter-Resin to submit documents required by the letter of credit
and eventually has paid the proceeds thereof, did not obviously make it a confirming bank.
The fact, too, that the draft required by the letter of credit is to be drawn under the account of
General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly stated that
"[t]he enclosure issolely an advise of credit opened by the abovementioned correspondent
and conveys no engagement by us." 24This written reservation by Bank of America in limiting
its obligation only to being an advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
credit. 25 The bare statement of the bank employees, aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and Bank of America's
letter of advise, 26 nor can it justify the conclusion that the bank must now assume total
liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should have obviously been a
great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of
credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In
the ordinary course of business, the perfection of contract precedes the issuance of a letter of
credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real support in U.C.P.
Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is bound only to check the
"apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's
Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance
to unaided senses that is not or may not be borne out by more rigorous examination or
greater knowledge."
May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft for partial availment thereunder and the required documents were later
negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is
commonly referred to as a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that might
have likewise warranted the application of the Negotiable Instruments Law and possible then
allowed it to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not
preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-
Resin admits having received P10,219,093.20 from bank of America on the letter of credit
and in having executed the corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank
of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship
existing between a drawer and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without recourse therefore, the
negotiating bank has the ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact that the correspondent
and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a
possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved banks
deal only with documents and not on goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya
did issue the letter of credit and whether or not the main contract of sale that has given rise to
the letter of credit has been breached, are not relevant to this controversy. They are matters,
instead, that can only be of concern to the herein parties in an appropriate recourse against
those, who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that
First, given the factual findings of the courts below, we conclude that petitioner Bank of
America has acted merely as a notifying bank and did not assume the responsibility of
a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit which has been disowned by the alleged issuer
bank.
No judgment of civil liability against the other defendants, Francisco Trajano and other
unidentified parties, can be made, in this instance, there being no sufficient evidence to
warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of
P10,219,093.20 with legal interest from the filing of the complaint until fully paid.
No costs.
SO ORDERED.









G.R. No. L-10195 November 29, 1958
BELMAN COMPAIA INCORPORADA, plaintiff-appellee, vs. CENTRAL BANK OF THE
PHILIPPINES, defendant-appellant.
PADILLA, J.:
In a complaint filed on 18 March 1955 in the Court of First Instance of Manila the plaintiff, a
corporation, alleges that having been a successful bidder to supply the Republic of the
Philippines with 1,000 reams of onion skin paper, on 21 September 1950 it applied to the
Philippine National Bank for a letter of credit in the sum of $4,300, United States currency, in
favor of Getz Bros. & Co., San Francisco, California, U.S.A., to pay for such reams, and the
Philippine National Bank approved and granted the application for the letter of credit; that the
Philippine National Bank, through the Crocker First National Bank, its correspondent in the
United States, paid to the payee the sum of $4,300, United States Currency; that on 26 April
1951 when the plaintiff paid its account to the Philippine National Bank in Manila, the
defendant, pursuant to Republic Act No. 601, as amended, assessed and collected from it
17% special excise tax on the amount in Philippine peso of foreign exchange sold, amounting
to P1,474.70 which the plaintiff paid to the defendant under protest for the reason that as the
letter of credit was approved and granted on 21 September 1950, or before 28 March 1951,
the date of the enactment or approval of Republic Act No. 601, as amended, the amount of
foreign exchange sold by the defendant bank by the letter of credit to the plaintiff corporation
was not subject to such excise tax; that on 28 December 1954 the plaintiff corporation made
a demand in writing upon the defendant bank for the refund of the aforesaid sum; and that
notwithstanding repeated demands the defendant bank refused to make the refund. The
plaintiff corporation prays that the 17% special excise tax assessed and collected from it on
the amount in Philippine peso of foreign exchange sold on 21 September 1950, be declared
illegal; and that the defendant bank be ordered to refund to it the sum of P1,474.70 illegally
assessed and collected (civil No. 25708).
On 25 March 1955 the defendant bank moved for the dismissal of the complaint on the
ground that
1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17%
special excise tax is in accordance with law, because it was a tax collected after
March 28, 1951, when the 17% special excise tax law went into effect, when the
plaintiff paid to the Philippine National Bank on April 25, 1951 the peso equivalent of
the draft in U. S. dollars accepted by the plaintiff.
2. The transaction in which foreign exchange was sold subject to the 17% excise tax
is not one of those exempted or refundable under Section 2, 3, 4, and 8 of said 17%
tax law, Republic Act No. 601.
On 1 April 1955 the plaintiff corporation objected to the motion to dismiss; on 5 April the
defendant bank filed a reply thereto; and on 11 April the plaintiff a "rejoinder to defendant's
reply." On 19 April the Court denied the motion to dismiss.
On 28 April 1955 the defendant filed its answer reiterating that although the plaintiff
corporation had applied for and been granted a commercial letter of credit on 21 September
1950, before the effectivity of Republic Act No. 601, as amended, no sale of foreign
exchange took place on that date, because such sale actually took place on 26 April 1951,
when the plaintiff paid to the Philippine National Bank the amount in Philippine currency of
the foreign exchange sold. Hence it was subject to the 17% special excise tax.
After hearing and filing by the parties of their respective memoranda, the Court rendered
judgment ordering the defendant bank to refund to the plaintiff corporation the sum of
P1,474.70, with legal interest thereon from 25 April 1951 until fully paid and to pay the costs.
A motion to set aside the judgment thus rendered was denied. The defendant has appealed.
Foreign exchange is the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another.1 The appellant claims that the grant
or approval on an application for a letter of credit for an amount payable in foreign currency is
only an executory contract, in the sense that until payment, return, or settlement of the
amount paid and delivered by, or collected from, the bank in foreign currency be made by the
debtor, the contract is not executed or consummated. Hence, if on the date of payment by
the debtor to the bank of the amount of foreign exchange sold the law imposing the excise
tax was already in force, such tax must be collected. On the other hand, the appellee
contends that, upon the approval or grant of an application for a letter of credit for an amount
payable in foreign currency, the contract is perfected or consummated. Hence, if on the date
of such approval or grant the law imposing the excise tax was not yet in existence, such tax
can not be assessed and collected. Both contentions cannot be sustained.
An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign
country to draw upon a debtor of another and to negotiate the draft through the agent or
correspondent bank or any bank in the country of the creditor, is a consummated contract,
when the agent or correspondent bank or any bank in the country of the creditor pays or
delivers to the latter the amount in foreign currency, as authorized by the bank in the country
of the debtor in compliance with the letter of credit granted by it. It is the date of the payment
of the amount in foreign currency to the creditor in his country by the agent or correspondent
bank of the bank in the country of the debtor that turns from executory to executed or
consummated contract. It is not the date of payment by the debtor to the bank in his country
of the amount of foreign exchange sold that makes the contract executed or consummated,
because the bank may grant the debtor extension of time to pay such debt. The contention of
the appellee that as there was a meeting of the minds and of contracting parties as to price
and object of the contract2upon the approval or grant of an application for a letter of credit for
an amount payable in payable in foreign currency, the contract was a valid and executed
contract of sale of foreign exchange. True, there was such a contract in the sense that one
party who has performed his part may compel the other to perform his.3 Still until payment be
made in foreign currency of the amount applied for in the letter of credit and approved and
granted by the bank, the same is not an executed or consummated contract. The payment of
the amount in foreign currency to the creditor by the bank or its agent or correspondent is
necessary to consummate the contract. Hence the date of such payment or delivery of the
amount in foreign currency to the creditor determines whether such amount of foreign
currency is subject to the tax imposed by the Government of the country where such letter of
credit was granted.
It appearing that the draft authorized by the letter of credit applied for by the appellee and
granted by the appellant must be drawn and presented or negotiated in San Francisco,
California, U.S.A., not later than 19 October 1950 (Exhibit H), it may be presumed that the
payment of $4,300 in favor of Getz Bros., Inc. in San Francisco, California, U.S.A., for the
account of the appellee was paid by the Crocker First National Bank, as agent or
correspondent of the Philippine National Bank, on or before 19 October 1950. Such being the
case, the excise tax at the rate of 17% on the amount to be paid by the appellant in Philippine
currency for the foreign exchange sold is not subject to such tax, because Republic Act No.
601 imposing such tax took effect only on 28 March 1951.4
The judgment appealed from is affirmed, without pronouncement as to costs.












































G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner, vs. THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
GUTIERREZ, JR., J.:p
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated
June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October
20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los
Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor
of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary."
(Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National
Bank and that it be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase
order and certifying that
a. All terms and conditions of the purchase order have been complied with
and that all logs are fresh cut and quality equal to or better than that
described in H.A. Christiansen's telex #201 of May 1, 1970, and that all logs
have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was
airmailed to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade
Development Company and one set to Consignee and Parties to be advised
by Hans-Axel Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to
be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California
92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating
that logs have been approved prior to shipment in accordance with terms and
conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I,
p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry
(Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the
logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate
receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363).
However, Christiansen refused to issue the certification as required in paragraph 4 of the
letter of credit, despite several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without
the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated August 16,
1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3,
1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of negotiating
documents. Any provision in any letter of credit covering log exports
requiring certification of buyer's agent or representative that said logs have
been approved for shipment as a condition precedent to negotiation of
shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi
Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50
per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company,
on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification
proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and Trust Company (now Citytrust)
before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant
before the lower court only to afford complete relief should the court a quo order Christiansen
to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter
of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary,
FEATI BANK be ordered to accept negotiation of the Letter of Credit and make
payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines
without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to
make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs
right to demand payment is absolute. Defendant CHRISTIANSEN having accepted
delivery of the logs by having them loaded in his chartered vessel the "Zenlin Glory"
and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea
(Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen
and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud the plaintiff, reflected in and aggravated by, not only his
refusal to issue the certification that would have enabled without question the plaintiff
to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud,
intimidation, violence and deceit. These accusations said defendant did not attempt
to prove, as in fact he left the country without even notifying his own lawyer. It was to
the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held
liable together with his (sic) co-defendant for having, by its wrongful act, i.e., its
refusal to negotiate the letter of credit in the absence of CHRISTIANSEN's
certification (in spite of the Central Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of credit, as may be seen on its
face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los
Angeles, California, undertook by its terms that the same shall be honored upon its
presentment. On the other hand, the notifying bank, the defendant Feati Bank and
Trust Company, by accepting the instructions from the issuing bank, itself assumed
the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may also be
held liable under the principles and laws on both trust and estoppel. When the
defendant BANK accepted its role as the notifying and negotiating bank for and in
behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a
trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was
then duty bound to protect the interests of the plaintiff under the terms of the letter of
credit, and must be held liable for damages and loss resulting to the plaintiff from its
failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and
negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied
with the terms and conditions of the letter of credit and presents the same to the
BANK together with the documents mentioned therein the said BANK will pay the
plaintiff the amount of the letter of credit. The Court is convinced that it was upon the
strength of this letter of credit and this implied representation of the defendant BANK
that the plaintiff delivered the logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom plaintiff had no business connections
and CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under
the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise
in the Court's opinion acted in bad faith, not only because of the clear declaration of
the Central Bank that such a requirement was illegal, but because the BANK, with all
the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182,
Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants
to pay the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time
payment is actually made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in
connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from
September 1, 1971, when the complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or
on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of
the judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's
filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner
filed before the Court of Appeals a petition forcertiorari and prohibition with preliminary
injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the
order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of
execution dated December 29, 1986, as well as his order dated January 14, 1987
denying the petitioner's urgent motion to suspend the writ of execution against its
properties are hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank & Trust Company, now
Citytrust Banking Corporation, during the pendency of its appeal from the adverse
decision in Civil Case No. 15121. However, the execution of the same decision
against defendant Axel Christiansen did not appeal said decision may proceed
unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of sale
dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of
Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the
lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer
that it was the bank to negotiate the letter of credit issued by the Security Pacific
National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did
notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before
the letter of credit was presented for payment, Feati Bank had already made an
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As
the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf
of the issuing bank (Security Pacific), confirmed such letter of credit and made the
same also its own obligation. This ruling finds support in the authority cited by
Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also
that the opening bank's obligation will be performed. In such a case, the notifying
bank will not simply transmit but will confirm the opening bank's obligation by making
it also its own undertaking, or commitment, or guaranty or obligation. (Ward &
Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only
upon negotiation of the letter of credit. This stance is untenable. Assurance,
commitments or guaranties supposed to be made by notifying banks to the
beneficiary of a letter of credit, as defined above, can be relevant or meaningful only
with respect to a future transaction, that is, negotiation. Hence, even before actual
negotiation, the notifying bank, by the mere act of notifying the beneficiary of the
letter of credit, assumes as of that moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the
latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case,
when Christiansen refused to issue the certification, it was as though refusal was
made by Feati Bank itself. Feati Bank should have taken steps to secure the
certification from Christiansen; and, if the latter should still refuse to comply, to hale
him to court. In short, Feati Bank should have honored Villaluz's demand for payment
of his logs by virtue of the irrevocable letter of credit issued in Villaluz's favor and
guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which
contained the statement "Since Villaluz" draft was not drawn strictly in compliance
with the terms of the letter of credit, Feati Bank's refusal to negotiate it was justified,"
did not dispose of this question on the merits. In that case, the question involved was
jurisdiction or discretion, and not judgment. The quoted pronouncement should not
be taken as a preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank
may not be a party to the transaction between Christiansen and Security Pacific
National Bank on the one hand, and Villaluz on the other hand; still, being guarantor
or agent of Christiansen and/or Security Pacific National Bank which had directly
dealt with Villaluz, Feati Bank may be sued properly on specific performance as a
procedural means by which the relief sought by Villaluz may be entertained. (Rollo,
pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal
is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE
ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-
COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD
THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE
LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO
ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN
IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable
under the letter of credit despite non-compliance by the beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of credit. The tender of documents by
the beneficiary (seller) must include all documents required by the letter. A correspondent
bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from
the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary
Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are governed by the
rule of strict compliance. In the Philippines, the same holds true. The same rule must also be
followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded
clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with
which documents, and shipping documents must be followed as stated in the letter.
There is no discretion in the bank or trust company to waive any requirements. The
terms of the letter constitutes an agreement between the purchaser and the bank. (p.
743)
Although in some American decisions, banks are granted a little discretion to accept a faulty
tender as when the other documents may be considered immaterial or superfluous, this
theory could lead to dangerous precedents. Since a bank deals only with documents, it is not
in a position to determine whether or not the documents required by the letter of credit are
material or superfluous. The mere fact that the document was specified therein readily means
that the document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit
(U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in
the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the
U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the
Code of Commerce enunciates that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by the usages and customs generally
observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and
constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder, that the provisions for
payment, acceptance or negotiation contained in the credit will be duly
fulfilled, provided that all the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the
advising bank) without engagement on the part of that bank, but when an issuing
bank authorizes or requests another bank to confirm its irrevocable credit and the
latter does so, such confirmation constitutes a definite undertaking of the confirming
bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they
appear on their face to be in accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face
to be in accordance with the terms and conditions of a credit by a bank authorized to
do so, binds the party giving the authorization to take up documents and reimburse
the bank which has effected the payment, acceptance or negotiation. (Emphasis
Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if
the documents tendered to it are on their face in accordance with the terms and conditions of
the documentary credit. And since a correspondent bank, like the petitioner, principally deals
only with documents, the absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as
it is not its obligation to look beyond the documents. It merely has to rely on the
completeness of the documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the
petitioner is not a notifying bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed
credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to
notify the respondent that the irrevocable credit has been transmitted to the petitioner on
behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the
legal relations arising from there varies. A credit may be an irrevocable credit and at the
same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that
the issuing bank may not without the consent of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right
to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. In this case, the correspondent bank gives
an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of
the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the
letter of credit. Another error which the lower court and the Court of Appeals made was to
confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify
and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc.
v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import
Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293,
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the letter
of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of
the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit
to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the
petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have been
stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with
the letter of credit. What was simply stated therein was the instruction that the petitioner
forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone
does not imply that the notifying bank promises to accept the draft drawn under the
documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National
Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit. The only evidence in this case, and upon which the private
respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit
was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him,
"in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it
depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner
that it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it
entered into cannot be categorized as an emphatic assurance that it will carry out the issuing
bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of
the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent
in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we
would have no basis to rule definitively that such "act" should be construed as an act of
confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin
Glory" and the only way to satisfy this need was to borrow money from the petitioner which
the latter granted. From these circumstances, a logical conclusion that can be gathered is
that the letter of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a
negotiating bank before negotiation has no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship
between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no
contractual duty toward the person for whose benefit the letter is written to discount
or purchase any draft drawn against the credit. No relationship of agent and
principal, or of trustee and cestui, between the receiving bank and the beneficiary of
the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the petitioner to accept the tender of
the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial
enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been
conferred upon the person for the benefit of another. In order therefore for the trust theory of
the private respondent to be sustained, the petitioner should have had in its possession a
sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific
appropriation of a sum of money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of credit up to the designated amount
specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not
receive in advance the sum of money from the buyer or the issuing bank. On the contrary,
when the correspondent bank accepts the tender and pays the amount stated in the letter,
the money that it doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then later seeks
reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee.
As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank
will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a
notifying bank, its only obligation is to notify the private respondent of the existence of the
letter of credit. How then can such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans
Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract
between the buyer and the seller but also of the credit agreement between the issuing bank
and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]).
The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of
services (to open the letter of credit) and not that of agency as was intimated by the Court of
Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the
letter of credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship
with the buyer, it has also nothing to do with the contract between the issuing bank and the
buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The
concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each
other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility
from the contract upon which it was opened. In the second place, the nature of both contracts
is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the
other hand, in an irrevocable credit the bank undertakes a primary obligation. (SeeNational
Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more
similar to that of an agency and not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank which is to notify or to transmit
the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
assurance that the issuing bank will perform what has been mandated to or expected of it. As
an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it
alone is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the
letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still
not be held liable for its only engagement is to notify and/or transmit to the seller the letter of
credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be
forced to pay the amount under the letter. As we have previously explained, there was a
failure on the part of the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The U.C.P. which is
incorporated in the letter of credit ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face in compliance with the credit. It
is not tasked with the duty of ascertaining the reason or reasons why certain documents have
not been submitted, as it is only concerned with the documents. Thus, whether or not the
buyer has performed his responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent but we
are deciding the controversy on the basis of what the law is, for the law is not meant to favor
only those who have been oppressed, the law is to govern future relations among people as
well. Its commitment is to all and not to a single individual. The faith of the people in our
justice system may be eroded if we are to decide not what the law states but what we believe
it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of
approval required of the private respondent to submit under the letter of credit, has become
insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard
to the petition before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in
condition No. 4 of the letter of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation prohibiting such a condition
in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more
than two months before the issuance of the Central Bank Memorandum on August
16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit
had already expired on July 30, 1971 when the Central Bank memorandum was
issued. In any event, it is difficult to see how such a condition could be categorized
as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could
and should have done was to refuse to load the logs on the vessel "Zenlin Glory",
unless Christiansen first issued the required certification that the logs had been
approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all
due precautions to assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its negotiation. (Rollo,
p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and
SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.










G.R. No. 160732 June 21, 2004
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON.
REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court
of Quezon City, Branch 90 and Maynilad Water Services, Inc., respondents
D E C I S I O N
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a
determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and
Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the
provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was
thereby:
x x x x x x x x x
2. Staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the petitioner, its
guarantors and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in
any manner any of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as
at the date of the filing of the petition;
x x x x x x x x x
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex
Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which
stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the
process for the payment by the banks of US$98 million out of the US$120 million
standby letter of credit so the banks have to make good such call/drawing of
payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P.
M. or any similar act for that matter, is violative of the above-quoted sub-paragraph
2.) of the dispositive portion of this Courts Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt
the written certification/notice of draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any payment by the banks to MWSS in
the event such written certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this
petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the
legality of said order as having been issued without or in excess of the lower courts
jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-
year period to manage, operate, repair, decommission and refurbish the existing MWSS
water delivery and sewerage services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of petitioners mostly foreign
loans.
To secure the concessionaires performance of its obligations under the Concession
Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank
guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year
facility with a number of foreign banks, led by Citicorp International Limited, for the issuance
of an Irrevocable Standby Letter of Credit6 in the amount of US$120,000,000 in favor of
MWSS for the full and prompt performance of Maynilads obligations to MWSS as
aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by
which it hoped to recover the losses it had allegedly incurred and would be incurring as a
result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it
desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the Concession
Agreement, the parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001
wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed
upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure
Notice and, since MWSS could not agree with the terms of said Notice, the matter was
referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties
agreeing to resolve the issues through an amendment of the Concession Agreement on
October 5, 2001, known as Amendment No. 1,8 which was based on the terms set down in
MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of
Trustees Resolution No. 487-2001,9 which provided inter alia for a formula that would allow
Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of
the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the Concession
Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover
Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003,
the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii)
or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
submitted a written notice11 on November 24, 2003, to Citicorp International Limited, as
agent for the participating banks, that by virtue of Maynilads failure to perform its obligations
under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit
and thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation
before the court a quowhich resulted in the issuance of the Stay Order of November 17, 2003
and the disputed Order of November 27, 2003.12
PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT
PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE
PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF
JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE
PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY
IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING
MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND
BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million
Standby Letter of Credit and Performance Bond are not property of the estate of the debtor
Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset
of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit
cannot also be considered a "claim" falling under the purview of the stay order as alleged by
respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of US$98 million is a violation of the order
issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation
to admissions, pleadings and/or pertinent records13 and that public respondent had
the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets
of the issuing banks are part or property of the estate of respondent Maynilad subject
to rehabilitation and which respondent Maynilad has not and has never claimed to
be;14
c) what is relevant is not whether the performance bond or assets of the issuing
banks are part of the estate of respondent Maynilad but whether the act of petitioner
in commencing the process for the payment by the banks of US$98 million out of the
US$120 million performance bond is covered and/or prohibited under sub-
paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of "all those affected by the proceedings
x x x upon publication of the notice of commencement;15" and
e) the obligations under the Standby Letter of Credit are not solidary and are not
exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up
the main issue of the petition before us which is, did the rehabilitation court sitting as such,
act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the
payment of the concession fees from the banks that issued the Irrevocable Standby Letter of
Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate
Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the
banks that issued it. The section reads in part "that jurisdiction over those affected by the
proceedings is considered acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to define rehabilitation as
an in rem proceeding. This provision is a logical consequence of the in rem nature of the
proceedings, where jurisdiction is acquired by publication and where it is necessary that the
assets of the debtor come within the courts jurisdiction to secure the same for the benefit of
creditors. The reference to "all those affected by the proceedings" covers creditors or such
other persons or entities holding assets belonging to the debtor under rehabilitation which
should be reflected in its audited financial statements. The banks do not hold any assets of
respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad
liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show
the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent
Maynilads own admission it is not. In issuing the clarificatory order of November 27, 2003,
enjoining petitioner from claiming from an asset that did not belong to the debtor and over
which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that
supports its claim that the commencement of the process to draw on the Standby Letter of
Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of
public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the
conclusion that such an enforcement is prohibited by said section because it is a "claim
against the debtor, its guarantors and sureties not solidarily liable with the debtor" and that
there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation
that would show or require the obligation of the banks to be solidary with the respondent
Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad
has procured to answer for its non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all
claims against guarantors and sureties, but only those claims against guarantors and
sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of
guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each
other. The guarantee theory destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantors obligation is merely collateral and it
arises only upon the default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a
letter of credit as an engagement by a bank or other person made at the request of a
customer that the issuer shall honor drafts or other demands of payment upon compliance
with the conditions specified in the credit.17
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents18 and is thus a commitment by the issuer that
the party in whose favor it is issued and who can collect upon it will have his credit against
the applicant of the letter, duly paid in the amount specified in the letter.19 They are in
effect absolute undertakings to pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted thereby into contracts of
guaranty.20 What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required shipping
documents are presented to it.21 They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credits of the International Chamber of Commerce.
In the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and
Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a
bank acting at the request and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing
banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank,
provided that the stipulated documents are presented to the nominated bank or the issuing
bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit
provides for sight payment."22
We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of
America NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the application
in our jurisdiction of the international credit regulatory set of rules known as the Uniform
Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber
of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under
Art. 2 of the Code of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or not, and
whether specified in this Code or not should be governed by the provisions contained
in it; in their absence, by the usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein
petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of
the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated
in Philippine Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the
surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can
be sued separately to enforce his liability as surety for the debts or obligations of the debtor.
The debts or obligations for which a surety may be liable include future debts, an amount
which may not be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement28 and herein petitioner
is authorized by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It provides further in
Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall
honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby
Letter of Credit regardless of the date on which the event giving rise to such Written
Certification arose.29
Taking into consideration our own rulings on the nature of letters of credit and the customs
and usage developed over the years in the banking and commercial practice of letters of
credit, we hold that except when a letter of credit specifically stipulates otherwise, the
obligation of the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent
to act on the obligation of the banks under the Letter of Credit under the argument that this
was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of
credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of Credit to which it had a clear right
under the law and the terms of said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the
parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate
remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court
may on motion or motu proprio, terminate, modify or set conditions for the
continuance of the stay order or relieve a claim from coverage thereof. We find,
however, that the public respondent had already accomplished this during the
hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on
November 21 and 24, 2003,30 where the parties including the creditors, Suez and
Chinatrust Commercial "presented their respective arguments."31 The public
respondent then ruled, "after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS and/or the creditors
Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings,
and/or pertinent portions of the records, this court is of the considered and humble
view that the issue must perforce be resolved in favor of Maynilad."32 Hence to
pursue their opposition before the same court would result in the presentation of the
same arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
remedy questioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the
execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition
for certiorari.
In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is
available to prevent a party from making use of the extraordinary remedy
of certiorari but that such remedy be an adequate remedy which is equally beneficial,
speedy and sufficient, not only a remedy which at some time in the future may offer
relief but a remedy which will promptly relieve the petitioner from the injurious acts of
the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal
remedies and the danger of failure of justice without the writ, that must usually
determine the propriety of certiorari.34
2. Respondent Maynilad argues that by commencing the process for payment under
the Standby Letter of Credit, petitioner violated an immediately executory order of the
court and, therefore, comes to Court with unclean hands and should therefore be
denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the
Standby Letter of Credit and the banks that issued it were not within the jurisdiction
of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could
not be considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction
of the lower court is without merit. The purpose of the initial hearing is to determine
whether the petition for rehabilitation has merit or not. The propriety of the stay order
as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent
was correct in enjoining the petitioner from drawing on the Standby Letter of Credit
will have no bearing on the determination to be made by public respondent whether
the petition for rehabilitation has merit or not. Our decision on the instant petition
does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the
Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND
VOID and SET ASIDE. The status quo Order herein previously issued is hereby LIFTED. In
view of the urgency attending this case, this decision is immediately executory.
No costs. SO ORDERED.
G.R. No. 105387 November 11, 1993
JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION, petitioner,
vs. THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under the
name and style "PHILIPPINE SJ INDUSTRIAL TRADING," respondents.
ROMERO, J.:
In this petition for review on certiorari, petitioner questions the reversal by the Court of
Appeals 1 of the trial court's ruling that a contract of sale had been perfected between
petitioner and private respondent over bus spare parts.
The facts as quoted from the decision of the Court of Appeals are as follows:
Sometime in 1981, defendant 2 established contact with plaintiff 3 through
the Philippine Consulate General in Hamburg, West Germany, because he
wanted to purchase MAN bus spare parts from Germany. Plaintiff
communicated with its trading partner. Johannes Schuback and Sohne
Handelsgesellschaft m.b.n. & Co. (Schuback Hamburg) regarding the spare
parts defendant wanted to order.
On October 16, 1981, defendant submitted to plaintiff a list of the parts
(Exhibit B) he wanted to purchase with specific part numbers and
description. Plaintiff referred the list to Schuback Hamburg for quotations.
Upon receipt of the quotations, plaintiff sent to defendant a letter dated 25
November, 1981 (Exh. C) enclosing its offer on the items listed by
defendant.
On December 4, 1981, defendant informed plaintiff that he preferred genuine
to replacement parts, and requested that he be given 15% on all items (Exh.
D).
On December 17, 1981, plaintiff submitted its formal offer (Exh. E)
containing the item number, quantity, part number, description, unit price
and total to defendant. On December, 24, 1981, defendant informed plaintiff
of his desire to avail of the prices of the parts at that time and enclosed
Purchase Order No. 0101 dated 14 December 1981 (Exh. F to F-4). Said
Purchase Order contained the item number, part number and description.
Defendant promised to submit the quantity per unit he wanted to order on
December 28 or 29 (Exh. F).
On December 29, 1981, defendant personally submitted the quantities he
wanted to Mr. Dieter Reichert, General Manager of plaintiff, at the latter's
residence (t.s.n., 13 December, 1984, p. 36). The quantities were written in
ink by defendant in the same Purchase Order previously submitted. At the
bottom of said Purchase Order, defendant wrote in ink above his signature:
"NOTE: Above P.O. will include a 3% discount. The above will serve as our
initial P.O." (Exhs. G to G-3-a).
Plaintiff immediately ordered the items needed by defendant from Schuback
Hamburg to enable defendant to avail of the old prices. Schuback Hamburg
in turn ordered (Order No. 12204) the items from NDK, a supplier of MAN
spare parts in West Germany. On January 4, 1982, Schuback Hamburg sent
plaintiff a proforma invoice (Exhs. N-1 to N-3) to be used by defendant in
applying for a letter of credit. Said invoice required that the letter of credit be
opened in favor of Schuback Hamburg. Defendant acknowledged receipt of
the invoice (t.s.n., 19 December 1984, p. 40).
An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to
plaintiff which was forwarded to and received by defendant on February 3,
1981 (t.s.n., 13 Dec. 1984, p. 42).
On February 16, 1982, plaintiff reminded defendant to open the letter of
credit to avoid delay in shipment and payment of interest (Exh. J). Defendant
replied, mentioning, among others, the difficulty he was encountering in
securing: the required dollar allocations and applying for the letter of credit,
procuring a loan and looking for a partner-financier, and of finding ways 'to
proceed with our orders" (Exh. K).
In the meantime, Schuback Hamburg received invoices from, NDK for partial
deliveries on Order No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3).
Schuback Hamburg paid NDK. The latter confirmed receipt of payments
made on February 16, 1984 (Exh.C-Deposition).
On October 18, 1982, Plaintiff again reminded defendant of his order and
advised that the case may be endorsed to its lawyers (Exh. L). Defendant
replied that he did not make any valid Purchase Order and that there was no
definite contract between him and plaintiff (Exh. M). Plaintiff sent a rejoinder
explaining that there is a valid Purchase Order and suggesting that
defendant either proceed with the order and open a letter of credit or cancel
the order and pay the cancellation fee of 30% of F.O.B. value, or plaintiff will
endorse the case to its lawyers (Exh. N).
Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff
enclosing therewith Debit Note (Exh. O) charging plaintiff 30% cancellation
fee, storage and interest charges in the total amount of DM 51,917.81. Said
amount was deducted from plaintiff's account with Schuback Hamburg
(Direct Interrogatories, 07 October, 1985).
Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983
and June 9, 1983 were to no avail (Exhs R and S).
Consequently, petitioner filed a complaint for recovery of actual or compensatory damages,
unearned profits, interest, attorney's fees and costs against private respondent.
In its decision dated June 13, 1988, the trial court 4 ruled in favor of petitioner by ordering
private respondent to pay petitioner, among others, actual compensatory damages in the
amount of DM 51,917.81, unearned profits in the amount of DM 14,061.07, or their peso
equivalent.
Thereafter, private respondent elevated his case before the Court of Appeals. On February
18, 1992, the appellate court reversed the decision of the trial court and dismissed the
complaint of petitioner. It ruled that there was no perfection of contract since there was no
meeting of the minds as to the price between the last week of December 1981 and the first
week of January 1982.
The issue posed for resolution is whether or not a contract of sale has been perfected
between the parties.
We reverse the decision of the Court of Appeals and reinstate the decision of the trial court. It
bears emphasizing that a "contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price. . . . " 5
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and
acceptance upon the thing and the cause which are to constitute the contract. The offer must
be certain and the acceptance absolute. A qualified acceptance constitutes a counter offer."
The facts presented to us indicate that consent on both sides has been manifested.
The offer by petitioner was manifested on December 17, 1981 when petitioner submitted its
proposal containing the item number, quantity, part number, description, the unit price and
total to private respondent. On December 24, 1981, private respondent informed petitioner of
his desire to avail of the prices of the parts at that time and simultaneously enclosed its
Purchase Order No. 0l01 dated December 14, 1981. At this stage, a meeting of the minds
between vendor and vendee has occurred, the object of the contract: being the spare parts
and the consideration, the price stated in petitioner's offer dated December 17, 1981 and
accepted by the respondent on December 24,1981.
Although said purchase order did not contain the quantity he wanted to order, private
respondent made good, his promise to communicate the same on December 29, 1981. At
this juncture, it should be pointed out that private respondent was already in the process of
executing the agreement previously reached between the parties.
Below Exh. G-3, marked as Exhibit G-3-A, there appears this statement made by private
respondent: "Note. above P.O. will include a 3% discount. The above will serve as our initial
P.O." This notation on the purchase order was another indication of acceptance on the part of
the vendee, for by requesting a 3% discount, he implicitly accepted the price as first offered
by the vendor. The immediate acceptance by the vendee of the offer was impelled by the fact
that on January 1, 1982, prices would go up, as in fact, the petitioner informed him that there
would be a 7% increase, effective January 1982. On the other hand, concurrence by the
vendor with the said discount requested by the vendee was manifested when petitioner
immediately ordered the items needed by private respondent from Schuback Hamburg which
in turn ordered from NDK, a supplier of MAN spare parts in West Germany.
When petitioner forwarded its purchase order to NDK, the price was still pegged at the old
one. Thus, the pronouncement of the Court Appeals that there as no confirmed price on or
about the last week of December 1981 and/or the first week of January 1982 was erroneous.
While we agree with the trial court's conclusion that indeed a perfection of contract was
reached between the parties, we differ as to the exact date when it occurred, for perfection
took place, not on December 29, 1981. Although the quantity to be ordered was made
determinate only on December 29, 1981, quantity is immaterial in the perfection of a sales
contract. What is of importance is the meeting of the minds as to the object and cause, which
from the facts disclosed, show that as of December 24, 1981, these essential elements had
already occurred.
On the part of the buyer, the situation reveals that private respondent failed to open an
irrevocable letter of credit without recourse in favor of Johannes Schuback of Hamburg,
Germany. This omission, however. does not prevent the perfection of the contract between
the parties, for the opening of the letter of credit is not to be deemed a suspensive condition.
The facts herein do not show that petitioner reserved title to the goods until private
respondent had opened a letter of credit. Petitioner, in the course of its dealings with private
respondent, did not incorporate any provision declaring their contract of sale without effect
until after the fulfillment of the act of opening a letter of credit.
The opening of a etter of credit in favor of a vendor is only a mode of payment. It is not
among the essential requirements of a contract of sale enumerated in Article 1305 and 1474
of the Civil Code, the absence of any of which will prevent the perfection of the contract from
taking place.
To adopt the Court of Appeals' ruling that the contract of sale was dependent on the opening
of a letter of credit would be untenable from a pragmatic point of view because private
respondent would not be able to avail of the old prices which were open to him only for a
limited period of time. This explains why private respondent immediately placed the order
with petitioner which, in turn promptly contacted its trading partner in Germany. As succinctly
stated by petitioner, "it would have been impossible for respondent to avail of the said old
prices since the perfection of the contract would arise much later, or after the end of the year
1981, or when he finally opens the letter of credit." 6
WHEREFORE, the petition is GRANTED and the decision of the trial court dated June 13,
1988 is REINSTATED with modification.
SO ORDERED.









































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 "X-2" 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. 25 Under 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 under fraud.
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 non-fulfillment 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.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI 26
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 defendant-appellee 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 defendant-appellant 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
co-defendant 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.
G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,
AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
D E C I S I O N
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most
important device in international trade. A creation of commerce and businessmen, the letter
of credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901
entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31
January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC)
entered into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the
Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner
was given the sole responsibility for the design, construction, commissioning, testing and
completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on
1 June 2000, or such later date as may be agreed upon between petitioner and respondent
LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is
entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC itself.5 Further, in
case of dispute, the parties are bound to settle their differences through mediation,
conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target completion date, or
such time for completion as may be determined by the parties' agreement, petitioner opened
in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter
referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand Banking Group Limited (ANZ
Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank
Corporation (SBC)8each in the amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a
series of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction
Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another
Request for Arbitration, this time filed by petitioner before the International Chamber of
Commerce (ICC)11 on 3 November 2000. In both arbitration proceedings, the common
issues presented were: [1) whether typhoon Zeb and any of its associated events constituted
force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had
the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on
target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
provisions of the Turnkey Contract,12 petitionerin two separate letters13 both dated 10
August 2000advised respondent banks of the arbitration proceedings already pending
before the CIAC and ICC in connection with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming under LHC
would constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to
Clause 8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks informed petitioner that they
would pay on the Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted; accordingly it
declared petitioner in default/delay in the performance of its obligations under the Turnkey
Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay
beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it would call on the securities for
the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
temporary restraining order and writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati.17 Petitioner sought to restrain
respondent LHC from calling on the Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities or any renewals or substitutes
thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same
day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC
of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until 26
November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable
injury to justify the issuance of the writ. Employing the principle of "independent contract" in
letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the principle of "independent
contract" could be invoked only by respondent banks since according to it respondent LHC is
the ultimate beneficiary of the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule
65, with prayer for the issuance of a temporary restraining order and writ of preliminary
injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by
the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call
on and use of the Securities as payment for liquidated damages. It averred that the Securities
are independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so
certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes
thereof and ordering respondent banks to cease and desist from transferring, paying or in
any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate
court expressed conformity with the trial court's decision that LHC could call on the Securities
pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment
that he had not complied with the underlying contract. Further, the appellate court held that
even assuming that the trial court's denial of petitioner's application for a writ of preliminary
injunction was erroneous, it constituted only an error of judgment which is not correctible by
certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY
BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING
THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED
THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE
DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the "independence principle"
on letters of credit when this case falls squarely within the "fraud exception rule." Respondent
LHC deliberately misrepresented the supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities
pursuant to the principle against unjust enrichment and that, under the premises, injunction
was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a
number of documentary and testimonial evidence came out through the use of different
modes of discovery available in the ICC Arbitration. It contends that after the filing of the
petition facts and admissions were discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays notwithstanding its knowledge and
admission that delays were excused under the Turnkey Contractto be able to draw against
the Securities. Reiterating that fraud constitutes an exception to the independence principle,
petitioner urges that this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer
grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and
not ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental
pleadings filed by petitioner present erroneous and misleading information which would
change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February
2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon
the Securities and that petitioner was entitled to the return of the sums wrongfully taken by
LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's
Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31
January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review
essentially dealt only with the issue of whether injunction could issue to restrain the
beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has
filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield
Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and
counterclaims arising from petitioner's performance/misperformance of its obligations as
contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v.
Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to
enforce and obtain execution of the ICC's partial award mentioned in petitioner's
Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum, LHC stresses that the question of whether the funds it drew on the subject
letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds
that the action to enforce the ICC's partial award is now fully within the Makati RTC's
jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-
shopping by keeping this appeal and at the same time seeking the suit for enforcement of the
arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of
Appeals correctly dismissed the petition for certiorari. Invoking the independence principle,
SBC argues that it was under no obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the latter's capacity or entitlement to so
certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and
the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits
that its actions could not be regarded as unjustified in view of the prevailing independence
principle under which it had no obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary
and the issuer of a letter of credit is not strictly contractual, because both privity and a
meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the underlying contract. Since
the bank's customer cannot draw on the letter, it does not function as an assignment by the
customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee,
because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the
draft presented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.30 The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the purchase price under
the contract for the sale of goods. However, credits are also used in non-sale settings where
they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings
have come to be known as standby credits.31
There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits
become payable upon the presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In the standby type, the
credit is payable upon certification of a party's nonperformance of the agreement. The
documents that accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by documents that he
has performed his contract. The beneficiary of the standby credit must certify that his obligor
has not performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee.33 A letter of credit, however,
changes its nature as different transactions occur and if carried through to completion ends
up as a binding contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international trade transactions,
the ICC has published from time to time updates on the Uniform Customs and Practice
(UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast
majority of letters of credit incorporate the UCP.35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that
the observance of the UCP is justified by Article 2 of the Code of Commerce which provides
that in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that there being no specific
provisions which govern the legal complexities arising from transactions involving letters of
credit, not only between or among banks themselves but also between banks and the seller
or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned
with or bound by such contract(s), even if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims
or defenses by the applicant resulting from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing
between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
the draft and the required documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment independent of any breach
of the main contract and precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of
any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or any
other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the
credit is independent from the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b) independence may be only as
to the justification aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and
assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the benefit of an independent
contract to the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied with.41 Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that
may invoke the independence principle on letters of creditdoes not impress this Court. To
say that the independence principle may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are used in commercial transactions. As it
is, the independence doctrine works to the benefit of both the issuing bank and the
beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other hand, the other
party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest
assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of
credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid
down a clear distinction between a letter of credit and a guarantee in that the settlement of a
dispute between the parties is not a pre-requisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with the very nature of the letter of credit.
If a letter of credit is drawable only after settlement of the dispute on the contract entered into
by the applicant and the beneficiary, there would be no practical and beneficial use for letters
of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the
issue:
The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs
than credits do and are usually triggered by a factual determination rather than by
the examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices
share a common purpose. Both ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the
obligor's performance, usually by hiring someone to complete that performance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the
cost of performance. The benefit of the surety contract to the beneficiary is obvious.
He knows that the surety, often an insurance company, is a strong financial
institution that will perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the surety's performance
takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicant's performance takes place. The standby credit has this opposite
effect of the surety contract: it reverses the financial burden of parties during
litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's performance. The beneficiary may
have to establish that fact in litigation. During the litigation, the surety holds the
money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiary's presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.42
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right
to ask the bank to honor the credit by allowing him to draw thereon. The situation itself
emasculates petitioner's posture that LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of
the amounts due under the Securities. Owing to the nature and purpose of the standby letters
of credit, this Court rules that the respondent banks were left with little or no alternative but to
honor the credit and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit (the
"Securities"), each in the amount of US$8,988,907, issued and confirmed by banks
or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually
renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages ("Liquidated Damages for Delay") the
amount of US$75,000 for each and every day or part of a day that shall elapse
between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for
Delay for each day of the delay on the following day without need of demand from
the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due to the
Contractor and/or by drawing on the Security."45
A contract once perfected, binds the parties not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which according to their nature, may be
in keeping with good faith, usage, and law.46A careful perusal of the Turnkey Contract
reveals the intention of the parties to make the Securities answerable for the liquidated
damages occasioned by any delay on the part of petitioner. The call upon the Securities,
while not an exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the Securities have been
proffered. Thus, even without the use of the "independence principle," the Turnkey Contract
itself bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that
there is already a breach in the Turnkey Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material representations of fact
that to his knowledge are untrue. In such a situation, petitioner insists, injunction is
recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is
not without limits and it is important to fashion those limits in light of the principle's purpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals.
To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to
resolve, among others, whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of
defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment.48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted
unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date.
It argued that if its claims for extension would be found meritorious by the ICC, then LHC
would not be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive right or
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a
main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive
remedy to secure the rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this discretion should be
exercised based upon the grounds and in the manner provided by law.51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the
complaint that there exists a right to be protected and that the acts against which the writ is to
be directed are violative of the said right.52 It must be shown that the invasion of the right
sought to be protected is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the writ to prevent
serious damage.53 Moreover, an injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to
restrain LHC's call on the Securities which would justify the issuance of preliminary injunction.
By petitioner's own admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey Contract.55Indeed, the Turnkey
Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the
Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any
of the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due, to the
Contractor and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on the
Securities wrongful or fraudulent for there was nothing in the Contract which would indicate
that the parties intended that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It is therefore premature
and absurd to conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate
court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
injunction.58 What petitioner did assert before the courts below was the fact that LHC's
draws on the Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to bring into play the
fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters,
theories or arguments not brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the first time on appeal.59 The
lower courts could thus not be faulted for not applying the fraud exception rule not only
because the existence of fraud was fundamentally interwoven with the issue of default still
pending before the arbitral tribunals, but more so, because petitioner never raised it as an
issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues
before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier
stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely
enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good
faith.60 More importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code,61 petitioner could have incorporated in its Contract with LHC,
a proviso that only the final determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities. However, the fact is petitioner did not do so;
hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that pursuant to the independence
principle the banks were under no obligation to determine the veracity of LHC's certification
that default has occurred. Neither were they bound by petitioner's declaration that LHC's call
thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the
required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's
draws upon the Securities were wrongful due to the non-existence of the fact of default, its
right to seek indemnification for damages it suffered would not normally be foreclosed
pursuant to general principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the
subject letters of credit had been fully drawn. This fact alone would have been sufficient
reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have
already become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video
Post Manila, Inc.64 this Court ruled that where the period within which the former employees
were prohibited from engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any declaration
upholding the propriety of the writ would be entirely useless as there would be no actual case
or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition mootfor any declaration by this Court as to propriety or impropriety of the
non-issuance of injunctive relief could have no practical effect on the existing
controversy.65 The other issues raised by petitioner particularly with respect to its right to
recover the amounts wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that
petitioner presented before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC
of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's
Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the same time pursuing Civil Case No.
04-332wherein petitioner pressed for judgment on the issue of whether the funds LHC
drew on the Securities should be returnedpetitioner resorted to forum-shopping. In both
instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded
on the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse judgment has
been rendered in one forum, of seeking another and possibly favorable opinion in another
forum other than by appeal or special civil action of certiorari, or the institution of two or more
actions or proceedings grounded on the same cause on the supposition that one or the other
court might look with favor upon the other party.68 To determine whether a party violated the
rule against forum-shopping, the test applied is whether the elements of litis pendentia are
present or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished with
summary dismissal of the multiple petitions and direct contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive ruling on this issue
until after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
from notice.
SO ORDERED.

























































G.R. No. 159622 July 30, 2004
LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P.
LUCENTE, petitioners, vs. METROPOLITAN BANK & TRUST COMPANY, respondent.
D E C I S I O N
YNARES-SANTIAGO, J.:
At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction,
an entruster which had taken actual and juridical possession of the goods covered by the
trust receipt may subsequently avail of the right to demand from the entrustee the deficiency
of the amount covered by the trust receipt.
As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as
follows:
Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of
money against Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban
and Manuel P. Lucente before the Regional Trial Court of Cebu City, Branch 19, docketed as
Civil Case No. CEB-4895.
Respondent alleged that petitioner corporation is engaged in the business of selling imported
welding rods and alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998
with respondent bank, in the amount of US$19,606.77, which was equivalent to P218,733.92
in Philippine currency at the time the transaction was consummated. The letter of credit was
opened to purchase various welding rods and electrodes from Perma Alloys, Inc., New York,
U.S.A., as evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner corporation
put up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan.
As an additional security, and as a condition for the approval of petitioner corporation's
application for the opening of the commercial letter of credit, respondent bank required
petitioners Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship
Agreement to the extent of P400,000.00, excluding interest, in favor of respondent bank.
Petitioner Lucente also executed a Deed of Assignment in the amount of P35,000.00 in favor
of respondent bank to cover the amount of petitioner corporation's obligation to the bank.
Upon compliance with these requisites, respondent bank opened an irrevocable letter of
credit for the petitioner corporation.
To secure the indebtedness of petitioner corporation, respondent bank required the execution
of a Trust Receipt in an amount equivalent to the letter of credit, on the condition that
petitioner corporation would hold the goods in trust for respondent bank, with the right to sell
the goods and the obligation to turn over to respondent bank the proceeds of the sale, if any.
If the goods remained unsold, petitioner corporation had the further obligation to return them
to respondent bank on or before November 23, 1983.
Upon arrival of the goods in the Philippines, petitioner corporation took possession and
custody thereof.
On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted
in the payment of its obligation to respondent bank and failed to turn over the goods to the
latter. On July 24, 1984, respondent bank demanded that petitioners, as entrustees, turn over
the goods subject of the trust receipt. On September 24, 1984, petitioners turned over the
subject goods to the respondent bank.
On July 31, 1985, in the presence of representatives of the petitioners and respondent bank,
the goods were sold at public auction. The goods were sold for P30,000.00 to respondent
bank as the highest bidder.
The proceeds of the auction sale were insufficient to completely satisfy petitioners'
outstanding obligation to respondent bank, notwithstanding the application of the time deposit
account of petitioner Lucente. Accordingly, respondent bank demanded that petitioners pay
the remaining balance of their obligation. After petitioners failed to do so, respondent bank
instituted the instant case to collect the said deficiency.
On March 31, 1997, after trial on the merits, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, foregoing premises considered, Judgment is hereby rendered in
favor of the plaintiff and against the defendant by (1) ordering the defendant to pay
jointly and severally to the plaintiff the sum of P292,172.23 representing the
defendant's obligation, as of April 17, 1986; (2) to pay the interest at the rate of 19%
per annum to be reckoned from April 18, 1986 until [the] obligation is fully paid; (3) to
pay service charge at the rate of 2% per annum starting April 18, 1986; (4) to pay the
sum equivalent to 10% per annum of the total amount due collectible by way of
Attorney's Fees; (5) to pay Litigation Expenses of P3,000.00 and to pay the cost of
the suit; and (6) to pay penalty charge of 12% per annum.
SO ORDERED.1
Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not
respondent bank has the right to recover any deficiency after it has retained possession of
and subsequently effected a public auction sale of the goods covered by the trust receipt; (2)
whether or not respondent bank is entitled to the amount of P3,000.00 as and for litigation
expenses and costs of the suit; and (3) whether or not respondent bank is entitled to the
award of attorney's fees.
On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision
of the trial court.2
Hence, this petition for review on the following assignment of errors:
I.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE
TRIAL COURT'S RULING THAT RESPONDENT HAD THE RIGHT TO CLAIM THE
DEFICIENCY FROM PETITIONERS NOTWITHSTANDING THE FACT THAT THE
GOODS COVERED BY THE TRUST RECEIPT WERE FULLY TURNED OVER TO
RESPONDENT.
II.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE
TRIAL COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL OBLIGATION,
INTEREST, ATTORNEY'S FEES, AND PENALTY AGAINST THE PETITIONERS.3
The instant petition is partly meritorious.
The resolution of the first assigned error hinges on the proper interpretation of Section 7 of
Presidential Decree No. 115, or the Trust Receipts Law, which reads:
Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from
the sale of the goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt
provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time
upon default or failure of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may,
not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a public
sale, become a purchaser. The proceeds of any such sale, whether public or private,
shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee
shall receive any surplus but shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary mail to the entrustee's last known
business address.
There is no question that petitioners failed to pay their outstanding obligation to respondent
bank. They contend, however, that when the entrustee fails to settle his principal loan, the
entruster may choose between two separate and alternative remedies: (1) the return of the
goods covered by the trust receipt, in which case, the entruster now acquires the ownership
of the goods which the entrustee failed to sell; or (2) cancel the trust and take possession of
the goods, for the purpose of selling the same at a private sale or at public auction.
Petitioners assert that, under this second remedy, the entruster does not acquire ownership
of the goods, in which case he is entitled to the deficiency. Petitioners argue that these two
remedies are so distinct that the availment of one necessarily bars the availment of the other.
Thus, when respondent bank availed of the remedy of demanding the return of the goods,
the actual return of all the unsold goods completely extinguished petitioners' liability.4
Petitioners' argument is bereft of merit.
A trust receipt is inextricably linked with the primary agreement between the parties. Time
and again, we have emphasized that a trust receipt agreement is merely a collateral
agreement, the purpose of which is to serve as security for a loan. Thus, in Abad v. Court of
Appeals,5 we ruled:
A letter of credit-trust receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank extends a loan covered by
the letter of credit, with the trust receipt as security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt. x x x.
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires
a "security interest" in the goods. It secures an indebtedness and there can be no
such thing as security interest that secures no obligation.6
The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an
additional layer of security to the lending bank. Trust receipts are indispensable contracts in
international and domestic business transactions. The prevalent use of trust receipts, the
danger of their misuse and/or misappropriation of the goods or proceeds realized from the
sale of goods, documents or instruments held in trust for entruster banks, and the need for
regulation of trust receipt transactions to safeguard the rights and enforce the obligations of
the parties involved are the main thrusts of the Trust Receipts Law.7
The second paragraph of Section 7 provides a statutory remedy available to an entruster in
the event of default or failure of the entrustee to comply with any of the terms and conditions
of the trust receipt or any other agreement between the entruster and the entrustee. More
specifically, the entruster "may cancel the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds realized therefrom at any time". The law
further provides that "the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may, not less
than five days after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall
be liable to the entruster for any deficiency."
The trust receipt between respondent bank and petitioner corporation contains the following
relevant clauses:
The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust
and take possession of the goods/documents/instruments subject hereof or of the
proceeds realized therefrom wherever they may then be found, upon default or
failure of the ENTRUSTEE to comply with any of the terms and conditions of this
Trust Receipt or of any other agreement between the BANK/ENTRUSTER and the
ENTRUSTEE; and the BANK/ENTRUSTER having taken repossession of the
goods/documents/instruments object hereof may, on or after default, give at least
five (5) days' previous notice to the ENTRUSTEE of its intention to sell the
goods/documents/instruments at public or private sale, at which public sale, it may
become a purchaser; Provided, that the proceeds of any such sale, whether public or
private, shall be applied: (a) to the payment of the expenses thereof; (b) to the
payment of the expenses of retaking, keeping and storing the
goods/documents/instruments; (c) to the satisfaction of all of the ENTRUSTEE's
indebtedness to the BANK/ENTRUSTER; and Provided, further, that the
ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency. x x x
No act or omission on the part of the BANK/ENTRUSTER shall be deemed and
considered a waiver of any of its rights hereunder or under any related letters of
credit, drafts or other documents unless such waiver is expressly made in writing
over the signature of the BANK/ENTRUSTER.8
The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second
paragraph of Section 7 of the Trust Receipts Law. The right of repossession and subsequent
sale at public auction which were availed of by respondent bank were rights available upon
default, and which were conferred by statute and reinforced by the contract between the
parties.
The initial repossession by the bank of the goods subject of the trust receipt did not result in
the full satisfaction of the petitioners' loan obligation. Petitioners are apparently laboring
under the mistaken impression that the full turn-over of the goods suffices to divest them of
their obligation to repay the principal amount of their loan obligation. This is definitely not the
case. In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement
Company, Inc.,9 we had occasion to rule:
PNB's possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession
by itself cannot be considered payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere possession does not
amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the
sale itself.
Neither can said repossession amount to dacion en pago. Dation in payment takes
place when property is alienated to the creditor in satisfaction of a debt in money and
the same is governed by sales. Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan obligation
and not for the purpose of transferring ownership thereof to PNB in satisfaction of
said loan. Thus, no dacion en pago was ever accomplished. (Citations omitted,
underscoring supplied)10
Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down
the position of the petitioner-spouses that their obligation to the entruster bank had been
extinguished when they relinquished possession of the goods in question. Thus:
A trust receipt is a security agreement, pursuant to which a bank acquires a
"security interest" in the goods. It secures an indebtedness and there can be no such
thing as security interest that secures no obligation. As defined in our laws:
(h) Security Interest means a property interest in goods, documents or
instruments to secure performance of some obligations of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or
retained for security only.
x x x x x x x x x
Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of
the goods. It was merely the holder of a security title for the advances it had made to
the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing
remain their own property and they hold it at their own risk. The trust receipt
arrangement did not convert the IBAA into an investor; the latter remained a lender
and creditor.
"x x x for the bank has previously extended a loan which the L/C represents
to the importer, and by that loan, the importer should be the real owner of
the goods. If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of a legal fiction than fact, for if
it were so, it could dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with the purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider
the bank as the true owner from the inception of the transaction would be to
disregard the loan feature thereof. x x x"
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely relieved
of their obligation to pay their loan because of their inability to dispose of the goods.
The fact that they were unable to sell the seashells in question does not affect IBAA's
right to recover the advances it had made under the Letter of Credit. (Citations
omitted.)12
Respondent bank's repossession of the properties and subsequent sale of the goods were
completely in accordance with its statutory and contractual rights upon default of petitioner
corporation.
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to
the entruster for any deficiency after the proceeds of the sale have been applied to the
payment of the expenses of the sale, the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments, and the satisfaction of the entrustee's
indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely
petitioner corporation's indebtedness to the respondent bank. Respondent bank was thus
well within its rights to institute the instant case to collect the deficiency.
We find, however, that there has been an error in the computation of the total amount of
petitioners' indebtedness to respondent bank.
Although respondent bank contends that the error of computation is a question of fact which
is beyond the power of this Court to review,13 the total amount of petitioners' indebtedness in
this case is not a question of fact. Rather, it is a question of law, i.e., the application of legal
principles for the computation of the amount owed to respondent bank, and is thus a matter
properly brought for our determination.
The first issue involves the amount of indebtedness prior to the imposition of interest and
penalty charges. The initial amount of the trust receipt of P218,733.92, was reduced to
P192,265.92 as of June 14, 1984, as per respondent's Statement of Past Due Trust Receipt
dated December 1, 1993.14 This amount presumably includes the application of P35,000.00,
the amount of petitioner Lucente's Deed of Assignment, which amount was applied by
respondent bank to petitioners' obligation. No showing was made, however, that the
P30,000.00 proceeds of the auction sale on July 31, 1985 was ever applied to the loan.
Neither was the amount of P50,414.00, representing the marginal deposit made by petitioner
corporation, deducted from the loan. Although respondent bank contends that the marginal
deposit should not be deducted from the principal obligation, this is completely contrary to
prevailing jurisprudence allowing the deduction of the marginal deposit, thus:
The marginal deposit requirement is a Central Bank measure to cut off excess
currency liquidity which would create inflationary pressure. It is a collateral security
given by the debtor, and is supposed to be returned to him upon his compliance with
his secured obligation. Consequently, the bank pays no interest on the marginal
deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter
of fact, the marginal deposit requirement for letters of credit has been discontinued,
except in those cases where the applicant for a letter of credit is not known to the
bank or does not maintain a good credit standing therein.
It is only fair then that the importer's marginal deposit (if one was made, as in this
case), should be set off against his debt, for while the importer earns no interest on
his marginal deposit, the bank, apart from being able to use said deposit for its own
purposes, also earns interest on the money it loaned to the importer. It would be
onerous to compute interest and other charges on the face value of the letter of
credit which the bank issued, without first crediting or setting off the marginal deposit
which the importer paid to the bank. Compensation is proper and should take place
by operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount (Art. 1290, Civil
Code). Although Abad is only a surety, he may set up compensation as regards what
the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code).15
The net amount of the obligation, represented by respondent bank to be P292,172.23 as of
April 17, 1986, would thus be P211,758.23.
To this principal amount must be imposed the following charges: (1) 19% interest per annum,
in keeping with the terms of the trust receipt;16 and (2) 12% penalty per annum, collected
based on the outstanding principal obligation plus unpaid interest, again in keeping with the
wording of the trust receipt.17 It appearing that petitioners have paid the interest and penalty
charges until April 17, 1986, the reckoning date for the computation of the foregoing charges
must be April 18, 1986.
A perusal of the records reveals that the trial court and the Court of Appeals erred in
imposing service charges upon the petitioners. No such stipulation is found in the trust
receipt. Moreover, the trial court and the Court of Appeals erred in computing attorney's fees
equivalent to 10% per annum, rather than 10% of the total amount due. There is no basis for
compounding the interest annually, as the trial court and Court of Appeals have done. This
amount would be unconscionable.
Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner
corporation is untenable. As co-signatories of the Continuing Suretyship Agreement, they
bound themselves, inter alia, to pay the principal sum in the amount of not more than
P400,000.00; interest due on the principal obligation; attorney's fees; and expenses that may
be incurred in collecting the credit. The amount owed to respondent bank is the amount of
the principal, interest, attorney's fees, and expenses in collecting the principal amount. The
Continuing Suretyship Agreement expressly states the nature of the liability of Lucente and
Llaban:
The liability of the SURETY shall be solidary, direct and immediate and not
contingent upon the bank's pursuit of whatever remedies the BANK have [sic]
against the Borrower or the securities or liens the BANK may possess and the
SURETY will at any time, whether due or not due, pay to the BANK with or withour
demand upon the Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.18
Solidary liability is one of the primary characteristics of a surety contract,19 and the
Continuing Suretyship Agreement expressly stipulates the solidary nature of Lucente and
Llaban's liability. All three petitioners thus share the solidary obligation in favor of respondent
bank, which is given the right, under the Civil Code, to proceed against any one of the
solidary debtors or some or all of them simultaneously.20
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The
decision of the Court of Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is
AFFIRMED with MODIFICATIONS. Accordingly, petitioners are ordered to pay respondent
bank the following: (1) P211,758.23 representing petitioners' net obligation as of April 17,
1986; (2) interest at the rate of 19% per annum and penalty at the rate of 12% per
annum reckoned from April 18, 1986; (3) attorney's fees equivalent to 10% of the total
amount due and collectible; and (4) litigation expenses in the amount of P3,000.00. The
service charge at the rate of 2% per annum beginning April 18, 1986 is deleted. Costs
against petitioners.
SO ORDERED.





























































G.R. No. 143772 November 22, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. PRUDENTIAL
BANK, Respondent.
D E C I S I O N
CORONA, J.:
Development Bank of the Philippines (DBP) assails in this petition for review on certiorari
under Rule 45 of the Rules of Court the December 14, 1999 decision1 and the June 8, 2000
resolution of the Court of Appeals in CA-G.R. CV No. 45783. The challenged decision
dismissed DBPs appeal and affirmed the February 12, 1991 decision of the Regional Trial
Court of Makati, Branch 137 in Civil Case No. 88-931 in toto, while the impugned resolution
denied DBPs motion for reconsideration for being pro forma.
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with
respondent Prudential Bank for US$498,000. This was in connection with its importation of
5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning
frame and various accessories, spare parts and tool gauge. These were released to Litex
under covering "trust receipts" it executed in favor of Prudential Bank. Litex installed and
used the items in its textile mill located in Montalban, Rizal.
On October 10, 1980, DBP granted a foreign currency loan in the amount of US$4,807,551 to
Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in
Montalban, Rizal, including the buildings and other improvements, machineries and
equipments there. Among the machineries and equipments mortgaged in favor of DBP were
the articles covered by the "trust receipts."
Sometime in June 1982, Prudential Bank learned about DBPs plan for the overall
rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over
the various items covered by the "trust receipts" which had been installed and used by Litex
in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner
of the said items and they were thus not part of the mortgaged assets that could be legally
ceded to DBP.
For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate
and chattel mortgages, including the articles claimed by Prudential Bank. During the
foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the
highest bidder.
Subsequently, DBP caused to be published in the September 2, 1984 issue of the Times
Journal an invitation to bid in the public sale to be held on September 10, 1984. It called on
interested parties to submit bids for the sale of the textile mill formerly owned by Litex, the
land on which it was built, as well as the machineries and equipments therein. Learning of the
intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP
reasserting its claim over the items covered by "trust receipts" in its name and advising DBP
not to include them in the auction. It also demanded the turn-over of the articles or
alternatively, the payment of their value.
An exchange of correspondences ensued between Prudential Bank and DBP. In reply to
Prudential Banks September 6, 1984 letter, DBP requested documents to enable it to
evaluate Prudential Banks claim. On September 28, 1994, Prudential Bank provided DBP
the requested documents. Two months later, Prudential Bank followed up the status of its
claim. In a letter dated December 3, 1984, DBP informed Prudential Bank that its claim had
been referred to DBPs legal department and instructed Prudential Bank to get in touch with
its chief legal counsel. There being no concrete action on DBPs part, Prudential Bank, in a
letter dated July 30, 1985, made a final demand on DBP for the turn-over of the contested
articles or the payment of their value. Without the knowledge of Prudential Bank, however,
DBP sold the Litex textile mill, as well as the machineries and equipments therein, to Lyon
Textile Mills, Inc. (Lyon) on June 8, 1987.
Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money
with damages against DBP with the Regional Trial Court of Makati, Branch 137, on May 24,
1988. The complaint was docketed as Civil Case No. 88-931.
On February 12, 1991, the trial court decided2 in favor of Prudential Bank. Applying the
provisions of PD 115, otherwise known as the "Trust Receipts Law," it ruled:
When PRUDENTIAL BANK released possession of the subject properties, over which it
holds absolute title to LITEX upon the latters execution of the trust receipts, the latter was
bound to hold said properties in trust for the former, and (a) to sell or otherwise dispose of the
same and to turn over to PRUDENTIAL BANK the amount still owing; or (b) to return the
goods if unsold. Since LITEX was allowed to sell the properties being claimed by
PRUDENTIAL BANK, all the more was it authorized to mortgage the same, provided of
course LITEX turns over to PRUDENTIAL BANK all amounts owing. When DBP, well aware
of the status of the properties, acquired the same in the public auction, it was bound by the
terms of the trust receipts of which LITEX was the entrustee. Simply stated, DBP held no
better right than LITEX, and is thus bound to turn over whatever amount was due
PRUDENTIAL BANK. Being a trustee ex maleficio of PRUDENTIAL BANK, DBP is
necessarily liable therefor. In fact, DBP may well be considered as an agent of LITEX when
the former sold the properties being claimed by PRUDENTIAL BANK, with the corresponding
responsibility to turn over the proceeds of the same to PRUDENTIAL BANK.3 (Citations
omitted)
The dispositive portion of the decision read:
WHEREFORE, judgment is hereby rendered ordering defendant DEVELOPMENT BANK OF
THE PHILIPPINES to pay plaintiff PRUDENTIAL BANK:
a) P3,261,834.00, as actual damages, with interest thereon computed from 10 August 1985
until the entire amount shall have been fully paid;
b) P50,000.00 as exemplary damages; and
c) 10% of the total amount due as and for attorneys fees.
SO ORDERED.
Aggrieved, DBP filed an appeal with the Court of Appeals. However, the appellate court
dismissed the appeal and affirmed the decision of the trial court in toto. It applied the
provisions of PD 115 and held that ownership over the contested articles belonged to
Prudential Bank as entrustor, not to Litex. Consequently, even if Litex mortgaged the items to
DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn over the
proceeds to Prudential Bank, being the party that advanced the payment for them.
On DBPs argument that the disputed articles were not proper objects of a trust receipt
agreement, the Court of Appeals ruled that the items were part of the trust agreement
entered into by and between Prudential Bank and Litex. Since the agreement was not
contrary to law, morals, public policy, customs and good order, it was binding on the parties.
Moreover, the appellate court found that DBP was not a mortgagee in good faith. It also
upheld the finding of the trial court that DBP was a trustee ex maleficio of Prudential Bank
over the articles covered by the "trust receipts."
DBP filed a motion for reconsideration but the appellate court denied it for being pro forma.
Hence, this petition.
Trust receipt transactions are governed by the provisions of PD 115 which defines such a
transaction as follows:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as 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 latters execution and delivery to the entruster of a signed document called a "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,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the
case of goods delivered under trust receipt for the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver
them to a principal; or (c) to effect the consummation of some transactions involving delivery
to a depository or register; or (d) to effect their presentation, collection or renewal.
x x x x x x x x x
In a trust receipt transaction, the goods are released by the entruster (who owns or holds
absolute title or security interests over the said goods) to the entrustee on the latters
execution and delivery to the entruster of a trust receipt. The trust receipt evidences the
absolute title or security interest of the entruster over the goods. As a consequence of the
release of the goods and the execution of the trust receipt, a two-fold obligation is imposed
on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust
for the purpose of selling or otherwise disposing of them and (2) to turn over to the entruster
either the proceeds thereof to the extent of the amount owing to the entruster or as appears
in the trust receipt, or the goods, documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt. In the case of goods, they may also be released for other purposes substantially
equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or
processing with the purpose of ultimate sale, in which case the entruster retains his title over
the said goods whether in their original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment or
transshipment or otherwise dealing with them in a manner preliminary or necessary to their
sale.4 Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his
execution of a trust receipt, is essentially for the purpose of their sale or is necessarily
connected with their ultimate or subsequent sale.
Here, Litex was not engaged in the business of selling spinning machinery, its accessories
and spare parts but in manufacturing and producing textile and various kinds of fabric. The
articles were not released to Litex to be sold. Nor was the transfer of possession intended to
be a preliminary step for the said goods to be ultimately or subsequently sold. Instead, the
contemporaneous and subsequent acts of both Litex and Prudential Bank showed that the
imported articles were released to Litex to be installed in its textile mill and used in its
business. DBP itself was aware of this. To support its assertion that the contested articles
were excluded from goods that could be covered by a trust receipt, it contended:
First. That the chattels in controversy were procured by DBPs mortgagor Lirag Textile Mills
("LITEX") for theexclusive use of its textile mills. They were not procured -
(a) to sell or otherwise procure their sale;
(b) to manufacture or process the goods with the
purpose of ultimate sale.5 (emphasis supplied)
Hence, the transactions between Litex and Prudential Bank were allegedly not trust receipt
transactions within the meaning of PD 115. It follows that, contrary to the decisions of the trial
court and the appellate court, the transactions were not governed by the Trust Receipts Law.
We disagree.
The various agreements between Prudential Bank and Litex commonly denominated as "trust
receipts" were valid. As the Court of Appeals correctly ruled, their provisions did not
contravene the law, morals, good customs, public order or public policy.
The agreements uniformly provided:
Received, upon the Trust hereinafter mentioned from the PRUDENTIAL BANK (hereinafter
referred to as BANK) the following goods and merchandise, the property of said
BANK specified in the bill of lading as follows:
Amount of Bill Description of Security Marks & Nos. Vessel

and in consideration thereof, I/We hereby agree to hold said goods in trust for the BANK
and as its property with liberty to sell the same for its account but without authority to make
any other disposition whatsoever of the said goods or any part thereof (or the proceeds
thereof) either by way of conditional sale, pledge, or otherwise.
x x x x x x x x x6 (Emphasis supplied)
The articles were owned by Prudential Bank and they were only held by Litex in trust. While it
was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or
their proceeds through conditional sale, pledge or any other means.
Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is
essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or
mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the
articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the
mortgage was void7 and had no legal effect.8 There being no valid mortgage, there could
also be no valid foreclosure or valid auction sale.9 Thus, DBP could not be considered either
as a mortgagee or as a purchaser in good faith.10
No one can transfer a right to another greater than what he himself has.11 Nemo dat quod
non habet. Hence, Litex could not transfer a right that it did not have over the disputed items.
Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had.
The spring cannot rise higher than its source.12 DBP merely stepped into the shoes of Litex
as trustee of the imported articles with an obligation to pay their value or to return them on
Prudential Banks demand. By its failure to pay or return them despite Prudential Banks
repeated demands and by selling them to Lyon without Prudential Banks knowledge and
conformity, DBP became a trusteeex maleficio.
On the matter of actual damages adjudged by the trial court and affirmed by the Court of
Appeals, DBP wants this Court to review the evidence presented during the trial and to
reverse the factual findings of the trial court. This Court is, however, not a trier of facts and it
is not its function to analyze or weigh evidence anew.13 The rule is that factual findings of the
trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court
and generally will not be reviewed on appeal.14 While there are recognized exceptions to this
rule, none of the established exceptions finds application here.
With regard to the imposition of exemplary damages, the appellate court agreed with the trial
court that the requirements for the award thereof had been sufficiently established. Prudential
Banks entitlement to compensatory damages was likewise amply proven. It was also shown
that DBP was aware of Prudential Banks claim as early as July, 1982. However, it ignored
the latters demand, included the disputed articles in the mortgage foreclosure and caused
their sale in a public auction held on April 19, 1983 where it was declared as the highest
bidder. Thereafter, in the series of communications between them, DBP gave Prudential
Bank the false impression that its claim was still being evaluated. Without acting on
Prudential Banks plea, DBP included the contested articles among the properties it sold to
Lyon in June, 1987. The trial court found that this chain of events showed DBPs fraudulent
attempt to prevent Prudential Bank from asserting its rights. It smacked of bad faith, if not
deceit. Thus, the award of exemplary damages was in order. Due to the award of exemplary
damages, the grant of attorneys fees was proper.15
DBPs assertion that both the trial and appellate courts failed to address the issue of
prescription is of no moment. Its claim that, under Article 1146 (1) of the Civil Code,
Prudential Banks cause of action had prescribed as it should be reckoned from October 10,
1980, the day the mortgage was registered, is not correct. The written extra-judicial demand
by the creditor interrupted the prescription of action.16 Hence, the four-year prescriptive
period which DBP insists should be counted from the registration of the mortgage was
interrupted when Prudential Bank wrote the extra-judicial demands for the turn over of the
articles or their value. In particular, the last demand letter sent by Prudential Bank was dated
July 30, 1988 and this was received by DBP the following day. Thus, contrary to DBPs claim,
Prudential Banks right to enforce its action had not yet prescribed when it filed the complaint
on May 24, 1988.
WHEREFORE, the petition is hereby DENIED. The December 14, 1999 decision and June 8,
2000 resolution of the Court of Appeals in CA-G.R. CV No. 45783 are AFFIRMED.
Costs against the petitioner.
SO ORDERED.


















G. R. No. 164317 February 6, 2006
ALFREDO CHING, Petitioner, vs. THE SECRETARY OF JUSTICE, ASST. CITY
PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO SUDIAM of the
Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and
THE PEOPLE OF THE PHILIPPINES, Respondents.
D E C I S I O N
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and
mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004
denying the motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters of credit were issued in
favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner
signed 13 trust receipts4 as surety, acknowledging delivery of the following goods:
T/R
Nos.
Date
Granted
Maturity
Date
Principal Description of Goods
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK"
Brand Synthetic
Graphite Electrode
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)
Calorized Lance Pipes
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
Refractory Tundish
Bricks
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for
CCM
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory
Nozzle Bricks
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite
Electrode [with] tapered
pitch filed nipples
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles
calorized lance pipes [)]
1895 12-17-80 03-17-81 P67,652.04 Spare parts for
Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory
Equipment5
Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with
authority to sell but not by way of conditional sale, pledge or otherwise; and in case such
goods were sold, to turn over the proceeds thereof as soon as received, to apply against the
relative acceptances and payment of other indebtedness to respondent bank. In case the
goods remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods, manufactured products or
proceeds thereof, whether in the form of money or bills, receivables, or accounts separate
and capable of identification" were respondent banks property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or
to return their value amounting to P6,940,280.66 despite demands. Thus, the bank filed a
criminal complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa
under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential
Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13)
Informations were filed against the petitioner before the Regional Trial Court (RTC) of Manila.
The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31
of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The
appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its
reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against petitioner.8 The City
Prosecutor was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on
February 24, 1988.9The RTC, for its part, granted the Motion to Quash the Informations filed
by petitioner on the ground that the material allegations therein did not amount to estafa.10
In the meantime, the Court rendered judgment in Allied Banking Corporation v.
Ordoez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative
of an obligation covered by the trust receipt; it is not limited to transactions involving goods
which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold. The Court also ruled that "the non-payment of the amount covered by a trust
receipt is an act violative of the obligation of the entrustee to pay."12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S.
No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there
was no probable cause to charge petitioner with violating P.D. No. 115, as petitioners liability
was only civil, not criminal, having signed the trust receipts as surety.13 Respondent bank
appealed the resolution to the Department of Justice (DOJ) via petition for review, alleging
that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the
misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.14
On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition
and reversing the assailed resolution of the City Prosecutor. According to the Justice
Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts
and as such, was the one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The
Justice Secretary also declared that petitioner could not contend that P.D. No. 115 covers
only goods ultimately destined for sale, as this issue had already been settled in Allied
Banking Corporation v. Ordoez,16where the Court ruled that P.D. No. 115 is "not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold but covers failure to turn over the proceeds of the sale
of entrusted goods, or to return said goods if unsold or not otherwise disposed of in
accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could
be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in
its decision in Rizal Commercial Banking Corporation v. Court of Appeals;17 and second, as
the corporate official responsible for the offense under P.D. No. 115, via criminal prosecution.
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without
prejudice to the civil liabilities arising from the criminal offense." Thus, according to the
Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed
is clearly separate and distinct from the criminal liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The
cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for
trial before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the
Secretary of Justice denied in a Resolution18 dated January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing
the resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT,
ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY
ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD
BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED
TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN
GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN
THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE
LENGTH OF TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY
INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT
CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY
PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF
THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this Petition is
concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different
divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn
that a similar action or proceeding has been filed or is pending before the Supreme Court, the
Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
undertakes to notify this Honorable Court within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT
PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE
OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE
AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR.
1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY
HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE
CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND
MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION
OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST
THEREFORE BE DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum
shopping executed by petitioner and incorporated in the petition was defective for failure to
comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and
mandamus was not the proper remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-
President of PBMI and the signatory to the trust receipts, is criminally liable for violation of
P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by
his actuations, had already been resolved and laid to rest in Allied Bank Corporation v.
Ordoez;22 and (c) petitioner was estopped from raising the
City Prosecutors delay in the final disposition of the preliminary investigation because he
failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE
GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING
INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He
claims that the rules of procedure should be used to promote, not frustrate, substantial
justice. He insists that the Rules of Court should be construed liberally especially when, as in
this case, his substantial rights are adversely affected; hence, the deficiency in his
certification of non-forum shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition before the CA is
defective because it failed to disclose essential facts about pending actions concerning
similar issues and parties. It asserts that petitioners failure to comply with the Rules of Court
is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in
Melo v. Court of Appeals.24
We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court
within five (5) days from such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition
should be accompanied by a sworn certification of non-forum shopping, as provided in the
third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The
petition shall contain the full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved, the factual background of the case
and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court,
the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is
such other action or proceeding, he must state the status of the same; and if he should
thereafter learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or
agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency
thereof within five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of
the avoidance of forum shopping itself. The requirement is mandatory. The failure of the
petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal
of the petition without prejudice, unless otherwise provided.26
Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible.
Petitioner failed to certify that he "had not heretofore commenced any other action involving
the same issues in the Supreme Court, the Court of Appeals or the different divisions thereof
or any other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the
Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote and
facilitate the orderly administration of justice, and therefore, should not be interpreted with
absolute literalness. In his works on the Revised Rules of Civil Procedure, former Supreme
Court Justice Florenz Regalado states that, with respect to the contents of the certification
which the pleader may prepare, the rule of substantial compliance may be availed
of.27 However, there must be a special circumstance or compelling reason which makes the
strict application of the requirement clearly unjustified. The instant petition has not alleged
any such extraneous circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus, the CA was not
informed whether, aside from the petition before it, petitioner had commenced any other
action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the
Secretary of Justice committed grave abuse of discretion in finding probable cause against
the petitioner for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal
Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are
not persuasive enough to justify the desired conclusion that respondent Secretary of Justice
gravely abused its discretion in coming out with his assailed Resolutions. Petitioner posits
that, except for his being the Senior Vice-President of the PBMI, there is no iota of evidence
that he was a participes crimines in violating the trust receipts sued upon; and that his
liability, if at all, is purely civil because he signed the said trust receipts merely as a xxx
surety and not as the entrustee. These assertions are, however, too dull that they cannot
even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation, partnership, association or other
judicial 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.
"There is no dispute that it was the respondent, who as senior vice-president of PBM,
executed the thirteen (13) trust receipts. As such, the law points to him as the official
responsible for the offense. Since a corporation cannot be proceeded against criminally
because it cannot commit crime in which personal violence or malicious intent is required,
criminal action is limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times,
[I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough
to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which
are ultimately destined for sale and not goods, like those imported by PBM, for use in
manufacture. This issue has already been settled in the Allied Banking Corporation case,
supra, where he was also a party, when the Supreme Court ruled that PD 115 is not limited
to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
component or a product ultimately sold but covers failure to turn over the proceeds of the
sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with
the terms of the trust receipts.
"In regard to the other assigned errors, we note that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is
evident that these are two (2) capacities which do not exclude the other. Logically, he can be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate
official responsible for the offense under PD 115, the present case is an appropriate remedy
under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to
the civil liabilities arising from the criminal offense thus, the civil liability imposed on
respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his
criminal liability under PD 115."28
Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never
received the goods as an entrustee for PBMI, hence, could not have committed any
dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods
and used the same in operating its machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly
because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM),
petitioner cannot be held criminally liable as the transactions sued upon were clearly entered
into in his capacity as an officer of the corporation" and that [h]e never received the goods as
an entrustee for PBM as he never had or took possession of the goods nor did he commit
dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of
merit.
35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioners responsibility as the corporate official of PBM
who received the goods in trust is premised on Section 13 of P.D. No. 115, which provides:
Section 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. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received
the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be
proceeded against by virtue of the PBMs violation of P.D. No. 115.29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a
quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and
enjoined (a) when necessary to afford adequate protection to the constitutional rights of the
accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the
officer are without or in excess of authority; (d) where the charges are manifestly false and
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case
against the accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess of his
authority and resolves to file an Information despite the absence of probable cause, such act
may be nullified by a writ of certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the
Information shall be prepared by the Investigating Prosecutor against the respondent only if
he or she finds probable cause to hold such respondent for trial. The Investigating Prosecutor
acts without or in excess of his authority under the Rule if the Information is filed against the
respondent despite absence of evidence showing probable cause therefor.34 If the Secretary
of Justice reverses the Resolution of the Investigating Prosecutor who found no probable
cause to hold the respondent for trial, and orders such prosecutor to file the Information
despite the absence of probable cause, the Secretary of Justice acts contrary to law, without
authority and/or in excess of authority. Such resolution may likewise be nullified in a petition
for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35
A preliminary investigation, designed to secure the respondent against hasty, malicious and
oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed;
and (b) whether there is probable cause to believe that the accused is guilty thereof. It is a
means of discovering the person or persons who may be reasonably charged with a crime.
Probable cause need not be based on clear and convincing evidence of guilt, as the
investigating officer acts upon probable cause of reasonable belief. Probable cause implies
probability of guilt and requires more than bare suspicion but less than evidence which would
justify a conviction. A finding of probable cause needs only to rest on evidence showing that
more likely than not, a crime has been committed by the suspect.36
However, while probable cause should be determined in a summary manner, there is a need
to examine the evidence with care to prevent material damage to a potential accuseds
constitutional right to liberty and the guarantees of freedom and fair play37 and to protect the
State from the burden of unnecessary expenses in prosecuting alleged offenses and holding
trials arising from false, fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse
of discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the
evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as 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 latters execution and delivery to the entruster of a signed document called a "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,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That,
in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with
his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to
deliver them to a principal; or c) to effect the consummation of some transactions
involving delivery to a depository or register; or d) to effect their presentation,
collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the
same to the buyer on credit, retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of such person for the purpose of
payment specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the
goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust
for the entruster and turn over the same to the entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt; (3) insure the goods for their total value
against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or instruments in the event of non-
sale or upon demand of the entruster; and (6) observe all other terms and conditions of the
trust receipt not contrary to the provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owing
to the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in
the trust receipt; provided, such are not contrary to the provisions of the document.41
In the case at bar, the transaction between petitioner and respondent bank falls under the
trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods
and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee,
with the bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK
as its property with liberty to sell the same within ____days from the date of the execution of
this Trust Receipt and for the Banks account, but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or the proceeds) either by way
of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft,
pilferage or other casualties as directed by the BANK, the sum insured to be payable in case
of loss to the BANK, with the understanding that the BANK is, not to be chargeable with the
storage premium or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to
the BANK, to apply against the relative acceptances (as described above) and for the
payment of any other indebtedness of mine/ours to the BANK. In case of non-sale within the
period specified herein, I/we agree to return the goods under this Trust Receipt to the BANK
without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in
the form of money or bills, receivables, or accounts separate and capable of identification as
property of the BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter
of public policy, the failure of person to turn over the proceeds of the sale of the goods
covered by a trust receipt or to return said goods, if not sold, is a public nuisance to be
abated by the imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been resolved in
the affirmative in Allied Banking Corporation v. Ordoez.44 The law applies to goods used by
the entrustee in the operation of its machineries and equipment. The non-payment of the
amount covered by the trust receipts or the non-return of the goods covered by the receipts,
if not sold or otherwise not disposed of, violate the entrustees obligation to pay the amount
or to return the goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations
in a trust receipt transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to merchandise
received under the obligation to return it (devolvera) to the owner.46 Thus, failure of the
entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to
the entruster or to return said goods if they were not disposed of in accordance with the
terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to
defraud. The law punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A
mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal
offense that causes prejudice, not only to another, but more to the public interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
President of PBMI and had no physical possession of the goods, he cannot avoid
prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 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.1wphi1 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.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural persons. However,
the penalty for the crime is imprisonment for the periods provided in said Article 315, which
reads:
ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed
22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in
this paragraph shall be imposed in its maximum period, adding one year for each
additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such cases, and in connection with the accessory penalties
which may be imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its
minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos;
and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed
200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the
following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the crime and the penalty therefor.
A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.49 However, a corporation may be charged and prosecuted for
a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be
fined.50
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author
of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an
act of a corporation or a crime and prescribes punishment therefor, it creates a criminal
offense which, otherwise, would not exist and such can be committed only by the corporation.
But when a penal statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the State, by statute,
defines a crime that may be committed by a corporation but prescribes the penalty therefor to
be suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty.51 Corporate
officers or employees, through whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by
virtue of their managerial positions or other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act.53 Moreover, all parties active in promoting a crime,
whether agents or not, are principals.54 Whether such officers or employees are benefited by
their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the
cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl
Warren, a corporate officer cannot protect himself behind a corporation where he is the
actual, present and efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.
SO ORDERED.

























G.R. No. 90828 September 5, 2000
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT OF
APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.
D E C I S I O N
DAVIDE, JR., C.J.:
In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration ofP40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the
latters convent at Camaman-an, Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2x4x", 300
SF tanguile wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN
cement adhesive from CM Builders Centre for the construction project.1 The following day,
31 October 1979, Petitioners applied for a commercial letter of credit2with the Philippine
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders
Centre. PBC approved the letter of credit3 for P22,389.80 to cover the full invoice value of
the goods. Petitioners signed a pro-forma trust receipt4 as security. The loan was due on 29
January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial
payment of the loan.5
On 7 May 1980, PBC wrote6 to Petitioners demanding that the amount be paid within seven
days from notice. Instead of complying with PBCs demand, Veloso confessed that they
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until
15 June 1980 to settle the account.7
PBC sent a new demand letter8 to Petitioners on 16 October 1980 and informed them that
their outstanding balance as of 17 November 1979 was P20,824.40 exclusive of attorneys
fees of 25%.9
On 2 December 1980, Petitioners proposed10 that the terms of payment of the loan be
modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting
31 January 1980 until the account is fully paid. Pending approval of the proposal, Petitioners
paid P1,000 to PBC on 4 December 1980,11 and thereafter P500 on 11 February 1981,12 16
March 1981,13 and 20 April 1981.14 Concurrently with the separate demand for attorneys
fees by PBCs legal counsel, PBC continued to demand payment of the balance.15
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust
Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information which
was filed with Branch 18, Regional Trial Court of Cagayan de Oro City. The accusatory
portion of the Information reads:
That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused entered into a trust receipt
agreement with the Philippine Banking Corporation at Cagayan de Oro City wherein the
accused, as entrustee, received from the entruster the following goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to
hold the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise
dispose of the said items and to turn over to the entruster the proceeds of the sale of said
goods or if there be no sale to return said items to the entruster on or before January 29,
1980 but that the said accused after receipt of the goods, with intent to defraud and cause
damage to the entruster, conspiring, confederating together and mutually helping one
another, did then and there wilfully, unlawfully and feloniously fail and refuse to remit the
proceeds of the sale of the goods to the entruster despite repeated demands but instead
converted, misappropriated and misapplied the proceeds to their own personal use, benefit
and gain, to the damage and prejudice of the Philippine Banking Corporation, in the aforesaid
sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.16
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per verbal
guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed
the documents without reading the fine print, only learning of the trust receipt implication
much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the
trust receipt was a mere formality.17
On 7 July 1986, the trial court promulgated its decision18 convicting Petitioners of estafa for
violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and sentencing
each of them to suffer imprisonment of two years and one day of prision correccional as
minimum to six years and one day of prision mayor as maximum, and to solidarily indemnify
PBC the amount of P20,824.44, with legal interest from 29 January 1980, 12 % penalty
charge per annum, 25% of the sums due as attorneys fees, and costs.
The trial court considered the transaction between PBC and Petitioners as a trust receipt
transaction under Section 4, P.D. No. 115. It considered Petitioners use of the goods in their
Carmelite monastery project an act of "disposing" as contemplated under Section 13, P.D.
No. 115, and treated the charge invoice19 for goods issued by CM Builders Centre as a
"document" within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-
G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling that they
violated the Trust Receipt Law, and in holding them criminally liable therefor. In the
alternative, they contend that at most they can only be made civilly liable for payment of the
loan.
In its decision20 6 March 1989, the Court of Appeals modified the judgment of the trial court
by increasing the penalty to six years and one day of prision mayor as minimum to fourteen
years eight months and one day ofreclusion temporal as maximum. It held that the
documentary evidence of the prosecution prevails over Velosos testimony, discredited
Petitioners claim that the documents they signed were in blank, and disbelieved that they
were coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration21 alleging that
the "Disclosure Statement on Loan/Credit Transaction"22 (hereafter Disclosure Statement)
signed by them and Tuiza was suppressed by PBC during the trial. That document would
have proved that the transaction was indeed a loan as it bears a 14% interest as opposed to
the trust receipt which does not at all bear any interest. Petitioners further maintained that
when PBC allowed them to pay in installment, the agreement was novated and a creditor-
debtor relationship was created.
In its resolution23 of 16 October 1989 the Court of Appeals denied the Motion for New
Trial/Reconsideration because the alleged newly discovered evidence was actually forgotten
evidence already in existence during the trial, and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised
the following issues:
1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE
GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, "DISCLOSURE ON
LOAN/CREDIT TRANSACTION," WHICH IF INTRODUCED AND ADMITTED,
WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF
DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE
ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR
VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315
PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-CALLED
TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO
CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the
petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they
had already fully paid PBC on 2 February 1990 the amount of P70,000 for the balance of the
loan, including interest and other charges, as evidenced by the different receipts issued by
PBC,24 and that the PBC executed an Affidavit of desistance.25
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was
akin to a voluntary surrender or plea of guilty which merely serves to mitigate Petitioners
culpability, but does not in any way extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition and required the
parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we
required the parties to move in the premises and for Petitioners to manifest if they are still
interested in the further prosecution of this case and inform us of their present whereabouts
and whether their bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of Appeals of Petitioners
Motion for New Trial and the true nature of the contract between Petitioners and the PBC. As
to the latter, Petitioners assert that it was an ordinary loan, not a trust receipt agreement
under the Trust Receipts Law.
The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial
may be granted if: (1) errors of law or irregularities have been committed during the trial
prejudicial to the substantial rights of the accused; or (2) new and material evidence has
been discovered which the accused could not with reasonable diligence have discovered and
produced at the trial, and which, if introduced and admitted, would probably change the
judgment.26
For newly discovered evidence to be a ground for new trial, such evidence must be (1)
discovered after trial; (2) could not have been discovered and produced at the trial even with
the exercise of reasonable diligence; and (3) material, not merely cumulative, corroborative,
or impeaching, and of such weight that, if admitted, would probably change the
judgment.27 It is essential that the offering party exercised reasonable diligence in seeking to
locate the evidence before or during trial but nonetheless failed to secure it.28
We find no indication in the pleadings that the Disclosure Statement is a newly discovered
evidence.
Petitioners could not have been unaware that the two-page document exists. The Disclosure
Statement itself states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF
THIS PAPER WHICH YOU SHALL SIGN."29 Assuming Petitioners copy was then
unavailable, they could have compelled its production in court,30which they never did.
Petitioners have miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that "they searched again their voluminous records,
meticulously and patiently, until they discovered this new and material evidence" only upon
learning of the Court of Appeals decision and after they were "shocked by the penalty
imposed."31 Clearly, the alleged newly discovered evidence is mere forgotten evidence that
jurisprudence excludes as a ground for new trial.32
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any
transaction by and between a person referred to as the entruster, and another person
referred to as the entrustee, whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latters execution and delivery to the entruster of
a signed document called a "trust receipt" wherein the entrustee binds himself to hold the
designated 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, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt.
There are two possible situations in a trust receipt transaction. The first is covered by the
provision which refers tomoney received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to "return" it (devolvera) to the
owner.33
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the
trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article 315
(1) of the Revised Penal Code,34 without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case at bar reveals that the transaction
intended by the parties was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that
day, ownership over the merchandise was already transferred to Petitioners who were to use
the materials for their construction project. It was only a day later, 31 October 1979, that they
went to the bank to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where goods are
owned by the bank and only released to the importer in trust subsequent to the grant of the
loan. The bank acquires a "security interest" in the goods as holder of a security title for the
advances it had made to the entrustee.35 The ownership of the merchandise continues to be
vested in the person who had 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.36 To secure that the bank shall
be paid, it takes full title to the goods at the very beginning and continues to hold that title as
his indispensable security until the goods are sold and the vendee is called upon to pay for
them; hence, the importer has never owned the goods and is not able to deliver
possession.37 In a certain manner, trust receipts partake of the nature of a conditional sale
where the importer becomes absolute owner of the imported merchandise as soon as he has
paid its price.38
Trust receipt transactions are intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased.39
The antecedent acts in a trust receipt transaction consist of the application and approval of
the letter of credit, the making of the marginal deposit and the effective importation of goods
through the efforts of the importer.40
PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took
notice even though it failed to attach any significance to such fact in the judgment. Despite
the Court of Appeals contrary view that the goods were delivered to Petitioners previous to
the execution of the letter of credit and trust receipt, we find that the records of the case
speak volubly and this fact remains uncontroverted. It is not uncommon for us to peruse
through the transcript of the stenographic notes of the proceedings to be satisfied that the
records of the case do support the conclusions of the trial court.41 After such perusal Grego
Mutia, PBCs credit investigator, admitted thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement
were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this letter of credit and
trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with
numeral 1.42
During the cross and re-direct examinations he also impliedly admitted that the transaction
was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused
you admit that?
A Because in the bank the loan is considered part of the loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower will pay the bank on
a certain specified date with interest43
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the transaction was a loan was
also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short it was a special
kind of loan.1wphi1 What can you say as to that?
A I dont think that would be a trust receipt because we were made to understand by the
manager who encouraged us to avail of their facilities that they will be granting us a loan44
PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with
Petitioners, to refute Velosos testimony, yet it only presented credit investigator Grego Mutia.
Nowhere from Mutias testimony can it be gleaned that PBC represented to Petitioners that
the transaction they were entering into was not a pure loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the
dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner.45 Here, it is crystal clear that on the
part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the money
for their personal use. The mala prohibita nature of the alleged offense notwithstanding,
intent as a state of mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale,
contrary to the express provision embodied in the trust receipt. They are contractors who
obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
should not be the basis for criminal prosecution in the event of violation of its provisions.46
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable to pay it may
be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as manifested by its Affidavit of
Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October
1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and SET ASIDE.
Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in
relation to Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.








G.R. No. 133176 August 8, 2002
PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA LIM, respondents.
D E C I S I O N
SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari1 of the Resolutions2 dated January 9, 1998 and March 25,
1998 of the Court of Appeals in CA-G.R. SP No. 42005, "Pilipinas Bank vs. The Honorable
Secretary of Justice, the City Prosecutor of Makati City, Alfredo T. Ong and Leoncia
Lim," reversing its Decision dated August 29, 1997.
On April 1991, Baliwag Mahogany Corporation (BMC), through its president, respondent
Alfredo T. Ong, applied for a domestic commercial letter of credit with petitioner Pilipinas
Bank (hereinafter referred to as the bank) to finance the purchase of about 100,000 board
feet of "Air Dried, Dark Red Lauan" sawn lumber.
The bank approved the application and issued Letter of Credit No. 91/725-HO in the amount
of P3,500,000.00. To secure payment of the amount, BMC, through respondent Ong,
executed two (2) trust receipts3 providing inter aliathat it shall turn over the proceeds of the
goods to the bank, if sold, or return the goods, if unsold, upon maturity on July 28, 1991 and
August 4, 1991.
On due dates, BMC failed to comply with the trust receipt agreement. On November 22,
1991, it filed with the Securities and Exchange Commission (SEC) a Petition for
Rehabilitation and for a Declaration in a State of Suspension of Payments under Section 6 (c)
of P.D. No. 902-A,4 as amended, docketed as SEC Case No. 4109. After BMC informed its
creditors (including the bank) of the filing of the petition, a Creditors' Meeting was held to:
(a) inform all creditor banks of the present status of BMC to avert any action which would
affect the company's operations, and (b) reach an accord on a common course of action to
restore the company to sound financial footing.
On January 8, 1992, the SEC issued an order5 creating a Management Committee wherein
the bank is represented. The Committee shall, among others, undertake the management of
BMC, take custody and control of all its existing assets and liabilities, study, review and
evaluate its operation and/or the feasibility of its being restructured.
On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a
Memorandum of Agreement6 (MOA) rescheduling the payment of BMCs existing debts.
On November 27, 1992, the SEC rendered a Decision7 approving the Rehabilitation Plan of
BMC as contained in the MOA and declaring it in a state of suspension of payments.
However, BMC and respondent Ong defaulted in the payment of their obligations under the
rescheduled payment scheme provided in the MOA. Thus, on April 1994, the bank filed with
the Makati City Prosecutors Office a complaint8 charging respondents Ong and Leoncia Lim
(as president and treasurer of BMC, respectively) with violation of the Trust Receipts Law
(PD No. 115), docketed as I.S. No. 94-3324. The bank alleged that both respondents failed to
pay their obligations under the trust receipts despite demand.9
On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a
Resolution10 recommending the dismissal of the complaint. On July 11, 1994, the Resolution
was approved by Provincial Prosecutor of Rizal Herminio T. Ubana, Sr.11 The bank filed a
motion for reconsideration but was denied.
Upon appeal by the bank, the Department of Justice (DOJ) rendered judgment12 denying the
same for lack of merit. Its motion for reconsideration was likewise denied.13
On July 5, 1996, the bank filed with this Court a petition for certiorari and mandamus seeking
to annul the resolution of the DOJ. In a Resolution dated August 21, 1996, this Court referred
the petition to the Court of Appeals for proper determination and disposition.14
On August 29, 1997, the Court of Appeals rendered judgment, the dispositive portion of
which reads:
"WHEREFORE, in view of all the foregoing, the assailed resolutions of the public
respondents are hereby SET ASIDE and in lieu thereof a new one rendered directing the
public respondents to file the appropriate criminal charges for violation of P.D. No. 115,
otherwise known as The Trust Receipts Law, against private respondents."15
However, upon respondents motion for reconsideration, the Court of Appeals reversed itself,
holding that the execution of the MOA constitutes novation which "places petitioner Bank in
estoppel to insist on the original trust relation and constitutes a bar to the filing of any criminal
information for violation of the trust receipts law."16
The bank filed a motion for reconsideration but was denied.17 Hence this petition.
Petitioner bank contends that the MOA did not novate, much less extinguish, the existing
obligations of BMC under the trust receipt agreement. The bank, through the execution of the
MOA, merely assisted BMC to settle its obligations by rescheduling the same. Hence, when
BMC defaulted in its payment, all its rights, including the right to charge respondents for
violation of the Trust Receipts Law, were revived.
Respondents Ong and Lim maintain that the MOA, which has the effect of a compromise
agreement, novated BMCs existing obligations under the trust receipt agreement. The
novation converted the parties relationship into one of an ordinary creditor and debtor.
Moreover, the execution of the MOA precludes any criminal liability on their part which may
arise in case they violate any provision thereof.
The only issue for our determination is whether respondents can be held liable for violation of
the Trust Receipts Law.
Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any transaction
by and between a person referred to as the entruster, and another person referred to as the
entrustee, whereby the entruster who owns or holds absolute title or security interest 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 a "trust receipt" wherein the entrustee binds himself to hold the designated 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, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust receipt.18
Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust
receipt to the entruster or to return the goods, if they were not disposed of, shall constitute
the crime of estafa under Article 315, par. 1(b) of the Revised Penal Code.19 If the violation
or offense is committed by a corporation, the penalty 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.20 It is on this premise that
petitioner bank charged respondents with violation of the Trust Receipts Law.1wphi1
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation
of PD No. 115.21However, what is being punished by the law is the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. 22
In this case, no dishonesty nor abuse of confidence can be attributed to respondents. Record
shows that BMC failed to comply with its obligations upon maturity of the trust receipts due to
serious liquidity problems, prompting it to file a Petition for Rehabilitation and Declaration in a
State of Suspension of Payments. It bears emphasis that when petitioner bank made a
demand upon BMC on February 11, 1994 to comply with its obligations under the trust
receipts, the latter was already under the control of the Management Committee created by
the SEC in its Order dated January 8, 1992.23 The Management Committee took custody of
all BMCs assets and liabilities, including the red lauan lumber subject of the trust receipts,
and authorized their use in the ordinary course of business operations. Clearly, it was the
Management Committee which could settle BMCs obligations. Moreover, it has not escaped
this Courts observation that respondent Ong paid P21,000,000.00 in compliance with the
equity infusion required by the MOA. The mala prohibita nature of the offense
notwithstanding, respondents intent to misuse or misappropriate the goods or their proceeds
has not been established by the records.24
Did the MOA novate the trust agreement between the parties?
In Quinto vs. People,25 this Court held that there are two ways which could indicate the
presence of novation, thereby producing the effect of extinguishing an obligation by another
which substitutes the same. The first is when novation has been stated and declared in
unequivocal terms. The second is when the old and the new obligations are incompatible on
every point. The test of incompatibility is whether or not the two obligations can stand
together. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions, otherwise, the change is merely
modificatory in nature and insufficient to extinguish the original obligation.
Contrary to petitioner's contention, the MOA did not only reschedule BMCs debts, but more
importantly, it provided principal conditions which are incompatible with the trust agreement.
The undisputed points of incompatibility between the two agreements are:
Points of incompatibility Trust Receipt MOA
1) Nature of contract Trust Receipt Loan26
2) Juridical relationship Trustor-Trustee Lender-Borrower
3) Status of obligation Matured Payable within 7 years27
4) Governing law Criminal Civil & Commercial28
5) Security offered Trust Receipts Real estate/chattel mortgages29
6) Interest rate per annum (Unspecified) 14%30
7) Default charges 24% 14%31
8) No. of parties 3 16
Hence, applying the pronouncement in Quinto, we can safely conclude that the MOA novated
and effectively extinguished BMC's obligations under the trust receipt agreement.
Petitioner bank's argument that BMC's non-compliance with the MOA revived respondents
original liabilities under the trust receipt agreement is completely misplaced. Section 8.4 of
the MOA on termination reads:
"8.4 Termination. Any provision of this Agreement to the contrary notwithstanding, if the
conditions for rescheduling specified in Section 7 shall not be complied with on such later
date as the Qualified Majority Lenders in their sole and absolute discretion may agree in
writing, then
(i) the obligation of the Lenders to reschedule the Existing Credits as contemplated
hereby shall automatically terminate on such date:
(ii) the Existing Agreements shall continue in full force and effect on the remaining
loan balances as if this Agreement had not been entered into;
(iii) all the rights of the lenders against the borrower and Spouses Ong prior to the
agreement shall revest to the lenders."
Indeed, what is automatically terminated in case BMC failed to comply with the conditions
under the MOA is not the MOA itself but merely the obligation of the lender (the bank) to
reschedule the existing credits. Moreover, it is erroneous to assume that the revesting of "all
the rights of lenders against the borrower" means that petitioner can charge respondents for
violation of the Trust Receipts Law under the original trust receipt agreement. As explained
earlier, the execution of the MOA extinguished respondents obligation under the trust
receipts. Respondents liability, if any, would only be civil in nature since the trust receipts
were transformed into mere loan documents after the execution of the MOA. This is
reinforced by the fact that the mortgage contracts executed by the BMC survive despite its
non-compliance with the conditions set forth in the MOA.
All told, we find no reversible error committed by the Court of Appeals in rendering the
assailed Resolutions.
WHEREFORE, the petition is DENIED. The assailed Resolutions of the Court of Appeals
dated January 9, 1998 and March 25, 1998 in CA-G.R. SP No. 42005 are hereby
AFFIRMED.
SO ORDERED.











G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET
AL., defendant-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-%
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 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-% 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.








G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK
AND TRUST COMPANY, respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming
with modifications, the earlier decision of the Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent
bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its
Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one
Angel dela Cruz who deposited with herein defendant the aggregate amount
of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein
plaintiff in connection with his purchased of fuel products from the latter
(Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco,
the Sucat Branch Manger, that he lost all the certificates of time deposit in
dispute. Mr. Tiangco advised said depositor to execute and submit a
notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of
said affidavit of loss, 280 replacement CTDs were issued in favor of said
depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand
Pesos (P875,000.00). On the same date, said depositor executed a
notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant bank "full control
of the indicated time deposits from and after date" of the assignment and
further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the
loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz alleging
that the same were delivered to herein plaintiff "as security for purchases
made with Caltex Philippines, Inc." by said depositor (TSN, February 9,
1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit
563) from herein plaintiff formally informing it of its possession of the CTDs
in question and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to
furnish the former "a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela
Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of
time deposit of P1,120,000.00 plus accrued interest and compounded
interest therein at 16% per annum, moral and exemplary damages as well as
attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant
complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the
complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of the said certificates
of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating
to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this
Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and
surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

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




G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS,
GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
CRUZ, J.:p
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these
events happened, operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and countersigned by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings
Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank, which forwarded them to the
Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several
times to ask whether the warrants had been cleared. She was told to wait. Accordingly,
Gomez was meanwhile not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on
July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court
of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however,
filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November
4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant
Golden Savings and Loan Association, Inc. and defendant Spouses Magno
Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No.
2498 of the sum of P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was made including the
amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon before
the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount of
P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and
Lucia Castillo attorney's fees and expenses of litigation in the amount of
P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file
this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the
clear contractual terms and conditions on the deposit slips allowing
Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the
checks or treasury warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a
mere collecting agent which cannot be held liable for its failure to collect on
the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored, thereby
perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants
involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been
cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof
from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its refusal to return the money
that to all appearances belonged to the depositor, who could therefore withdraw it any time
and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings
deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its
own. It relied on Metrobank to determine the validity of the warrants through its own services.
The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden
Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the
go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own
account.
The argument of Metrobank that Golden Savings should have exercised more care in
checking the personal circumstances of Gomez before accepting his deposit does not hold
water. It was Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury warrants were subject to clearing, pending
which the depositor could not withdraw its proceeds. There was no question of Gomez's
identity or of the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it
allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling more than one and a half million pesos (and this was 1979). There was no reason
why it should not have waited until the treasury warrants had been cleared; it would not have
lost a single centavo by waiting. Yet, despite the lack of such clearance and
notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not
once, not twice, but thrice from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the
warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its
long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on
the dorsal side of the deposit slips through which the treasury warrants were deposited by
Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only
as the depositor's collecting agent, assuming no responsibility beyond care
in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge back
to the depositor's account any amount previously credited, whether or not
such item is returned. This also applies to checks drawn on local banks and
bankers and their branches as well as on this bank, which are unpaid due
to insufficiency of funds, forgery, unauthorized overdraft or any other reason.
(Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a
collecting agent for Golden Savings and give it the right to "charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also
applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft of any other reason." It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its
Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they
have apparently been imposed by the bank unilaterally, without the consent of the depositor.
Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given permit at the back of
the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels
that even if the deposit slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank
seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not
exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it
was the clearance given by it that assured Golden Savings it was already safe to allow
Gomez to withdraw the proceeds of the treasury warrants he had deposited
Metrobank misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance
could be implied from its allowing Golden Savings to withdraw from its account not only once
or even twice but three times. The total withdrawal was in excess of its original balance
before the treasury warrants were deposited, which only added to its belief that the treasury
warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there
would have been no need at all for Golden Savings to deposit the treasury warrants with it for
clearance. There would have been no need for it to wait until the warrants had been cleared
before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes
more so in the case at bar when it is considered that the supposed dishonor of the warrants
was not communicated to Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established. 9 This was the finding of the lower courts which we see no reason
to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It
must be established by clear, positive and convincing evidence. This was
not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts,
are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants themselves
non-negotiable. There should be no question that the exception on Section 3 of the
Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to
Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free
from defenses. But this treasury warrant is not within the scope of the negotiable
instrument law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration, is actually an Order for payment out of
"a particular fund," and is not unconditional and does not fulfill one of the essential
requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of
the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings
assumed that they were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee
when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands, 12 but we feel this case is inapplicable to the present controversy. That case
involved checks whereas this case involves treasury warrants. Golden Savings never
represented that the warrants were negotiable but signed them only for the purpose of
depositing them for clearance. Also, the fact of forgery was proved in that case but not in the
case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the
checks without question from one Antonio Ramirez notwithstanding that the payee was the
Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No
similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which
Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the
dishonor. The amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the dishonor of the warrants.
Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already been informed of
the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3
of the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.
SO ORDERED.
G.R. No. 148789 January 16, 2003
BPI FAMILY SAVINGS BANK, INC. AND HEDZELITO NOEL
BAYABORDA, petitioners, vs. ROMEO MANIKAN, respondent.
VITUG, J.:
Petitioners seek a review of the decision of the Court of Appeals in C.A. G.R. SP. No. 48011
which has affirmed the judgment of the Regional Trial Court, Branch 26, of Iloilo City,
dismissing the complaint of petitioners formandamus and ordering them to pay respondent
the sum of P30,000.00 by way of attorney's fees.
It would appear that respondent, being the City Treasurer of Iloilo City, assessed petitioner
bank business taxes for the years 1992 and 1993. On 26 January 1994, the bank issued two
manager's checks payable to the City Treasurer of Iloilo City, the first, Manager's Check No.
010649 for P462,270.60, was to cover the business tax for the year 1992, and the second,
Manager's Check No. 010650 in the amount of P482,988.45, was to settle the business tax
for the year 1993. Hedzelito Bayaborda, then manager of the banks Iloilo Branch, instructed
an employee, Edmund Sabio, to deliver the two manager's checks to the Secretary to the
City Mayor, a certain Toto Espinosa, who, in turn, handed them over to his secretary, Leila
Salcedo, for transmittal to the City Treasurer. The value of the checks were eventually
credited to the account of the City Treasurer of Iloilo City. The checks, however, were not
applied to satisfy the tax liabilities of petitioner but of other taxpayers.
The misapplication of the proceeds of the checks came to the knowledge of respondent City
Treasurer who, thereupon, created a committee to look into the matter. The investigation
revealed that it was upon the representation of Leila Salcedo that the manager's checks were
used to pay tax liabilities of other taxpayers and not those of petitioner bank. Meanwhile, the
bank, through counsel, made a demand on respondent to issue official receipts to show that
it had paid its business taxes for the years 1992 and 1993 covered by the diverted manager's
checks. When he refused to issue the receipts requested, respondent was sued by
petitioners formandamus and damages.
The Regional Trial Court dismissed the complaint for mandamus and ruled that petitioners
had no clear legal right to demand the issuance of official receipts nor could respondent,
given the circumstances, be compelled to issue another set of receipts in the name of the
bank. The trial court further ordered petitioners to pay respondent the sum of P30,000.00 by
way of attorney's fees.
The Court of Appeals, on appeal by petitioners, sustained the trial court in toto.
In their petition for review before this Court, petitioners urge a reversal of the decision of the
appellate court contending that -
"a) AN ACTION FOR MANDAMUS NECESSARILY INCLUDES INDEMNIFICATION
FOR DAMAGES AND IS ASSESSED ON A PUBLIC OFFICIAL'S PRIVATE
CAPACITY. HENCE, SUING A PUBLIC OFFICIAL IN HIS PRIVATE CAPACITY
DOES NOT AS A MATTER OF RIGHT ENTITLE HIM TO AN AWARD OF
ATTORNEY'S FEES BY WAY OF COUNTERCLAIM.
"b) THE RECEIPT BY THE CITY TREASURER'S OFFICE OF ILOILO OF THE
FACE VALUE OF THE TWO MANAGER'S CHECKS INTENDED FOR PAYMENT
OF ITS BUSINESS TAXES FOR THE YEAR 1992 AND 1993 ENTITLES IT TO THE
ISSUANCE OF AN OFFICIAL RECEIPT ENFORCEABLE BY A WRIT OF
MANDAMUS."
In order that a writ of mandamus may aptly issue, it is essential that, on the one hand, the
person petitioning for it has a clear legal right to the claim that is sought and that, on the other
hand, the respondent has an imperative duty to perform that which is demanded of
him.1 Mandamus will not issue to enforce a right, or to compel compliance with a duty, which
is questionable or over which a substantial doubt exists. The principal function of the writ
of mandamus is to command and to expedite, not to inquire and to adjudicate; thus, it is
neither the office nor the aim of the writ to secure a legal right but to implement that which is
already established. Unless the right to the relief sought is unclouded, mandamus will not
issue.2
The checks delivered by petitioner bank to Toto Espinosa were managers checks. A
managers check, like a cashiers check, is an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity and honor behind its issuance. By its peculiar
character and general use in commerce, a managers check or a cashiers check is regarded
substantially to be as good as the money it represents.3
By allowing the delivery of the subject checks to a person who is not directly charged with the
collection of its tax liabilities, the bank must be deemed to have assumed the risk of a
possible misuse thereof even as it appears to have fallen short of the diligence ordinarily
expected of it. The bank, of course, is not precluded from pursuing a right of action against
those who could have been responsible for the wrongdoing or who might have been unjustly
benefited thereby.
The award of attorneys fees in favor of respondent City Treasurer, however, should be
deleted. Such an award, in the concept of damages under Article 2208 of the Civil Code,
demands factual and legal justifications.4 While the law allows some degree of discretion on
the part of the courts in awarding attorneys fees and expenses of litigation, the use of that
judgment, however, must be done with great care approximating as closely as possible the
instances exemplified by the law. Attorneys fees in the concept of damages are not
recoverable against a party just because of an unfavorable judgment. Repeatedly, it has
been said that no premium should be placed on the right to litigate.5
WHEREFORE, the instant petition is partly granted. The appealed decision is affirmed save
for the award of attorneys fees in favor of private respondent which is ordered deleted. No
costs.
SO ORDERED.
























































G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, 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
"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.
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 ofcertiorari is denied and the decision of the Court of Appeals is hereby
affirmed, with costs.



















G.R. No. 126568 April 30, 2003
QUIRINO GONZALES LOGGING CONCESSIONAIRE, QUIRINO GONZALES and
EUFEMIA GONZALES,petitioners, vs. THE COURT OF APPEALS (CA) and REPUBLIC
PLANTERS BANK, respondents.
CARPIO MORALES, J.:
In the expansion of its logging business, petitioner Quirino Gonzales Logging Concessionaire
(QGLC), through its proprietor, general manager co-petitioner Quirino Gonzales, applied
on October 15, 1962 for credit accommodations1 with respondent Republic Bank (the Bank),
later known as Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962, granting it a credit line of
P900,000.002 broken into an overdraft line of P500,000.00 which was later reduced to
P450,000.00 and a Letter of Credit (LC) line of P400,000.00.3
Pursuant to the grant, the Bank and petitioners QGLC and the spouses Quirino and Eufemia
Gonzales executed ten documents: two denominated "Agreement for Credit in Current
Account,"4 four denominated "Application and Agreement for Commercial Letter of
Credit,"5 and four denominated "Trust Receipt."6
Petitioners' obligations under the credit line were secured by a real estate mortgage on four
parcels of land: two in Pandacan, Manila, one in Makati (then part of Rizal), and another in
Diliman, Quezon City.7
In separate transactions, petitioners, to secure certain advances from the Bank in connection
with QGLC's exportation of logs, executed a promissory note in 1964 in favor of the Bank.
They were to execute three more promissory notes in 1967.
In 1965, petitioners having long defaulted in the payment of their obligations under the credit
line, the Bank foreclosed the mortgage and bought the properties covered thereby, it being
the highest bidder in the auction sale held in the same year. Ownership over the properties
was later consolidated in the Bank on account of which new titles thereto were issued to it.8
On January 27, 1977, alleging non-payment of the balance of QGLC's obligation after the
proceeds of the foreclosure sale were applied thereto, and non-payment of the promissory
notes despite repeated demands, the Bank filed a complaint for "sum of money" (Civil Case
No. 106635) against petitioners before the Regional Trial Court (RTC) of Manila.
The complaint listed ten causes of action. The first concerns the overdraft line under which
the Bank claimed that petitioners withdrew amounts (unspecified) at twelve percent per
annum which were unpaid at maturity and that after it applied the proceeds of the foreclosure
sale to the overdraft debt, there remained an unpaid balance of P1,224,301.56.
The Bank's second to fifth causes of action pertain to the LC line under which it averred that
on the strength of the LCs it issued, the beneficiaries thereof drew and presented sight drafts
to it which it all paid after petitioners' acceptance; and that it delivered the tractors and
equipment subject of the LCs to petitioners who have not paid either the full or part of the
face value of the drafts.
Specifically with respect to its second cause of action, the Bank alleged that it issued LC No.
63-0055D on January 15, 1963 in favor of Monark International Incorporated9 covering the
purchase of a tractor10 on which the latter allegedly drew a sight draft with a face value of
P71,500.00,11 which amount petitioners have not, however, paid in full.
Under its third cause of action, the Bank charged that it issued LC No. 61-1110D on
December 27, 1962 also in favor of Monark International covering the purchase of another
tractor and other equipment;12 and that Monark International drew a sight draft with a face
value of P80,350.00,13 and while payments for the value thereof had been made by
petitioners, a balance of P68,064.97 remained.
Under the fourth cause of action, the Bank maintained that it issued LC No. 63-0182D on
February 11, 1963 in favor of J.B.L. Enterprises, Inc.14 covering the purchase of two
tractors,15 and J.B.L. Enterprises drew on February 13, 1963 a sight draft on said LC in the
amount of P155,000.00 but petitioners have not paid said amount.
On its fifth cause of action, the Bank alleged that it issued LC No. 63-0284D on March 14,
1963 in favor of Super Master Auto Supply (SMAS) covering the purchase of "Eight Units
GMC (G.I.) Trucks"; that on March 14, 1963, SMAS drew a sight draft with a face value of
P64,000.0016 on the basis of said LC; and that the payments made by petitioners for the
value of said draft were deficient by P45,504.74.
The Bank thus prayed for the settlement of the above-stated obligations at an interest rate of
eleven percent per annum, and for the award of trust receipt commissions, attorney's fees
and other fees and costs of collection.
The sixth to ninth causes of action are anchored on the promissory notes issued by
petitioners allegedly to secure certain advances from the Bank in connection with the
exportation of logs as reflected above.17 The notes were payable 30 days after date and
provided for the solidary liability of petitioners as well as attorney's fees at ten percent of the
total amount due18 in the event of their non-payment at maturity.
The note dated June 18, 1964, subject of the sixth cause of action, has a face value of
P55,000.00 with interest rate of twelve percent per annum;19 that dated July 7, 1967 subject
of the seventh has a face value of P20,000.00;20 that dated July 18, 1967 subject of the
eighth has a face value of P38,000.00;21 and that dated August 23, 1967 subject of the ninth
has a face value of P11,000.00.22 The interest rate of the last three notes is pegged at
thirteen percent per annum.23
On its tenth and final cause of action, the Bank claimed that it has accounts receivable from
petitioners in the amount of P120.48.
In their Answer24 of March 3, 1977, petitioners admit the following: having applied for credit
accommodations totaling P900,000.00 to secure which they mortgaged real properties;
opening of the LC/Trust Receipt Line; the issuance by the Bank of the various LCs; and the
foreclosure of the real estate mortgage and the consolidation of ownership over the
mortgaged properties in favor of the Bank. They deny, however, having availed of the credit
accommodations and having received the value of the promissory notes, as they do deny
having physically received the tractors and equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint states no cause of action, and
assuming that it does, the same is/are barred by prescription or null and void for want of
consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC attached the preferred shares of
stocks of the spouses Quirino and Eufemia Gonzales with the Bank with a total par value of
P414,000.00.
Finding for petitioners, the trial court rendered its Decision of April 22, 1992 the dispositive
portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in the first to the tenth causes
of action of its complaint are denied for the reasons earlier mentioned in the body of
this decision;
2. As regards the claims of defendants pertaining to their counterclaim (Exhibits "1",
"2" and "3"), they are hereby given ten (10) years from the date of issuance of the
torrens title to plaintiff and before the transfer thereof in good faith to a third party
buyer within which to ask for the reconveyance of the real properties foreclosed by
plaintiff,
3. The order of attachment which was issued against the preferred shares of stocks
of defendants-spouses Quirino Gonzales and Eufemia Gonzales with the Republic
Bank now known as Republic Planters Bank dated March 21, 1977 is hereby
dissolved and/or lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and for attorney's
fees, with costs against plaintiff.
SO ORDERED.
In finding for petitioners, the trial court ratiocinated:25
Art. 1144 of the Civil Code states that an action upon a written contract prescribes in
ten (10) years from the time the right of action accrues. Art. 1150 states that
prescription starts to run from the day the action may be brought. The obligations
allegedly created by the written contracts or documents supporting plaintiff's first to
the sixth causes of action were demandable at the latest in 1964. Thus when the
complaint was filed on January 27, 1977 more than ten (10) years from 1964 [when
the causes of action accrued] had already lapsed. The first to the sixth causes of
action are thus barred by prescription. . . .
As regards the seventh and eight causes of action, the authenticity of which
documents were partly in doubt in the light of the categorical and uncontradicted
statements that in 1965, defendant Quirino Gonzales logging concession was
terminated based on the policy of the government to terminate logging concessions
covering less than 20,000 hectares. If this is the case, the Court is in a quandary why
there were log exports in 1967? Because of the foregoing, the Court does not find
any valid ground to sustain the seventh and eight causes of action of plaintiff's
complaint.
As regards the ninth cause of action, the Court is baffled why plaintiff extended to
defendants another loan when defendants according to plaintiff's records were
defaulting creditors? The above facts and circumstances has (sic) convinced this
Court to give credit to the testimony of defendants' witnesses thatthe Gonzales
spouses signed the documents in question in blank and that the promised loan was
never released to them. There is therefore a total absence of consent since
defendants did not give their consent to loans allegedly procured, the proceeds of
which were never received by the alleged debtors, defendants herein. . . .
Plaintiff did not present evidence to support its tenth cause of action. For this reason,
it must consequently be denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they seek the return of the real
and personal properties which they have given in good faith to plaintiff. Again,
prescription may apply. The real properties of defendants acquired by plaintiff were
foreclosed in 1965 and consequently, defendants had one (1) year to redeem the
property or ten (10) years from issuance of title on the ground that the obligation
foreclosed was fictitious.
xxx xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the trial court by
Decision27 of June 28, 1996 which disposed as follows:28
WHEREFORE, premises considered, the appealed decision (dated April 22, 1992) of
the Regional Trial Court (Branch 36) in Manila in Civil Case No. 82-4141 is hereby
REVERSED and let the case be remanded back to the court a quo for the
determination of the amount(s) to be awarded to the [the Bank]-appellant relative to
its claims against the appellees.
SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld the contention of the Bank
that the notices of foreclosure sale were "tantamount" to demand letters upon the petitioners
which interrupted the running of the prescriptive period.29
As regards the seventh to ninth causes of action, the CA also upheld the contention of the
Bank that the written agreements-promissory notes prevail over the oral testimony of
petitioner Quirino Gonzales that the cancellation of their logging concession in 1967 made it
unbelievable for them to secure in 1967 the advances reflected in the promissory notes.30
With respect to petitioners' counterclaim, the CA agreed with the Bank that:31
Certainly, failure on the part of the trial court to pass upon and determine the
authenticity and genuineness of [the Bank's] documentary evidence [the trial court
having ruled on the basis of prescription of the Bank's first to sixth causes of action]
makes it impossible for the trial court' to eventually conclude that theobligation
foreclosed (sic) was fictitious. Needless to say, the trial court's ruling averses (sic)
the well-entrenched rule that 'courts must render verdict on their findings of facts."
(China Banking Co. vs. CA, 70 SCRA 398)
Furthermore, the defendants-appellees' [herein petitioners'] counterclaim is basically
an action for the reconveyance of their properties, thus, the trial court's earlier ruling
that the defendants-appellees' counterclaim has prescribed is itself a ruling that the
defendants-appellees' separate action for reconveyance has also prescribed.
The CA struck down the trial court's award of attorney's fees for lack of legal basis.32
Hence, petitioners now press the following issues before this Court by the present petition for
review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPONDENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S] FIRST,
SECOND, THIRD, FOURTH, FIFTH AND SIXTH CAUSES OF ACTION HAVE NOT
PRESCRIBED CONTRARY TO THE FINDINGS OF THE LOWER COURT, RTC
BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE ALREADY
PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPODNENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S] SEVENTH,
EIGHT AND NINTH CAUSES OF ACTION APPEARS (SIC.) TO BE IMPRESSED
WITH MERIT CONTRARY TO THE FINDINGS OF THE LOWER COURT RTC
BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID GROUND TO SUSTAIN
[THEM] AND FOR LACK OF EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN REVERSING THE
FINDINGS OF THE REGIONAL TRIAL COURT BRANCH 36 OF MANILA THAT
PETITIONERS-APPELLANT (SIC.) MAY SEEK THE RETURN OF THE REAL AND
PERSONAL PROPERTIES WHICH THEY MAY HAVE GIVEN IN GOOD FAITH AS
THE SAME IS BARRED BY PRESCRIPTION AND THAT PETITIONERS-
APPELLANT (SIC.) HAD ONE (1) YEAR TO REDEEM THE PROPERTY OR TEN
(10) YEARS FROM ISSUANCE OF THE TITLE ON THE GROUND THAT THE
OBLIGATION FORECLOSED WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
PEITIONERS-APPELLANTS [SIC] ARE NOT ENTITLED TO AN AWARD OF
ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon written contract, an obligation
created by law, and a judgment must be brought within ten years from the time the right of
action accrues.33
The finding of the trial court that more than ten years had elapsed since the right to bring an
action on the Bank's first to sixth causes had arisen34 is not disputed. The Bank contends,
however, that "the notices of foreclosure sale in the foreclosure proceedings of 1965 are
tantamount to formal demands upon petitioners for the payment of their past due loan
obligations with the Bank, hence, said notices of foreclosure sale interrupted/forestalled the
running of the prescriptive period."35
The Bank's contention does not impress. Prescription of actions is interrupted when they are
filed before the court, when there is a written extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt by the debtor.36
The law specifically requires a written extrajudicial demand by the creditors which is absent in
the case at bar. The contention that the notices of foreclosure are "tantamount" to a written
extrajudicial demand cannot be appreciated, the contents of said notices not having been
brought to light.
But even assuming arguendo that the notices interrupted the running of the prescriptive
period, the argument would still not lie for the following reasons:
With respect to the first to the fifth causes of action, as gleaned from the complaint, the Bank
seeks the recovery of the deficient amount of the obligation after the foreclosure of the
mortgage. Such suit is in the nature of a mortgage action because its purpose is precisely to
enforce the mortgage contract.37 A mortgage action prescribes after ten years from the time
the right of action accrued.38
The law gives the mortgagee the right to claim for the deficiency resulting from the price
obtained in the sale of the property at public auction and the outstanding obligation at the
time of the foreclosure proceedings.39 In the present case, the Bank, as mortgagee, had the
right to claim payment of the deficiency after it had foreclosed the mortgage in 1965.40 In
other words, the prescriptive period started to run against the Bank in 1965. As it filed the
complaint only on January 27, 1977, more than ten years had already elapsed, hence, the
action on its first to fifth causes had by then prescribed. No other conclusion can be reached
even if the suit is considered as one upon a written contract or upon an obligation to pay the
deficiency which is created by law,41 the prescriptive period of both being also ten years.42
As regards the promissory note subject of the sixth cause of action, its period of prescription
could not have been interrupted by the notices of foreclosure sale not only because, as
earlier discussed, petitioners' contention that the notices of foreclosure are tantamount to
written extra-judicial demand cannot be considered absent any showing of the contents
thereof, but also because it does not appear from the records that the said note is covered by
the mortgage contract.
Coming now to the second issue, petitioners seek to evade liability under the Bank's seventh
to ninth causes of action by claiming that petitioners Quirino and Eufemia Gonzales signed
the promissory notes in blank; that they had not received the value of said notes, and that the
credit line thereon was unnecessary in view of their money deposits, they citing "Exhibits 2 to
2-B,"43 in, and unremitted proceeds on log exports from, the Bank. In support of their claim,
they also urge this Court to look at Exhibits "B" (the Bank's recommendation for approval of
petitioners' application for credit accommodations), "P" (the "Application and Agreement for
Commercial Letter of Credit" dated January 16, 1963) and "T" (the "Application and
Agreement for Commercial Letter of Credit" dated February 14, 1963).
The genuineness and due execution of the notes had, however, been deemed admitted by
petitioners, they having failed to deny the same under oath.44 Their claim that they signed
the notes in blank does not thus lie.
Petitioners' admission of the genuineness and due execution of the promissory notes
notwithstanding, they raise want of consideration45 thereof. The promissory notes, however,
appear to be negotiable as they meet the requirements of Section 146 of the Negotiable
Instruments Law. Such being the case, the notes are prima faciedeemed to have been
issued for consideration.47 It bears noting that no sufficient evidence was adduced by
petitioners to show otherwise.
Exhibits "2" to "2-B" to which petitioners advert in support of their claim that the credit line on
the notes was unnecessary because they had deposits in, and remittances due from, the
Bank deserve scant consideration. Said exhibits are merely claims by petitioners under their
then proposals for a possible settlement of the case dated February 3, 1978. Parenthetically,
the proposals were not even signed by petitioners but by certain Attorneys Osmundo R.
Victoriano and Rogelio P. Madriaga.
In any case, it is no defense that the promissory notes were signed in blank as Section
1448 of the Negotiable Instruments Law concedes the prima facie authority of the person in
possession of negotiable instruments, such as the notes herein, to fill in the blanks.
As for petitioners' reliance on Exhibits "B", "P" and "T," they have failed to show the
relevance thereof to the seventh up to the ninth causes of action of the Bank.
On the third issue, petitioners asseverate that with the trial court's dismissal of the Bank's
complaint and the denial of its first to sixth causes of action, it is but fair and just that the real
properties which were mortgaged and foreclosed be returned to them.49 Such, however,
does not lie. It is not disputed that the properties were foreclosed under Act No. 3135 (An Act
to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages), as amended. Though the Bank's action for deficiency is barred by prescription,
nothing irregular attended the foreclosure proceedings to warrant the reconveyance of the
properties covered thereby.
As for petitioners' prayer for moral and exemplary damages, it not having been raised as
issue before the courts below, it can not now be considered. Neither can the award of
attorney's fees for lack of legal basis.
WHEREFORE, the CA Decision is hereby AFFIRMED with MODIFICATION.
Republic Bank's Complaint with respect to its first to sixth causes of action is hereby
DISMISSED. Its complaint with respect to its seventh to ninth causes of action is
REMANDED to the court of origin, the Manila Regional Trial Court, Branch 36, for it to
determine the amounts due the Bank thereunder.
SO ORDERED.
















G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI and/or LEE KIAN
HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-
respondents.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint
for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy,
Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory
note executed by respondent Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to
petitioner, and drawn against the China Banking Corporation, to pay the
balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a
common ground that the complaint states no cause of action. The trial court granted the
defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review
by Certiorari, assigning the following as the alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13,
RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter
executed and delivered to the former a promissory note, engaging to pay the petitioner Bank
or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per
annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02.
On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank
drawn against China Banking Corporation, bearing respectively the serial numbers 384934,
for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks
were allegedly issued in full settlement of the drawer's account evidenced by the promissory
note. These two checks were not delivered to the petitioner-payee or to any of its authorized
representatives. For reasons not shown, these checks came into the possession of
respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's
indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the
Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the
Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung,
President of Plastic Corporation, that the transaction was legal and regular, instructed the
cashier of Producers Bank to accept the checks for deposit and to credit them to the account
of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any or all
of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or
rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative
obligation of the defendant; and (3) an act or omission of the defendant in violation of said
legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have
long recognized the business custom of using printed checks where blanks are provided for
the date of issuance, the name of the payee, the amount payable and the drawer's signature.
All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and
sign it. However, the mere fact that he has done these does not give rise to any liability on his
part, until and unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law,
which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. 3Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another. 4 Without the initial delivery of the instrument from
the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery
must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank
checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner
herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any
right or interest therein and cannot therefore assert any cause of action, founded on said
checks, whether against the drawer Sima Wei or against the Producers Bank or any of the
other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the
promissory note, and the alternative defendants, including Sima Wei, on the two checks. On
appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that
its cause of action was not based on collecting the sum of money evidenced by the
negotiable instruments stated but on quasi-delict a claim for damages on the ground of
fraudulent acts and evident bad faith of the alternative respondents. This was clearly an
attempt by the petitioner Bank to change not only the theory of its case but the basis of his
cause of action. It is well-settled that a party cannot change his theory on appeal, as this
would in effect deprive the other party of his day in court. 5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed
from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by
her. Her allegation that she has paid the balance of her loan with the two checks payable to
petitioner Bank has no merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that there was delivery to
petitioner Bank, the delivery of checks in payment of an obligation does not constitute
payment unless they are cashed or their value is impaired through the fault of the
creditor. 6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on
the promissory note by some other cause, petitioner Bank has a right of action against her for
the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with
them. Since petitioner Bank never received the checks on which it based its action against
said respondents, it never owned them (the checks) nor did it acquire any interest therein.
Thus, anything which the respondents may have done with respect to said checks could not
have prejudiced petitioner Bank. It had no right or interest in the checks which could have
been violated by said respondents. Petitioner Bank has therefore no cause of action against
said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who
would have a cause of action against her co-respondents, if the allegations in the complaint
are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the
applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the
same in view of Our finding that the petitioner Bank did not acquire any right or interest in the
checks due to lack of delivery. It therefore has no cause of action against the respondents, in
the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first
cause of action, the case is REMANDED to the trial court for a trial on the merits, consistent
with this decision, in order to determine whether respondent Sima Wei is liable to the
Development Bank of Rizal for any amount under the promissory note allegedly signed by
her.
SO ORDERED.







G.R. No. L-18657 August 23, 1922
THE GREAT EASTERN LIFE INSURANCE CO., plaintiff-appellant, vs. HONGKONG &
SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-
appellees.
STATEMENT
The plaintiff is an insurance corporation, and the defendants are banking corporations, and
each is duly licensed to do its respective business in the Philippines Islands.
May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking
Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M.
Maasim fraudulently obtained possession of the check, forged Melicor's signature, as an
endorser, and then personally endorsed and presented it to the Philippine National Bank
where the amount of the check was placed to his credit. After having paid the check, and on
the next day, the Philippine national Bank endorsed the check to the Hongkong and
Shanghai Banking Corporation which paid it and charged the amount of the check to the
account of the plaintiff. In the ordinary course of business, the Hongkong Shanghai Banking
Corporation rendered a bank statement to the plaintiff showing that the amount of the check
was charged to its account, and no objection was then made to the statement. About four
months after the check was charged to the account of the plaintiff, it developed that Lazaro
Melicor, to whom the check was made payable, had never received it, and that his signature,
as an endorser, was forged by Maasim, who presented and deposited it to his private
account in the Philippine National Bank. With this knowledge , the plaintiff promptly made a
demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit
for the amount of the forged check, which the bank refused to do, and the plaintiff
commenced this action to recover the P2,000 which was paid on the forged check. On the
petition of the Shanghai Bank, the Philippine National Bank was made defendant. The
Shanghai Bank denies any liability, but prays that, if a judgment should be rendered against
it, in turn, it should have like judgment against the Philippine National Bank which denies all
liability to either party.
Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff
and in favor of the defendants, from which the plaintiff appeals, claiming that the court erred
in dismissing the case, notwithstanding its finding of fact, and in not rendering a judgment in
its favor, as prayed for in its complaint.
JOHNS, J.:
There is no dispute about any of the findings of fact made by the trial court, and the plaintiff
relies upon them for a reversal. Among other things, the trial court says:
Who is responsible for the refund to the drawer of the amount of the check drawn
and payable to order, when its value was collected by a third person by means of
forgery of the signature of the payee? Is it the drawee or the last indorser, who
ignored the forgery at the time of making the payment, or the forger?
To lower court found that Melicor's name was forged to the check. "So that the person to
whose order the check was issued did not receive the money, which was collected by E. M.
Maasim," and then says:
Now then, the National Bank should not be held responsible for the payment of made
to Maasim in good faith of the amount of the check, because the indorsement of
Maasim is unquestionable and his signature perfectly genuine, and the bank was not
obliged to identify the signature of the former indorser. Neither could the Hongkong
and Shanghai Banking Corporation be held responsible in making payment in good
faith to the National Bank, because the latter is a holder in due course of the check in
question. In other words, the two defendant banks can not be held civilly responsible
for the consequences of the falsification or forgery of the signature of Lazaro Melicor,
the National Bank having had no notice of said forgery in making payment to
Maasim, nor the Hongkong bank in making payment to National Bank. Neither bank
incurred in any responsibility arising from that crime, nor was either of the said banks
by subsequent acts, guilty of negligence or fault.
This was fundamental error.
Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words,
the plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It
did not authorize or direct the bank to pay the check to any other person than Melicor, or his
order, and the testimony is undisputed that Melicor never did part with his title or endorse the
check, and never received any of its proceeds. Neither is the plaintiff estopped or bound by
the banks statement, which was made to it by the Shanghai Bank. This is not a case where
the plaintiff's own signature was forged to one of it checks. In such a case, the plaintiff would
have known of the forgery, and it would have been its duty to have promptly notified the bank
of any forged signature, and any failure on its part would have released bank from any
liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the
check, and the legal presumption is that the bank would not honor the check without the
genuine endorsement of Melicor. In other words, when the plaintiff received it banks
statement, it had a right to assume that Melicor had personally endorsed the check, and that,
otherwise, the bank would not have paid it.
Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
That section is square in point.
The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to
anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay
the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid to
Melicor, and he never paid to Melicor, and he never personally endorsed the check, or
authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence,
upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this
action.
It is admitted that the Philippine National Bank cashed the check upon a forged signature,
and placed the money to the credit of Maasim, who was a forger. That the Philippine National
Bank then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid.
The Philippine National Bank had no license or authority to pay the money to Maasim or
anyone else upon a forge signature. It was its legal duty to know that Melicor's endorsment
was genuine before cashing the check. Its remedy is against Maasim to whom it paid the
money.
The judgment of the lower court is reversed, and one will be entered here in favor of the
plaintiff and against the Hongkong and Shanghai Banking Corporation for the P2,000, with
interest thereon from November 8, 1920 at the rate of 6 per cent per annum, and the costs of
this action, and a corresponding judgment will be entered in favor of the Hongkong Shanghai
Banking Corporation against the Philippine National Bank for the same amount, together with
the amount of its costs in this action. So ordered.



















G.R. No. L-43596 October 31, 1936
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF
NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
RECTO, J.:
This case was submitted for decision to the court below on the following stipulation of facts:
1. That plaintiff is a banking corporation organized and existing under and by virtue
of a special act of the Philippine Legislature, with office as principal place of business
at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City
Bank of New York is a foreign banking corporation with a branch office duly
authorized and licensed to carry and engage in banking business in the Philippine
Islands, with branch office and place of business in the National City Bank Bldg., City
of Manila, P. I., and that the defendant Motor Service Company, Inc., is a corporation
organized and existing under and by virtue of the general corporation law of the
Philippine Islands, with office and principal place of business at 408 Rizal Avenue,
City of Manila, P. I., engaged in the purchase and sale of automobile spare parts and
accessories.
2. That on April 7 and 9, 1933, an unknown person or persons negotiated with
defendant Motor Service Company, Inc., the checks marked as Exhibits A and A-1,
respectively, which are made parts of the stipulation, in payment for automobile tires
purchased from said defendant's stores, purporting to have been issued by the
"Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against
the Philippine National Bank and in favor of the International Auto Repair Shop, for
P144.50 and P215.75; and said checks were indorsed by said unknown persons in
the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the
time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan
Transportation Co., Inc., on both checks were genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant
Motor Service Company, Inc, at the National City Bank of New York and the former
was accordingly credited with the amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and
the Philippine National Bank credited the National City Bank of New York for the
amounts thereof, believing at the time that the signatures of the drawer were
genuine, that the payee is an existing entity and the endorsement at the back thereof
regular and genuine.
5. The Philippine National Bank then found out that the purported signatures of J. L.
Klar, as Manager and Treasurer of the Pangasinan Transportation Company, Inc., in
said Exhibits A and A-1 were forged when so informed by the said Company, and it
accordingly demanded from the defendants the reimbursement of the amounts for
which it credited the National City Bank of New York at the clearing house and for
which the latter credited the Motor Service Co., but the defendants refused, and
continue to refuse, to make such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said
check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal
court of Manila and forming part of the record of the present case, are admitted by
the parties as genuine and are made part of this stipulation as well as Exhibit H
hereto attached and made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City
Bank of New York. a decision was thereafter rendered giving plaintiff judgment for the total
amount of P360.25, with interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken by the plaintiff from
the decision of the municipal court of Manila where this case originated, became perfected
because of plaintiff's failure to attach to the record within 15 days from receipt of notice of
said decision, the certificate of appeal bond required by section 76 of the Code of Civil
Procedure. It is not disputed that both the appeal docket fee and the appeal cash bond were
paid and deposited within the prescribed time. The issue is whether the mere failure to file
the official receipt showing that such deposit was made within the said period is a sufficient
ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of
Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no further
consideration. No error was committed in allowing said appeal.
We now pass on to consider and determine the main question presented by this appeal,
namely, whether the appellee has the right to recover from the appellant, under the
circumstances of this case, the value of the checks on which the signatures of the drawer
were forged. The appellant maintains that the question should be answered in the negative
and in support of its contention appellant advanced various reasons presently to be
examined carefully.
I. It is contended, first of all, that the payment of the checks in question made by the drawee
bank constitutes an "acceptance", and, consequently, the case should be governed by the
provisions of section 62 of the Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages
that he will pay it according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
This contention is without merit. A check is a bill of exchange payable on demand and only
the rules governing bills of exchange payable on demand are applicable to it, according to
section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step
unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it
follows that the provisions relative to "acceptance" are without application to checks.
Acceptance implies, in effect, subsequent negotiation of the instrument, which is not true in
case of the payment of a check because from the moment a check is paid it is withdrawn
from circulation. The warranty established by section 62, is in favor of holders of the
instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of
negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can
invoke the warranty provided in section 62 against the drawee. Moreover, according to
section 191, "acceptance" means "an acceptance completed by delivery or notification" and
this concept is entirely incompatible with payment, because when payment is made the
check is retained by the bank, and there is no such thing as delivery or notification to the
party receiving the payment. Checks are not to be accepted, but presented at once for
payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in
the ordinary sense of the term. A check being payable immediately and on demand, the bank
can fulfill its duty to the depositor only by paying the amount demanded. The holder has no
right to demand from the bank anything but payment of the check, and the bank has no right,
as against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not
an instrument which in the ordinary course of business calls for acceptance. The holder can
never claim acceptance as his legal right. He can present for payment, and only for payment.
(1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the presentation of
checks for acceptance, before they are paid, in which case we have a "certification"
equivalent to "acceptance" according to section 187, which provides that "where a check is
certified by the bank on which it is drawn, the certification is equivalent to an acceptance",
and it is then that the warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the order of the drawer, which
must not express that the drawee will perform his promise by any other means than the
payment of money. (Sec. 132.) When the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability thereon (sec. 188), and
then the check operates as an assignment of a part of the funds to the credit of the drawer
with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may
be accepted. The bank may accept if it chooses; and it is frequently induced by convenience,
by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the
obligation. The act by which the bank places itself under obligation to pay to the holder the
sum called for by a check must be the expressed promise or undertaking of the bank
signifying its intent to assume the obligation, or some act from which the law will imperatively
imply such valid promise or undertaking. The most ordinary form which such an act assumes
is the acceptance by the bank of the check, or, as it is perhaps more often called, the
certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself liable in any event to
pay the check upon demand, but this is not an "acceptance" of the check in the true sense of
that term. Although a check does not call for acceptance, and the holder can present it only
for payment, the certification of checks is a means in constant and extensive use in the
business of banking, and its effects and consequences are regulated by the law merchant.
Checks drawn upon banks or bankers, thus marked and certified, enter largely into the
commercial and financial transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of balances from one house
and one bank to another. In the great commercial centers, they make up no inconsiderable
portion of the circulation, and thus perform a useful, valuable, and an almost indispensable
office. The purpose of procuring a check to be certified is to impart strength and credit to the
paper by obtaining an acknowledgment from the certifying bank that the drawer has funds
therein sufficient to cover the check and securing the engagement of the bank that the check
will be paid upon presentation. A certified check has a distinctive character as a species of
commercial paper, and performs important functions in banking and commercial
business. When a check is certified, it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on deposit, payable to the holder on
demand. The check becomes a basis of credit an easy mode of passing money from hand
to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be accepted, though
acceptance is not usual. By the law merchant, the certificate of the bank that a check is good
is equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the
hands of the drawee, that they have been set apart for its satisfaction, and that they shall be
so applied whenever the check is presented for payment. It is an undertaking that the check
is good then, and shall continue good, and this agreement is as binding on the bank as its
notes of circulation, a certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards both parties is to enable
the holder to use it as money. The transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is available also to him for all the
purposes of money. Thus it continues to perform its important functions until in the course of
business it goes back to the bank for redemption, and is extinguished by payment. It cannot
be doubted that the certifying bank intended these consequences, and it is liable accordingly.
To hold otherwise would render these important securities only a snare and a delusion. A
bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-
regulated banks the practice is at once to charge the check to the account of the drawer, to
credit it in a certified check account, and, when the check is paid, to debit that account with
the amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States
Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and evidenced by some
word or mark, usually the words "good", "certified" or "accepted" written upon the check by
the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary,
476.) The bank virtually says, that check is good; we have the money of the drawer here
ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the
money; you may certify the check and retain the money for me until this check is presented.
The law will not permit a check, when due, to be thus presented, and the money to be left
with the bank for the accommodation of the holder without discharging the drawer. The
money being due and the check presented, it is his own fault if the holder declines to receive
the pay, and for his own convenience has the money appropriated to that check subject to its
future presentment at any time within the statute of limitations. (1 Morse on Banks and
Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to support its view is
vitiated by the fact that they take the word "acceptance" in its ordinary meaning and not in the
technical sense in which it is used in the Negotiable Instruments Law. Appellant says that
when payment is made, such payment amounts to an acceptance, because he who pays
accepts. This is true in common parlance but "acceptance" in legal contemplation. The word
"acceptance" has a peculiar meaning in the Negotiable Instruments Law, and, as has been
above stated, in the instant case there was payment but no acceptatance, or what is
equivalent to acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment" neither includes
nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the
court asks, if a mere promise to pay a check is binding on a bank, why should not the
absolute payment of the check have the same effect? In response, it is submitted that the two
things, that is acceptance and payment, are entirely different. If the drawee accepts the
paper after seeing it, and then permits it to go into circulation as genuine, on all the principles
of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who
has taken the paper on the faith of the acceptance, or certification. On the other hand, mere
payment of the paper at the termination of its course does not act as an estoppel. The
attempt to state a general rule covering both acceptance and payment is responsible for a
large part of the conflicting arguments which have been advanced by the courts with respect
to the rule. (Annotation at 12 A. L. R., 1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court
said:
We are of the opinion that "payment is not acceptance". Acceptance, as defined by
section 131, cannot be confounded with payment. . . .
Acceptance, certification, or payment of a check, by the express language of the
statute, discharges the liability only of the persons named in the statute, to wit, the
drawer and all indorsers, and the contract of indorsement by the negotiator if the
check is discharged by acceptance, certification, or payment. But clearly the statute
does not say that the contract of warranty of the negotiator, created by section 65, is
discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on
a forged or unauthorized indorsement of the payee's name, and charging the same to the
drawer's account, do not amount to an acceptance so as to make the bank liable to the
payee, is supported by all of the recent cases in which the question is considered. (Cases
cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is
not an acceptance thereof so as to render the drawee bank liable to the true payee.
(Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69
A. L. R., 1077, [1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the
court said:
The defendant in error contends that the payment of the check shows acceptance by the
bank, urging that there can be no more definite act by the bank upon which a check has been
drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable
Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of
exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be
in writing signed by the drawee. Payment is the final act which extinguishes a bill.
Acceptance is a promise to pay in the future and continues the life of the bill. It was held in
the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check
upon a forged indorsement did not operate as an acceptance in favor of the true owner. The
contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A.,
93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483;
13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in those
states. The opinion of the Supreme Court of the United States seems more logical, and the
provision of the Negotiable Instruments Act now require an acceptance to be in writing.
Under this statute the payment of a check on a forged indorsement, stamping it "paid," and
charging it to the account of the drawer, do not constitute an acceptance of the check or
create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg.
Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas.
1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837;
State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract between drawee and
payee. Drawee's payment of check on unauthorized indorsement does not constitute
"acceptance" of check. (Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check upon a forged or
unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance.
(Dakota Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust
Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the
language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very unauthorized
payments of which they complain. This suggestion does not seem forceful to us. It is
the contention which was made before the Supreme Court of the United States in
First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The
language of the opinion in that case is so apt in the present case that we quote it:
"It is further contended that such an acceptance of a check as creates a privity
between the payee and the bank is established by the payment of the amount of this
check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to the claim against it. The bank
supposed that it had paid the check, but this was an error. The money it paid was
upon a pretended and not a real indorsement of the name of the payee. . . . We
cannot recognize the argument that payment of the amount of the check or sight
draft under such circumstances amounts to an acceptance creating a privity of
contract with the real owner.
"It is difficult to construe a payment as an acceptance under any circumstances. . . .
A banker or individual may be ready to make actual payment of a check or draft
when presented, while unwilling to make a promise to pay at a future time. Many, on
the other hand, are more ready to promise to pay than to meet the promise when
required. The difference between the transactions is essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged indorsement does
not operate as an acceptance of the check so as to authorize an action by the real
owner to recover its amount from the drawee bank. (Michie on Banks and Banking,
vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found
in a footnote to the foregoing citation. (See also, Federal Land Bank vs. Collins, 156
Miss., 893; 127 So., 570; 69 A. L. R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this
question was discussed at considerable length. The court said:
In the light of the first of these statutes, counsel for appellant is forced to stand upon the
narrow ledge that the payment of the check by the two banks will constitute an acceptance.
The drawee bank simply marked it "paid" and did not write anything else except the date. The
bank first paying the check, the Commercial National Bank and Trust Company, simply wrote
its name as indorser and passed the check on to the drawee bank; does this constitute an
acceptance? The precise question has not been presented to this court for decision. Without
reference to authorities in other jurisdictions it would appear that the drawee bank had never
written its name across the paper and therefore, under the strict terms of the statute, could
not be bound as an acceptor; in the second place, it does not appear to us to be illogical and
unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is
equivalent to the same thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel correctly states that the theory
upon which the numerous courts hold that the payment of a check creates privity between
the holder of the check and the drawee bank is tantamount to a pro tanto assignment of that
part of the funds. It is most easily understood how the payment of the check, when not
authorized to be done by the drawee bank, might under such circumstances create liability on
the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn,
380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the
acceptance of a check was necessary in order to give the holder thereof a right of action
thereon against the bank, and further held in a case similar to this, so far as this question is
concerned, that the acceptance of a check so as to give a right of action to the payee is
inferred from the retention of the check by the bank and its subsequent charge of the amount
to the drawer, although it was presented by, and payment made, an unauthorized person.
Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19 L.
ed., 897), wherein the Supreme Court of the United States, not having such a case before it,
threw out the suggestion that, if it was shown that a bank had charged the check on its books
against the drawer and made settlement with the drawee that the holder could recover on
account of money had and received, invoking the rule of justice and fairness, it might be said
there was an implied promise to the holder to pay it on demand. (SeeNational Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then
argued that it would be inequitable and unconscionable for the owner and payee of the check
to be limited to an action against an insolvent drawer and might thereby lose the debt. They
recognized the legal principle that there is no privity between the drawer bank and the holder,
or payee, of the check, and proceeded to hold that no particular kind of writing was
necessary to constitute an acceptance and that it became a question of fact, and the bank
became liable when it stamped it "paid" and charged it to the account of the drawer, and
cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep.,
751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St.,
234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable Instruments Law
by the State of Tennessee. However, in this case Judge Snodgrass points out that
the Millard case, supra, was dicta. The Dodge case, from the Ohio court, held exactly
as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin
Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055),
the court held to the contrary, called attention to the fact that the Dodge case was no
longer the law, and proceeded to announce that, whatever might have been the law
before the passage of the Negotiable Instrument Act in that state, it was no longer
the law; that the rule announced in the Dodge case had been "discarded." The court,
in the latter case, expressed its doubts that the courts of Tennessee and
Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra,
in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the
Supreme Court of the United States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank,
without any knowledge that the indorsement of the payee was unauthorized, paid the
check, and it was contended that by the payment the privity of contract existing
between the drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as creates a privity
between the payee and the bank is established by the payment of the amount of this
check in the manner described. This argument is based upon the erroneous
assumption that the bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of the claim against it. The bank
supposed that it had paid the check; but this was an error. The money it paid was
upon a pretended and not a real indorsement of the name of the payee. The real
indorsement of the payee was as necessary to a valid payment as the real signature
of the drawer; and in law the check remains unpaid. Its pretended payment did not
diminish the funds of the drawer in the bank, or put money in the pocket of the
person entitled to the payment. The state of the account was the same after the
pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount of a check or sight
draft under such circumstances amounts to an acceptance, creating a privity of
contract with the real owner. It is difficult to construe a payment as an acceptance
under any circumstances. The two things are essentially different. One is a promise
to perform an act, the other an actual performance. A banker or an individual may be
ready to make actual payment of a check or draft when presented, while unwilling to
make a promise to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The difference between the
transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the stamping of the check
"paid" and the charging of the amount thereof to the drawer constituted an
acceptance, but we are of opinion that none of these cases cited hold that it is in
compliance with the Negotiable Instruments Act; paying the check and stamping
same is not the equivalent of accepting the check in writing signed by the drawee.
The cases holding that payment as indicated above constituted acceptance were
rendered prior to the adoption of the Negotiable Instruments Act in the particular
state, and these decisions are divided into two classes: the one holding that the
check delivered by the drawer to the holder and presented to the bank or drawee
constitutes an assignment pro tanto; the other holding that the payment of the check
and the charging of same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee bank.
We have already seen that our own court has repudiated the assignment pro
tanto theory, and since the adoption of the Negotiable Instrument Act by this state we
are compelled to say that payment of a check is not equivalent to accepting a check
in writing and signing the name of the acceptor thereon. Payment of the check and
the charging of same to the drawer does not constitute an acceptance. Payment of
the check is the end of the voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea. What we have said
applies to the holder and not to the drawer of the check. On this question we
conclude that the general rule is that an action cannot be maintained by a payee of
the check against the bank on which is draw unless the check has been certified or
accepted by the bank in compliance with the statute, even though at the time the
check is that an action cannot be maintained by a payee of the drawer of the check
out of which the check is legally payable; and that the payment of the check by the
bank on which it is drawn, even though paid on the unauthorized indorsement of the
name of the holder (without notice of the defect by the bank), does not constitute a
certification thereof, neither is it an acceptance thereof; and without acceptance or
certification, as provided by statute, there is no privity of contract between the
drawee bank and the payee, or holder of the check. Neither is there an
assignmentpro tanto of the funds where the check is not drawn on a particular fund,
or does not show on its face that it is an assignment of a particular fund. The above
rule as stated seems to have been the rule in the majority of the states even before
the passage of the uniform Negotiable Instruments Act in the several states.
The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388),
which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme
Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the
following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at
page 396), it was said: "The payment of a bill or check by the drawee amounts to
more than an acceptance. The rule, holding that such a payment has all the efficacy
of an acceptance, is founded upon the principle that the greater includes the less."
We are unable to agree with this statement as there is no similarity between
acceptance and payment; payment discharges the instrument, and no one else is
expected to advance anything on the faith of it; acceptance, contemplates further
circulation, induced by the fact of acceptance. The rule that the acceptor made
certain admissions which will inure to the benefit of subsequent holders, has no
applicability to payment of the instrument where subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's signature and that a
drawee could not recover money paid upon a forgery of the drawer's name, because it was
said, the drawee was negligent not to know the forgery and it must bear the consequence of
its negligence, is fast fading into the misty past, where it belongs. It was founded in
misconception of the fundamental principles of law and common sense. (2 Morse, Banks and
Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under no circumstances
(except, of course, where the purchaser of the bill has participated in the fraud upon the
drawee) would the drawee be allowed to recover bank money paid under a mistake of fact
upon a bill of exchange to which the name of the drawer had been forged. This doctrine has
been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the
most fair, nor best calculated to effectuate justice between the drawee and the drawer. (5
R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the leading case of
Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief
Justice of the Supreme Court of Massachusetts, in the case of Dedham National
Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an
impression of convenience rather than for any more academic reason; or perhaps we may
say that Lord Mansfield took the case out of the doctrine as to payments under a mistake of
fact by the assumption that a holder who simply presents negotiable paper for payment
makes no representation as to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United
States Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333),
that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an
unrestricted indorsement of a draft and presentation to the drawee is a representation that
the signature of the drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank
(15 N. D., 299), it was also held that "the drawee of a forged check who has paid the same
without detecting the forgery, may upon discovery of the forgery, recover the money paid
from the party who received the money, even though the latter was a good faith holder,
provided the latter has not been misled or prejudiced by the drawee's failure to detect the
forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance or payment from
denying genuineness of the drawer's name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has ascertained the bill to be genuine.
But the holder has preceded him in negligence, by himself not ascertaining the true character
of the paper before he received it, or presented it for acceptance or payment. And although,
as a general rule, the drawee is more likely to know the drawer's handwriting than a stranger
is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer
more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the
paper without previously ascertaining its genuineness. And the mistake of the drawee should
always be allowed to be corrected, unless the holder, acting upon faith and confidence
induced by his honoring the draft, would be placed in a worse position by according such
privilege to him. This view has been applied in a well considered case, and is intimidated in
another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge
the acceptor with knowledge of his correspondent's handwriting, "unless some bona
fide holder has purchased the paper on the faith of such an act." Negligence in making
payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see
why any exception should be made to the principle, which would apply as well as to release
an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative rights of a drawee
who, under a mistake of fact, has paid, and a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it is only fair to consider the
question of diligence or negligence of the parties in respect thereto. (Woods and
Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who
pays a forged check, for the genuineness of the drawer's signature, is absolute only in favor
of one who has not, by his own fault or negligence, contributed to the success of the fraud or
to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep.,
349; Woods and Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann.,
310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.],
63.) If it appears that the one to whom payment was made was not an innocent sufferer, but
was guilty of negligence in not doing something, which plain duty demanded, and which, if it
had been done, would have avoided entailing loss on any one, he is not entitled to retain the
moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of
Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First
Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294;
American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188;
B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R.,
986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299;
12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham,
30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged
check to retain the money obtained he must be able to show that the whole responsibility of
determining the validity of the signature was upon the drawee, and that the negligence of
such drawee was not lessened by any failure of any precaution which, from his implied
assertion in presenting the check as a sufficient voucher, the drawee had the right to believe
he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvantvs. Bank,
63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank
of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) The
recovery is permitted in such case, because, although the drawee was constructively
negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the
forgery would in all probability have been detected and the fraud defeated. (First National
Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence
of actual fault on the part of the drawee, his constructive fault in not knowing the signature of
the drawer and detecting the forgery will not preclude his recovery from one who took the
check under circumstances of suspicion without proper precaution, or whose conduct has
been such as to mislead the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud. (National Bank of
America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810;
Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat.
Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties
alike innocent of forgery, can be traced to the neglect or fault of either, it is unreasonable that
it would be borne by him, even if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of
Danvers vs. First National Bank of Salem,supra; B. B. Ford & Co. vs. People's Bank of
Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the
check or draft, or has reason to believe that the instrument is not genuine, but fails to inform
the drawee of his suspicions the indorser according to the reasoning of some courts will be
held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford
& Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia,
93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who
purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by
indorsing it or presenting it for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty, the drawee, who has, without actual
negligence on his part, paid the forged demand, may recover the money paid from such
negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the
drawee must, in order to recover back the holder, show that he himself was free from fault.
(See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has
occurred, the drawee may recover the amount it paid on the forged draft or check. (Security
Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac.,
945.)
But we are aware of no case in which the principle that the drawee is bound to know the
signature of the drawer of a bill or check which he undertakes to pay has been held to be
decisive in favor of a payee of a forged bill or check to which he has himself given credit by
his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of
Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N.
E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197
Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent
disregard of duty has contributed to induce the drawee to commit. . . . The holder must
refund, if by his negligence he has contributed to the consummation of the mistake on the
part of the drawee by misleading him. . . . If the only fault attributable to the drawee is the
constructive fault which the law raises from the bald fact that he has failed to detect the
forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then
he is not precluded from recovery from a holder whose conduct has been such as to mislead
the drawee or induce him to pay the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder
was negligent in not making due inquiry concerning the validity of the check before he took it,
and if the drawee can be said to have been excused from making inquiry before taking the
check because of having had a right to, presume that the holder had made such inquiry."
The rule that one who first negotiates forged paper without taking some precaution to learn
whether or not it is genuine should not be allowed to retain the proceeds of the draft or check
from the drawee, whose sole fault was that he did not discover the forgery before he paid the
draft or check, has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson
Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation
at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a forged check,
purchases it, indorses it, generally, and presents it to the drawee bank, which pays it, the
latter may recover if its only negligence was its mistake in having failed to detect the forgery,
since its mistake, did not mislead the purchaser or bring about a change in position. (Security
Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241
Pac., 945.)
Also, a drawee could recover from another bank the portion of the proceeds of a forged
check cashed by the latter and deposited by the forger in the second bank and never
withdrawn, upon the discovery of the forgery three months later, after the drawee had paid
the check and returned the voucher to the purported drawer, where the purchasing bank was
negligent in taking the check, and was not injured by the drawee's negligence in discovering
and reporting the forgery as to the amount left on deposit, since it was not a purchaser for
value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the amount paid on the
check, after discovery of the forgery, from another bank, which put the check into circulation
by cashing it for the one who had forged the signature of both drawer and payee without
making any inquiry as to who he was although he was a stranger, after which the check
reached, and was paid by, the drawee, after going through the hands of several intermediate
indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following
statement was made:
We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of
the Brule National Bank in putting the check in circulation, was not discharged by payment of
the check by the drawee (First National Bank), nor was the Brule National Bank deceived or
misled to its prejudice by such payment. The Brule National Bank by its indorsement and
delivery warranted its own identification of Kost and the genuineness of his signature. The
indorsement of the check by the Brule National Bank was such as to assign the title to the
check to its assignee, the Whitbeck National Bank, and the amount was credited to the
indorser. The check bore no indication that it was deposited for collection, and was not in any
manner restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit
farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any
other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon
the warrant of genuineness, which implied the full identification of Kost, and his signature by
the defendant bank. This view of the statute is in accord with the decisions of many courts.
(First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First
National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44;
People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S.
W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331),
decided in 1929. We have carefully examined this decision and we do not feel justified in
accepting its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price,
and it predicated on the wrong premise that the payment includes acceptance, and that a
bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning
of section 62 of the Negotiable Instruments Act. Moreover in a more recent decision, that of
Louisa National Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931,
the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to discover it was a
forgery. It was bound to know the signature of its customer, Armstrong, and it was
derelict in failing to give his signature to the check sufficient attention and
examination to enable it to discover instantly the forgery. The appellant, when the
check was presented to it by Banfield, failed to make an inquiry of or about him and
did not cause or have him to be identified. Its act in so paying to him the check is a
degree of negligence on its part equivalent to positive negligence. It indorsed the
check, and, while such indorsement may not be regarded within the meaning of the
Negotiable Instrument Law as amounting to a warranty to appellant of that which it
indorsed, it at least substantially served as a representation to it that it had exercised
ordinary care and had complied with the rules and customs of prudent banking. Its
indorsement was calculated, if it did not in fact do so, to lull the drawee bank into
indifference as to the drawer's signature to it when paying the check and charging it
to its customer's account and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a check both are
without fault, no recovery may be had of the money so paid. (Deposit Bank of
Georgetown vs. Fayette National Bank, supra, and cases cited.) Or the rule may be
more accurately stated that, where the drawee pays the money, he cannot recover it
back from a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a
recovery may be had by the drawee of such holder. The negligence of the Bank of
Louisa in failing to inquire of and about Banfield, and to cause or to have him
identified before it parted with its money on the forged check, may be regarded as
the primary and proximate cause of the loss. Its negligence in this respect reached in
its effect the appellee, and induced incaution on its part. In comparison of the
degrees of the negligence of the two, it is apparent that of the appellant excels in
culpability. Both appellant and appellee inadvertently made a mistake, doubtless due
to a hurry incident to business. The first and most grievous one was made by the
appellant , amounting to its disregard of the duty, it owed itself as well as the duty it
owed to the appellee, and it cannot on account thereof retain as against the appellee
the money which it so received. It cannot shift the loss to the appellee, for such
disregard of its duty inevitably contributed to induce the appellee to omit its duty
critically to examine the signature of Armstrong, even if it did not know it instantly at
the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in purchasing the
checks in question is such as to give the appellee the right to recover upon said checks, and
on the other hand, whether the drawee bank was not itself negligent, except for its
constructive fault in not knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check
Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter
check, which is prior in number to the former check, is however, issued on a later
date. This circumstance must have aroused at least the curiosity of the Motor
Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from unknown persons. And
not only this; check Exhibit A is indorsed by a subagent of the agent of the payee,
International Auto Repair Shop. The Motor Service Co., Inc., made no inquiry
whatsoever as to the extent of the authority of these unknown persons. Our Supreme
Court said once that "any person taking checks made payable to a corporation,
which can act only by agents, does so at his peril, and must abide by the
consequences if the agent who indorses the same is without authority" (Insular Drug
Co. vs. National Bank, 58, Phil., 684).
x x x x x x x x x
Check Exhibit A-1, aside from having been indorsed by a supposed agent of the
international Auto Repair Shop is crossed generally. The existence of two parallel
lines transversally drawn on the face of this check was a warning that the check
could only be collected through a banking institution (Jacobs, Law of Bills of
Exchange, etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and 79).
Yet the Motor Service Co., Inc., accepted the check in payment for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the
Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm and we received
checks from them every month in payment of their account. The two checks in
question seem to be exactly similar to the checks which we received from the
Pangasinan Transportation Co. every month."
If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's
signature in the two checks, may be considered as an omission in good faith
because of the similarity stated in the letter, then the same consideration applies to
the Philippine National Bank, for the drawer is a customer of both the Motor Service
Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one between two equally
innocent persons, the drawee bank and the holder, and that they are governed by the
authorities already cited and also the following:
The point in issue has sometimes been said to be that of negligence. The drawee
who has paid upon the forged signature is held to bear the loss, because he has
been negligent in failing to recognize that the handwriting is not that of his customer.
But it follows obviously that if the payee, holder, or presenter of the forged paper has
himself been in default, if he has himself been guilty of a negligence prior to that of
the banker, or if by any act of his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon the banker. The courts
have shown a steadily increasing disposition to extend the application of this rule
over the new conditions of fact which from time to time arise, until it can now rarely
happen that the holder, payee, or presenter can escape the imputation of having
been in some degree contributory towards the mistake. Without any actual change in
the abstract doctrines of the law, which are clear, just, and simple enough, the
gradual but sure tendency and effect of the decisions have been to put as heavy a
burden of responsibility upon the payee as upon the drawee, contrary to the original
custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85
and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following
statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for money had and
received. If his claim did not rest upon a transaction relating to a negotiable
instrument plaintiff could recover as for money paid under mistake, unless defendant
could show some equitable reason, such as changed condition since, and relying
upon, payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that
this rule giving right to recover money paid under mistake should extend to
negotiable paper, and it rejects in its entirety the theory of estoppel and puts a case
of this kind on exactly the same basis as the ordinary case of payment under
mistake. But the great weight of authority, and that based on the better reasoning,
holds that the exigencies of business demand a different rule in relation to negotiable
paper. What is that rule? Is it an absolute estoppel against the drawee in favor of a
holder, no matter how negligent such holder has been? It surely is not. The correct
rule recognizes the fact that, in case of payment without a prior acceptance or
certification, the holder takes the paper upon the of the prior indorsers and the credit
of the drawer, and not upon the credit of the drawee, in making payment, has a right
to rely upon the assumption that the payee used due diligence, especially where
such payee negotiated the bill or check to a holder, thus representing that it had so
fully satisfied itself as to the identity and signature of the maker that it was willing to
warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.)
Such correct rule denies the drawee the right to recover when the holder was without
fault or when there has been some change of position calling for equitable relief.
When a holder of a bill of exchange uses all due care in the taking of bill or check
and the drawee thereafter pays same, the transaction is absolutely closed modern
business could not be done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by which the great
bulk of business is carried on, checks and drafts, upon the other hand it encourages
and demands prudent business methods upon the part of those receiving such
mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn.,
263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National
Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of
Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66
S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St.
Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla.,
824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' &
Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence is clear. It took
this check from a stranger without other identification than that given by another
stranger; its cashier witnessed the mark of such stranger thus vouching for the
identity and signature of the maker; and it indorsed the check as "Paid," thus further
throwing plaintiff off guard. Defendant could not but have known, when negotiating
such check and putting it into the channel through which it would finally be presented
to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it
to do, would have to rely solely upon the apparent faith and credit that defendant had
placed in the drawer. From the very circumstances of this case plaintiff had to act on
the facts as presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment by plaintiff, that in
"equity and good conscience" plaintiff should not recover it says it did not pay over
any money to the forger until after plaintiff had paid the check. There would be merit
in such contention if defendant had indorsed the check for "collection," thus advising
plaintiff that it was relying on plaintiff and not on the drawer. It stands in court where
it would have been if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:
. . . If the holder has been negligent in paying the forged paper, or has by his
conduct, however innocent, misled or deceived the drawee to his damage, it would
be unjust for him to be allowed to shield himself from the results of his own
carelessness by asserting that the drawee was bound in law to know his drawer's
signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or
made without the authority of the person whose signature it purports to be, is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
It not appearing that the appellee bank did not warrant to the appellant the genuineness of
the checks in question, by its acceptance thereof, nor did it perform any act which would
have induced the appellant to believe in the genuineness of said instruments before appellant
purchased them for value, it can not be said that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to retain the amount of the forged check
paid to it by the appellee.
VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of
the drawer's signature may recover the payment back, unless his mistake has placed an
innocent holder of the paper in a worse position than he would have been in if the discovery
of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable
Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when
a bank has been deceived, it is a harsh rule which compels it to suffer although no one has
suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the appellant's position
would not become worse than if the drawee had refused the payment of these checks upon
their presentation. The appellant has lost nothing by anything which the drawee has done. It
had in its hands some forged worthless papers. It did not purchase or acquire these papers
because of any representation made to it by the drawee. It purchased them from unknown
persons and under suspicious circumstances. It had no valid title to them, because the
persons from whom it received them did not have such title. The appellant could not have
compelled the drawee to pay them, and the drawee could have refused payment had it been
able to detect the forgery. By making a refund, the appellant would only returning what it had
received without any title or right. And when appellant pays back the money it had received it
will be entitled to have restored to it the forged papers it parted with. There is no good reason
why the accidental payment made by the appellant should inure to the benefit of the
appellant. If there were injury to the appellant said injury was caused not by the failure of the
appellee to detect the forgery but by the very negligence of the appellant in purchasing
commercial papers from unknown persons without making inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which it is drawn, the
bank is estopped to deny the genuineness of the drawer's signature and his capacity
to issue the instrument;
2. That if a drawee bank pays a forged check which was previously accepted or
certified by the said bank it cannot recover from a holder who did not participate in
the forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply its acceptance in the sense
that this word is used in section 62 of the Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without former
acceptance, the drawee can not recover from a holder in due course not chargeable
with any act of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the money obtained thereon,
there must be a showing that the duty to ascertain the genuineness of the signature
rested entirely upon the drawee, and that the constructive negligence of such drawee
in failing to detect the forgery was not affected by any disregard of duty on the part of
the holder, or by failure of any precaution which, from his implied assertion in
presenting the check as a sufficient voucher, the drawee had the right to believe he
had taken;
6. That in the absence of actual fault on the part of the drawee, his constructive fault
in not knowing the signature of the drawer and detecting the forgery will nor preclude
his recovery from one who took the check under circumstances of suspicion and
without proper precaution, or whose conduct has been such as to mislead the
drawee or induce him to pay the check without the usual scrutiny or other
precautions against mistake or fraud;
7. That on who purchases a check or draft is bound to satisfy himself that the paper
is genuine, and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions on the issue as
the correct one, will not hinder the circulation of two recognized mediums of
exchange by which the great bulk of business is carried on, namely, drafts and
checks, on the other hand, it will encourage and demand prudent business methods
on the part of those receiving such mediums of exchange;
9. That it being a matter of record in the present case, that the appellee bank in no
more chargeable with the knowledge of the drawer's signature than the appellant is,
as the drawer was as much the customer of the appellant as of the appellee, the
presumption that a drawee bank is bound to know more than any indorser the
signature of its depositor does not hold;
10. That according to the undisputed facts of the case the appellant in purchasing
the papers in question from unknown persons without making any inquiry as to the
identity and authority of the said persons negotiating and indorsing them, acted
negligently and contributed to the appellee's constructive negligence in failing to
detect the forgery;
11. That under the circumstances of the case, if the appellee bank is allowed to
recover, there will be no change of position as to the injury or prejudice of the
appellant.
Wherefore, the assignments of error are overruled, and the judgment appealed from must be,
as it is hereby, affirmed, with costs against the appellant. So ordered.
G.R. No. L-29432, August 06, 1975
JAI-ALAI CORPORATION OF THE PHILIPPINES, PETITIONER, VS. BANK OF THE
PHILIPPINE ISLANDS, RESPONDENT.
D E C I S I O N
CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the
petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June
25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the
respondent).
From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were
deposited by the petitioner in its current account with the respondent bank. The particulars of
these checks are as follows:
1. Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and
payable to the Inter-Island Gas Service, Inc. or order:
Date Check Exhibit
Deposited Number Amount Number
4/2/59 B-352680 P500.00 18
4/20/59 A-156907 372.32 19
4/24/59 A-156924 397.82 20
5/4/59 B-364764 250.00 23
5/6/59 B-364775 250.00 24
2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to
the Inter-Island Gas Service, Inc. or bearer:
4/13/59 B-335063 P2108.70 21
4/27/59 B-335072 2210.94 22
3. Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and
payable to the Inter-Island Gas Service, Inc. or bearer:
5/18/59 VN430188 P940.80 25
4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to
the Inter-Island Gas Service, Inc. or order:
5/14/59 1860160 P500.00 26
5/18/59 1860660 500.00 27
All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez,
a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon
deposit, temporarily credited to the petitioner's account in accordance with the clause printed
on the deposit slips issued by the respondent and which reads:
"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby
received for deposit, is provisional only, until such time as the proceeds thereof, in current
funds or solvent credits, shall have been actually received by the Bank and the latter
reserves to itself the right to charge back the item to the account of itsdepositor, at any time
before that event, regardless of whether or not the item itself can be returned."
About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and
after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered
that all the indorsements made on the checks purportedly by its cashiers,
Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued
payable to the said company) as well as the rubber stamp impression thereon reading "Inter-
Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the
petitioner, the respondent, the drawers and the drawee-banks of the said checks about the
forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of
Manila.[1]
The respondent's cashier, Ramon Sarthou, upon receipt of the letter of Inter-Island Gas
dated August 31, 1959, called up the petitioner's cashier, Manuel Garcia, and advised the
latter that in view of the circumstances he would debit the value of the checks against the
petitioner's account as soon as they were returned by the respectivedrawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded
from the respondent, as collecting bank, the return of the amounts they had paid on account
thereof. When the drawee-banks returned the checks to the respondent, the latter paid their
value which the former in turn paid to the Inter-Island Gas. The respondent, for its part,
debited the petitioner's current account and forwarded to the latter the checks containing the
forgedindorsements, which the petitioner, however, refused to accept.
On October 8, 1959 the petitioner drew against its current account with the respondent a
check for P135,000 payable to the order of the Marino Olondriz y Cia. in payment of certain
shares of stock. The check was, however, dishonored by the respondent as its records
showed that as of October 8, 1959 the current account of the petitioner, after netting out the
value of the checks (P8,030.58) with the forged indorsements, had a balance of only
P128,257.65.
The petitioner then filed a complaint against the respondent with the Court of First Instance of
Manila, which was however dismissed by the trial court after due trial, and as well by the
Court of Appeals, on appeal.
Hence, the present recourse.
The issues posed by the petitioner in the instant petition may be briefly stated as follows:
(a) Whether the respondent had the right to debit the petitioner's current account in the
amount corresponding to the total value of the checks in question after more than three
months had elapsed from the date their value was credited to the petitioner's account;
(b) Whether the respondent is estopped from claiming that the amount of P8,030.58,
representing the total value of the checks with the forged indorsements, had not been
properly credited to the petitioner's account, since the same had already been paid by
the drawee-banks and received in due course by the respondent; and
(c) On the assumption that the respondent had improperly debited the petitioner's current
account, whether the latter is entitled to damages.
These three issues interlock and will be resolved jointly.
In our opinion, the respondent acted within legal bounds when it debited the petitioner's
account. When the petitioner deposited the checks with the respondent, the nature of the
relationship created at that stage was one of agency, that is, the bank was to collect from
the drawees of the checks the corresponding proceeds. It is true that the respondent had
already collected the proceeds of the checks when it debited the petitioner's account, so that
following the rule in Gullas vs. Philippine National Bank[2] it might be argued that the
relationship between the parties had become that of creditor and debtor as to preclude the
respondent from using the petitioner's funds to make payments not authorized by the
latter. It is our view nonetheless that no creditor-debtor relationship was created between the
parties.
Section 23 of the Negotiable Instruments Law (Act 2031) states that[3]
"When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority."
Since under the foregoing provision, a forged signature in a negotiable instrument is wholly
inoperative and no right to discharge it or enforce its payment can be acquired through or
under the forged signature except against a party who cannot invoke the forgery, it stands to
reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the
checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for,
as found by the court a quo and by the appellate court, the indorsements on the checks had
been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the
payments made by thedrawee-banks to the respondent on account of the said checks were
ineffective; and, such being the case, the relationship of creditor and debtor between the
petitioner and the respondent had not been validly effected, the checks not having been
properly and legitimately converted into cash.[4]
In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank,[5] the Court ruled that it is the
obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forgedindorsement of the payee. The reason is that the
bank with which the check was deposited has no right to pay the sum stated therein to the
forger "or anyone else upon a forged signature." "It was its duty to know," said the Court,
"that [the payee's] endorsement was genuine before cashing the check." The petitioner must
in turn shoulder the loss of the amounts which the respondent, as its collecting agent, had to
reimburse to the drawee-banks.
We do not consider material for the purposes of the case at bar that more than three months
had elapsed since the proceeds of the checks in question were collected by the
respondent. The record shows that the respondent had acted promptly after being informed
that the indorsements on the checks were forged. Moreover, having received the checks
merely for collection and deposit, the respondent cannot be expected to know or ascertain
the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed
them to the respondent in accordance with the rules and practices of commercial banks, of
which the Court takes due cognizance, the petitioner is deemed to have given the warranty
prescribed in Section 66 of the Negotiable Instruments Law that every single one of those
checks "is genuine and in all respects what it purports to be."
The petitioner was, moreover, grossly recreant in accepting the checks in question from
Ramirez. It could not have escaped the attention of the petitioner that the payee of all the
checks was a corporation the Inter-Island Gas Service, Inc. Yet, the petitioner cashed
these checks to a mere individual who was admittedly a habitue at its jai-alai games without
making any inquiry as to his authority to exchange checks belonging to the payee-
corporation. In Insular Drug Co. vs. National[6] the Court made the pronouncement that
". . . The right of an agent to indorse commercial paper is a very responsible power and will
not be lightly inferred. A salesman with authority to collect money belonging to his principal
does not have the implied authority to indorse checks received in payment. Any person
taking checks made payable to a corporation, which can act only by agents, does so at his
peril, and must abide by the consequences if the agent who indorses the same is without
authority." (italics supplied)
It must be noted further that three of the checks in question are crossed checks,
namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the
petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs.
21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from
liability with respect to them. The fact that they are bearer checks and at the same time
crossed checks should have aroused the petitioner's suspicion as to the title of Ramirez over
them and his authority to cash them (apparently to purchase jai-alai tickets from the
petitioner), it appearing on their face that a corporate entity the Inter-Island Gas Service,
Inc. was the payee thereof and Ramirez delivered the said checks to the petitioner
ostensibly on the strength of the payee's cashiers' indorsements.
At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places
his indorsement on an instrument negotiable by delivery he incurs all the liability of
an indorser," and under Section 66 of the same statute a general indorser warrants that the
instrument "is genuine and in all respects what it purports to be." Considering that the
petitioner indorsed the said checks when it deposited them with the respondent, the petitioner
as an indorser guaranteed the genuineness of all prior indorsements thereon. The
respondent which relied upon the petitioner's warranty should not be held liable for the
resulting loss. This conclusion applies similarly to exh. 22 which is an uncrossed bearer
instrument, for under Section 65 of the Negotiable Instruments Law, "Every person
negotiating an instrument by deliverywarrants (a) That the instrument is genuine and in all
respects what it purports to be." Under that same section this warranty "extends in favor of no
holder other than the immediate transferee," which, in the case at bar, would be the
respondent.
The provision in the deposit slip issued by the respondent which stipulates that it "reserves to
itself the right to charge back the item to the account of its depositor," at any time before
"current funds or solvent credits shall have been actually received by the Bank," would not
materially affect the conclusion we have reached. That stipulation prescribes that there must
be an actual receipt by the bank of current funds or solvent credits; but as we have earlier
indicated the transfer by the drawee-banks of funds to the respondent on account of the
checks in question was ineffectual because made under the mistaken and valid assumption
that the indorsements of the payee thereon were genuine. Under article 2154 of the New
Civil Code "If something is received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises." There was, therefore, in
contemplation of law, no valid payment of money made by the drawee-banks to the
respondent on account of the questioned checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner's cost.






G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA T. EBRADA, defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch
XXIII in Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check
No. 508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic
Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank
was later advised by the said bureau that the alleged indorsement on the reverse side of the
aforesaid check by the payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly
died as of July 14, 1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to
refund the amount of P1,246.08. 4 To recover what it had refunded to the Bureau of
Treasury, plaintiff Bank made verbal and formal demands upon defendant Ebrada to account
for the sum of P1,246.08, but said defendant refused to do so. So plaintiff Bank sued
defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the
check in question, or at the very least, has acquired her rights from a holder in due course
and therefore entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no
cause of action against her; that it is in estoppel, or so negligent as not to be entitled to
recover anything from her. 5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against
Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint
against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida
Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First
Instance of Manila where the parties submitted a partial stipulation of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check
No. BP-508060, payable to the order of one MARTIN LORENZO, in the sum
of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check
will be marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following
signatures, in this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by
the Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the
purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on
said check on February 27, 1963 when she encashed it with the plaintiff
Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the
cash proceeds of said check in the sum of P1,246.08 from the plaintiff Bank,
she immediately turned over the said amount to the third-party defendant
and fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the
said amount to the fourth-party defendant JUSTINA TINIO on the same date,
as evidenced by the receipt signed by her which will be marked as Exhibit
"1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other
fact not covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence presented, the trial
court rendered a decision, the dispositive portion of which reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant Mauricia
T. Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-
SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the
complaint on June 16, 1966, until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have against
Adelaida Dominguez in connection with this case is hereby reserved. The
right of the estate of Dominguez to file the fourth-party complaint against
Justina Tinio is also reserved.
SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE
VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER
ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DECEASED
FOR 11- YEARS AND THAT THE APPELLANT DID NOT BENEFIT
FROM ENCASHING SAID CHECK.
From the stipulation of facts it is admitted that the check in question was delivered to
defendant-appellant by Adelaida Dominguez for the purpose of encashment and that her
signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is
admitted that defendant-appellant was the last indorser of the said check. As such indorser,
she was supposed to have warranted that she has good title to said check; for under Section
65 of the Negotiable Instruments Law: 6
Every person negotiating an instrument by delivery or by qualified
indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the
next preceding sections;
(b) That the instrument is at the time of his indorsement valid and subsisting.
It turned out, however, that the signature of the original payee of the check, Martin Lorenzo
was a forgery because he was already dead 7 almost 11 years before the check in question
was issued by the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law
(Act 2031):
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instruments, or to give a discharge thereof against any party
thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of
one forged signature therein will render void all the other negotiations of the check with
respect to the other parties whose signature are genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or
unauthorized signature which is inoperative. Applying this principle to the case before Us, it
can be safely concluded that it is only the negotiation predicated on the forged indorsement
that should be declared inoperative. This means that the negotiation of the check in question
from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should
be declared of no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo
to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-
appellant who did not know of the forgery, should be considered valid and enforceable,
barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to the holder
thereof, it was discovered that the signature of the payee was forged? Can the drawee bank
recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee
of a check can recover from the holder the money paid to him on a forged instrument. It is not
supposed to be its duty to ascertain whether the signatures of the payee or indorsers are
genuine or not. This is because the indorser is supposed to warrant to the drawee that the
signatures of the payee and previous indorsers are genuine, warranty not extending only to
holders in due course. One who purchases a check or draft is bound to satisfy himself that
the paper is genuine and that by indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that he has performed his duty and the
drawee who has paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to detect the forgery, yet if the
encasher of the check had performed his duty, the forgery would in all probability, have been
detected and the fraud defeated. The reason for allowing the drawee bank to recover from
the encasher is:
Every one with even the least experience in business knows that no
business man would accept a check in exchange for money or goods unless
he is satisfied that the check is genuine. He accepts it only because he has
proof that it is genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who vouches for it. If he is
deceived he has suffered a loss of his cash or goods through his own
mistake. His own credulity or recklessness, or misplaced confidence was the
sole cause of the loss. Why should he be permitted to shift the loss due to
his own fault in assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to detect the
forgery when the check was presented? 8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in
question from Adelaida Dominguez, was duty-bound to ascertain whether the check in
question was genuine before presenting it to plaintiff Bank for payment. Her failure to do so
makes her liable for the loss and the plaintiff Bank may recover from her the money she
received for the check. As reasoned out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the forgery would have been detected and the
fraud defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance
Company drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation
payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the
check and forged the signature of Melicor, as an indorser, and then personally indorsed and
presented the check to the Philippine National Bank where the amount of the check was
placed to his (Maasin's) credit. On the next day, the Philippine National Bank indorsed the
cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the
amount of the check to the insurance company. The Court held that the Hongkong and
Shanghai Banking Corporation was liable to the insurance company for the amount of the
check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai
Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is presented
to a bank by another and purports upon its face to have been duly indorsed
by the payee of the check, it is the duty of the bank to know that the check
was duly indorsed by the original payee, and where the bank pays the
amount of the check to a third person, who has forged the signature of the
payee, the loss falls upon the bank who cashed the check, and its only
remedy is against the person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss
when it paid the amount of the check in question to defendant-appellant, but it has the
remedy to recover from the latter the amount it paid to her. Although the defendant-appellant
to whom the plaintiff Bank paid the check was not proven to be the author of the supposed
forgery, yet as last indorser of the check, she has warranted that she has good title to
it 10 even if in fact she did not have it because the payee of the check was already dead 11
years before the check was issued. The fact that immediately after receiving title cash
proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to Adelaida Dominguez (Third-
Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina
Tinio on the same date would not exempt her from liability because by doing so, she acted as
an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with
costs against defendant-appellant.
SO ORDERED.






































G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner,
Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right
of the drawer to recover from the drawee bank who pays a check with a forged indorsement
of the payee, debiting the same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against the private
respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of
the money value of eighty-two (82) checks charged against the petitioner's account with the
respondent drawee Bank on the ground that the payees' indorsements were forgeries. The
Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a
decision on November 17, 1987 dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22,
1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's
(petitioner herein) gross negligence in issuing the checks was the proximate cause of the
loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne
by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the
petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as
the alleged errors of the respondent Court: 1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE
NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE
CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT
THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN
CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS
WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located
at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries
are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account
numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws checks against her checking
account with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up as to all
material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than
eight (8) years. After the bookkeeper prepared the checks, the completed checks were
submitted to the petitioner for her signature, together with the corresponding invoice receipts
which indicate the correct obligations due and payable to her suppliers. Petitioner signed
each and every check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and confidence on her
bookkeeper. The issuance and delivery of the checks to the payees named therein were left
to the bookkeeper. Petitioner admitted that she did not make any verification as to whether or
not the checks were delivered to their respective payees. Although the respondent drawee
Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her usual practice stated above, a
total of eighty-two (82) checks in favor of several suppliers. These checks were all presented
by the indorsees as holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's
checking account numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation
to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued
on September 18, 1984 in favor of Senson Enterprises in the amount of
P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation
was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984
in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was
only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9,
1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her
obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated
August 11, 1984 in favor of Grocer's International Food Corp. in the amount
of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-
1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy
Products in the amount of P11,648.00 (Exh. A-78), her obligation was only
P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2
Practically, all the checks issued and honored by the respondent drawee bank were crossed
checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank,
the latter also furnished her with a monthly statement of her transactions, attaching thereto all
the cancelled checks she had issued and which were debited against her current account. It
was only after the lapse of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.
Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without
authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in
the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in
Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's
Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin
branch. The rest of the checks were deposited in Account No. 0443-4, under the name of
Benito Lam at the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the checks testified
that they did not receive nor even see the subject checks and that the indorsements
appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which conducted
periodic inspection of the branches' operations failed to discover, check or stop the
unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a
Branch Manager and no other official of the respondent drawee bank, may accept a second
indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two
(82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the
Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their
respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee Bank to
credit her account with the money value of the eighty-two (82) checks totalling P1,208.606.89
for having been wrongfully charged against her account. Respondent drawee Bank refused
to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn against the
drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose
signature is genuine, who instituted this action to recover from the drawee bank the money
value of eighty-two (82) checks paid out by the drawee bank to holders of those checks
where the indorsements of the payees were forged. How and by whom the forgeries were
committed are not established on the record, but the respective payees admitted that they did
not receive those checks and therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL
provides:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by the party
whose signature is forged. A party whose signature to an instrument was forged was
never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus, if a person's
signature is forged as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's signature as a
drawer of a check is forged, the drawee bank cannot charge the amount thereof
against the drawer's account because he never gave the bank the order to pay. And
said section does not refer only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged indorsement, i.e., the
forged signature of the payee or indorsee of a note or check. Since under said
provision a forged signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an indorsement prevents any
subsequent party from acquiring any right as against any party whose name appears
prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However, the law makes
an exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements of checks
may generally be broken into two types of cases: (1) where forgery was accomplished by a
person not associated with the drawer for example a mail robbery; and (2) where the
indorsement was forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged indorsements. While
there is no duty resting on the depositor to look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by
the depositor's own employees. And if the drawer (depositor) learns that a check drawn by
him has been paid under a forged indorsement, the drawer is under duty promptly to report
such fact to the drawee bank. 5 For his negligence or failure either to discover or to report
promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee
who has debited his account under a forged indorsement. 6 In other words, he is precluded
from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and completed by her
trusted employee, Alicia Galang, and were given to her for her signature. Her signing the
checks made the negotiable instrument complete. Prior to signing the checks, there was no
valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the
payee, there can be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter authorized her
employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees.
Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered
them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures of the payees as first indorsers
were forged. The record fails to show the identity of the party who made the forged
signatures. The checks were then indorsed for the second time with the names of Alfredo Y.
Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The
second indorsements were all genuine signatures of the alleged holders. All the eighty-two
(82) checks bearing the forged indorsements of the payees and the genuine second
indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the
Buendia branch of respondent drawee Bank to the credit of their respective savings accounts
in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been forged
cannot charge the drawer's account for the amount of said check. An exception to this rule is
where the drawer is guilty of such negligence which causes the bank to honor such a check
or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his cancelled check. This
accounts for the rule that although a depositor owes a duty to his drawee bank to examine
his cancelled checks for forgery of his own signature, he has no similar duty as to forged
indorsements. A different situation arises where the indorsement was forged by an employee
or agent of the drawer, or done with the active participation of the latter. Most of the cases
involving forgery by an agent or employee deal with the payee's indorsement. The drawer
and the payee often time shave business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity with the signatures of
the parties. However, sooner or later, some leak will show on the drawer's books. It will then
be just a question of time until the fraud is discovered. This is specially true when the agent
perpetrates a series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized payment is
based on failure of the depositor to act as a prudent businessman would under the
circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty
of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed
against the invoices attached thereto. Furthermore, although she regularly received her bank
statements, she apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent forgeries would not have been
accomplished. It was not until two years after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her
account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's suppliers
complained of non-payment. Assuming that even one single complaint had been made,
petitioner would have been duty-bound, as far as the respondent drawee Bank was
concerned, to make an adequate investigation on the matter. Had this been done, the
discrepancies would have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's honoring of the
subsequent checks with forged indorsements. On the other hand, since the record mentions
nothing about such a complaint, the possibility exists that the checks in question covered
inexistent sales. But even in such a case, considering the length of a period of two (2) years,
it is hard to believe that petitioner did not know or realize that she was paying more than she
should for the supplies she was actually getting. A depositor may not sit idly by, after
knowledge has come to her that her funds seem to be disappearing or that there may be a
leak in her business, and refrain from taking the steps that a careful and prudent
businessman would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine her records with
reasonable diligence whether before she signed the checks or after receiving her bank
statements. Had the petitioner examined her records more carefully, particularly the invoice
receipts, cancelled checks, check book stubs, and had she compared the sums written as
amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would
have easily discovered that in some checks, the amounts did not tally with those appearing in
the sales invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular entries.
Likewise had petitioner been more vigilant in going over her current account by taking careful
note of the daily reports made by respondent drawee Bank in her issued checks, or at least
made random scrutiny of cancelled checks returned by respondent drawee Bank at the close
of each month, she could have easily discovered the fraud being perpetrated by Alicia
Galang, and could have reported the matter to the respondent drawee Bank. The respondent
drawee Bank then could have taken immediate steps to prevent further commission of such
fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her
negligence which caused the respondent drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, petitioner cannot
now complain should the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to
prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai
Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently
taken and the signature of the payee was forged not by an agent or employee of the drawer.
The drawer was not found to be negligent in the handling of its business affairs and the theft
of the check by a total stranger was not attributable to negligence of the drawer; neither was
the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was
not negligent, the drawee was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement because the drawee did
not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the checks because
they were crossed checks. Issuing a crossed check imposes no legal obligation on the
drawee not to honor such a check. It is more of a warning to the holder that the check cannot
be presented to the drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for payment against the drawee
bank in the course of normal banking transactions between banks. The crossed check cannot
be presented for payment but it can only be deposited and the drawee bank may only pay to
another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from having checks
with more than one indorsement. The banking rule banning acceptance of checks for deposit
or cash payment with more than one indorsement unless cleared by some bank officials does
not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said
check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation
by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops
the further negotiation of an instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement is restrictive
which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written
in express words at the back of the instrument, so that any subsequent party may be
forewarned that ceases to be negotiable. However, the restrictive indorsee acquires the right
to receive payment and bring any action thereon as any indorser, but he can no longer
transfer his rights as such indorsee where the form of the indorsement does not authorize
him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because there is no
privity between them, as far as the drawer-depositor is concerned, such bank may not legally
refuse to honor a negotiable bill of exchange or a check drawn against it with more than one
indorsement if there is nothing irregular with the bill or check and the drawer has sufficient
funds. The drawee cannot be compelled to accept or pay the check by the drawer or any
holder because as a drawee, he incurs no liability on the check unless he accepts it. But the
drawee will make itself liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery
by reason of her gross negligence. But under Section 196 of the NIL, any case not provided
for in the Act shall be governed by the provisions of existing legislation. Under the laws
of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the cause of the loss because
negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may
not be awarded damages. However, under Article 1170 of the same Code the respondent
drawee Bank may be held liable for damages. The article provides
Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as depositor
(obligee) and the respondent drawee bank as the obligor. In the performance of its obligation,
the drawee bank is bound by its internal banking rules and regulations which form part of any
contract it enters into with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch managers and it did
accept the same upon the mere approval of Boon, a chief accountant, it contravened the
tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with
respect to the acceptance of checks with second indorsement for deposit even without the
approval of the branch manager despite periodic inspection conducted by a team of auditors
from the main office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds
with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the appropriate
standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely,
respondent drawee Bank cannot claim it exercised such a degree of diligence that is required
of it. There is no way We can allow it now to escape liability for such negligence. Its liability
as obligor is not merely vicarious but primary wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss with the
petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:
Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the
courts according to the circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being made clear that
the decision to hold the drawee bank liable is based on law and substantial justice and not on
mere equity. And although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying to the circumstances of
the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to
be the proximate cause of her loss does not preclude her from recovering damages. The
reason why the decision dealt on a discussion on proximate cause is due to the error pointed
out by petitioner as allegedly committed by the respondent court. And in breaches of contract
under Article 1173, due diligence on the part of the defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the
reception of evidence to determine the exact amount of loss suffered by the petitioner,
considering that she partly benefited from the issuance of the questioned checks since the
obligation for which she issued them were apparently extinguished, such that only the excess
amount over and above the total of these actual obligations must be considered as loss of
which one half must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.












































G.R. No. L-8844 December 16, 1914
FERNANDO MAULINI, ET AL., plaintiffs-appellees, vs. ANTONIO G.
SERRANO, defendant-appellant.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the city of Manila in favor
of the plaintiff for the sum of P3,000, with interest thereon at the rate of 1 per cent month
from September 5, 1912, together with the costs.
The action was brought by the plaintiff upon the contract of indorsement alleged to have been
made in his favor by the defendant upon the following promissory note:
3,000. Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or
before the 5th day of September, 1912, the sum of three thousand pesos (P3,000)
for value received for commercial operations. Notice and protest renounced. If the
sum herein mentioned is not completely paid on the 5th day of September, 1912, this
instrument will draw interest at the rate of 1 per cent per month from the date when
due until the date of its complete payment. The makers hereof agree to pay the
additional sum of P500 as attorney's fees in case of failure to pay the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose
Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila, June 5,
1912. (Sgd.) A.G. Serrano.
The first question for resolution on this appeal is whether or not, under the Negotiable
Instruments Law, an indorser of a negotiable promissory note may, in an action brought by
his indorsee, show, by parol evidence, that the indorsement was wholly without consideration
and that, in making it, the indorser acted as agent for the indorsee, as a mere vehicle of
transfer of the naked title from the maker to the indorsee, for which he received no
consideration whatever.
The learned trial court, although it received parol evidence on the subject provisionally, held,
on the final decision of the case, that such evidence was not admissible to alter, very, modify
or contradict the terms of the contract of indorsement, and, therefore, refused to consider the
evidence thus provisionally received, which tended to show that, by verbal agreement
between the indorser and the indorsee, the indorser, in making the indorsement, was acting
as agent for the indorsee, as a mere vehicle for the transference of naked title, and that his
indorsement was wholly without consideration. The court also held that it was immaterial
whether there was a consideration for the transfer or not, as the indorser, under the evidence
offered, was an accommodation indorser.
We are of the opinion that the trial court erred in both findings.1awphil.net
In the first place, the consideration of a negotiable promissory note, or of any of the contracts
connected therewith, like that of any other written instrument, is, between the immediate
parties to the contract, open to attack, under proper circumstances, for the purpose of
showing an absolute lack or failure of consideration.
It seems, according to the parol evidence provisionally admitted on the trial, that the
defendant was a broker doing business in the city of Manila and that part of his business
consisted in looking up and ascertaining persons who had money to loan as well as those
who desired to borrow money and, acting as a mediary, negotiate a loan between the two.
He had done much business with the plaintiff and the borrower, as well as with many other
people in the city of Manila, prior to the matter which is the basis of this action, and was well
known to the parties interested. According to his custom in transactions of this kind, and the
arrangement made in this particular case, the broker obtained compensation for his services
of the borrower, the lender paying nothing therefor. Sometimes this was a certain per cent of
the sum loaned; at other times it was a part of the interest which the borrower was to pay, the
latter paying 1 per cent and the broker per cent. According to the method usually
followed in these transactions, and the procedure in this particular case, the broker delivered
the money personally to the borrower, took note in his own name and immediately
transferred it by indorsement to the lender. In the case at bar this was done at the special
request of the indorsee and simply as a favor to him, the latter stating to the broker that he
did not wish his name to appear on the books of the borrowing company as a lender of
money and that he desired that the broker take the note in his own name, immediately
transferring to him title thereto by indorsement. This was done, the note being at
once transferred to the lender.
According to the evidence referred to, there never was a moment when Serrano was the real
owner of the note. It was always the note of the indorsee, Maulini, he having furnished the
money which was the consideration for the note directly to the maker and being the only
person who had the slightest interest therein, Serrano, the broker, acting solely as an agent,
a vehicle by which the naked title to the note passed fro the borrower to the lender. The only
payment that the broker received was for his services in negotiating the loan. He was paid
absolutely nothing for becoming responsible as an indorser on the paper, nor did the
indorsee lose, pay or forego anything, or alter his position thereby.
Nor was the defendant an accommodation indorser. The learned trial court quoted that
provision of the Negotiable Instruments Law which defines an accommodation party as "one
who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew the same to be only an accommodation party." (Act No. 2031,
sec. 29.)
We are of the opinion that the trial court misunderstood this definition. The accommodation to
which reference is made in the section quoted is not one to the person who takes the note
that is, the payee or indorsee, but one to the maker or indorser of the note. It is true that in
the case at bar it was an accommodation to the plaintiff, in a popular sense, to have the
defendant indorse the note; but it was not the accommodation described in the law, but,
rather, a mere favor to him and one which in no way bound Serrano. In cases of
accommodation indorsement the indorser makes the indorsement for the accommodation of
the maker. Such an indorsement is generally for the purpose of better securing the payment
of the note that is, he lend his name to the maker, not to the holder. Putting it in another
way: An accommodation note is one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some other party who is to use it
and is expected to pay it. The credit given to the accommodation part is sufficient
consideration to bind the accommodation maker. Where, however, an indorsement is made
as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve
himself from a distasteful situation, and where the only consideration for such indorsement
passes from the indorser to the indorsee, the situation does not present one creating an
accommodation indorsement, nor one where there is a consideration sufficient to sustain an
action on the indorsement.
The prohibition in section 285 of the Code of Civil Procedure does not apply to a case like the
one before us. The purpose of that prohibition is to prevent alternation, change, modification
or contradiction of the terms of a written instrument, admittedly existing, by the use of parol
evidence, except in the cases specifically named in the section. The case at bar is not one
where the evidence offered varies, alters, modifies or contradicts the terms of the contract of
indorsement admittedly existing. The evidence was not offered for that purpose. The purpose
was to show that no contract of indorsement ever existed; that the minds of the parties never
met on the terms of such contract; that they never mutually agreed to enter into such a
contract; and that there never existed a consideration upon which such an agreement could
be founded. The evidence was not offered to vary, alter, modify, or contradict the terms of an
agreement which it is admitted existed between the parties, but to deny that there ever
existed any agreement whatever; to wipe out all apparent relations between the parties, and
not to vary, alter or contradict the terms of a relation admittedly existing; in other words, the
purpose of the parol evidence was to demonstrate, not that the indorser did not intend to
make the particular indorsement which he did make; not that he did not intend to make the
indorsement in the terms made; but, rather, to deny the reality of any indorsement; that a
relation of any kind whatever was created or existed between him and the indorsee by
reason of the writing on the back of the instrument; that no consideration ever passed to
sustain an indorsement of any kind whatsoever.
The contention has some of the appearances of a case in which an indorser seeks prove
forgery. Where an indorser claims that his name was forged, it is clear that parol evidence is
admissible to prove that fact, and, if he proves it, it is a complete defense, the fact being that
the indorser never made any such contract, that no such relation ever existed between him
and the indorsee, and that there was no consideration whatever to sustain such a contract. In
the case before us we have a condition somewhat similar. While the indorser does not claim
that his name was forged, he does claim that it was obtained from him in a manner which,
between the parties themselves, renders, the contract as completely inoperative as if it had
been forged.
Parol evidence was admissible for the purpose named.1awphil.net
There is no contradiction of the evidence offered by the defense and received provisionally
by the court. Accepting it as true the judgment must be reversed.
The judgment appealed from is reversed and the complaint dismissed on the merits; no
special finding as to costs.

G.R. No. L-17845 April 27, 1967
INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner, vs.
FRANCISCO SEVILLA, respondent.
SANCHEZ, J.:
On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and
severally, in favor of the Bank of the Philippine Islands, or its order, a promissory note for
P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of
P15,000.00, proceeds of the promissory note, was received from the bank by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a
favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the
outstanding balance stood P4,850.00. No payment thereafter made.
On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together
with interest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated
demands.
Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of
Rizal, Special Proceeding No. 1518. Francisco Sevilla was named administrator.
In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of
P5,746.12, plus attorneys fees in the sum of P1,500.00. The administrator resisted the claim
upon the averment that the deceased Victor Sevilla "did not receive any amount as
consideration for the promissory note," but signed it only "as surety for Oscar Varona".
On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the
amount of P5,746.12, and directing the administrator to pay the same from any available
funds belonging to the estate of the deceased Victor Sevilla.
The motion to reconsider having been overruled, the administrator appealed.1 The Court of
Appeals, in a decision promulgated on July, 15, 1960, voted to set aside the order appealed
from and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate
estate."
The case is now before this Court on certiorari to review the judgment of the Court of
Appeals.
Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim
"in the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the
deceased Victor Sevilla," be approved.
1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of
the 15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not
be essayed. As such accommodation the makers, the individual obligation of each of them to
the bank is no different from, and no greater and no less than, that contract by Oscar Varona.
For, while these two did not receive value on the promissory note, they executed the same
with, and for the purpose of lending their names to, Oscar Varona. Their liability to the bank
upon the explicit terms of the promissory note is joint and several.2 Better yet, the bank could
have pursued its right to collect the unpaid balance against either Sevilla or Sadaya. And the
fact is that one of the last two, Simeon Sadaya, paid that balance.
2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total
amount paid from Oscar Varona. This is but right and just. Varona received full value of the
promissory note.3 Sadaya received nothing therefrom. He paid the bank because he was a
joint and several obligor. The least that can be said is that, as between Varona and Sadaya,
there is an implied contract of indemnity. And Varona is bound by the obligation to reimburse
Sadaya.4
3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look
into the relations inter se amongst the three consigners of the promissory note. Their
relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same
thing be said about the relations of the three consigners, in respect to each other?
Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who
paid can not be joint and several. For, indeed, had payment been made by Oscar Varona,
instead of Simeon Sadaya, Varona could not have had reason to seek reimbursement from
either Sevilla or Sadaya, or both. After all, the proceeds of the loan went to Varona and the
other two received nothing therefrom.
4. On principle, a solidary accommodation maker who made payment has the right to
contribution, from his co-accommodation maker, in the absence of agreement to the contrary
between them, and subject to conditions imposed by law. This right springs from an implied
promise between the accommodation makers to share equallythe burdens that may ensue
from their having consented to stamp their signatures on the promissory note.5 For having
lent their signatures to the principal debtor, they clearly placed themselves in so far as
payment made by one may create liability on the other in the category of mere joint
grantors of the former.6 This is as it should be. Not one of them benefited by the promissory
note. They stand on the same footing. In misfortune, their burdens should be equally spread.
Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is substantially
reproduced in Article 20738 of our Civil Code, on this point stated:
Otros, como Pothier, entienden que, si bien el principio es evidente enestricto
concepto juridico, se han extremado sus consecuencias hasta el punto de que estas
son contrarias, no solo a la logica, sino tambien a la equidad, que debe ser el alma
del Derecho, como ha dicho Laurent.
Esa accion sostienen no nace de la fianza, pues, en efecto, el hecho de
afianzar una misma deuda no crea ningun vinculo juridico, ni ninguna razon de
obligar entre los fiadores, sino que trae, por el contrario, su origen de una acto
posterior, cual es el pago de toda la deuda realizado por uno de ellos, y la equdad,
no permite que los denias fiadores, que igualmente estaban estaban obligos a dicho
pago, se aprovenchen de ese acto en perjuico del que lo realozo.
Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es
consecuencia del beneficio o del derecho de division, como tenemos ya dicho. En
efecto, por virtud de esta todos los cofiadores vienen obligados a contribuir al pago
de parte que a cada uno corresponde. De ese obligacion, contraida por todos ellos,
se libran los que no han pagado por consecuencia del acto realizado por el que
pago, y si bien este no hizo mas que cumplir el deber que el contracto de fianza le
imponia de responder de todo el debito cuando no limito su obligacion a parte
alguna del mismo, dicho acto redunda en beneficio de los otros cofiadores los cuales
se aprovechan de el para quedar desligados de todo compromiso con el acreedor.9
5. And now, to the requisites before one accommodation maker can seek reimbursement
from a co-accommodation maker.
By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency
shall be supplied by the provisions of this Code". Nothing extant in the Negotiable
Instruments Law would define the right of one accommodation maker to seek reimbursement
from another. Perforce, we must go to the Civil Code.1wph1.t
Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case
comes within the ambit of Article 2073 of the Civil Code which reads:
ART. 2073. When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the others
the share which is proportionally owing from him.
If any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the payment has been
made in virtue of a judicial demand or unless the principal debtor is insolvent.10
As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one
surety has paid the debt to the creditor and is seeking contribution from his cosureties."11
Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent
reason. Says Manresa:12
c) Requisitos para el ejercicio del derecho de reintegro o de reembolso derivado de
la corresponsabilidad de los cofiadores.
La tercera de las prescripciones que comprende el articulo se refiere a los
requisitos que deben concurrir para que pueda tener lugar lo dispuesto en el mismo.
Ese derecho que concede al fiador para reintegrarse directamente de los fiadores de
lo que pago por ellos en vez de dirigir su reclamacion contra el deudor, es un
beneficio otorgado por la ley solo ell dos casos determinados, cuya justificacion
resulta evidenciada desde luego; y esa limitacion este debidamente aconsejada por
una razon de prudencia que no puede desconocerse, cual es la de evitar que por la
mera voluntad de uno de los cofiadores pueda hacerse surgir la accion de reintegro
contra los demas en prejuicio de los mismos.
El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues
teniendo en primer termino el fiador que paga por el deudor el derecho de
indemnizacion contra este, sancionado por el art. 1,838, es de todo punto indudable
que ejercitando esta accion pueden quedar libres de toda responsabilidad los demas
cofiadores si, a consecuencia de ella, indemniza el fiado a aquel en los terminos
establecidos en el expresado articulo. Por el contrario de prescindir de dicho
derecho el fiador, reclamando de los confiadores en primer lugar el oportuno
reintegro, estos en tendrian mas remedio que satisfacer sus ductares respectivas,
repitiendo despues por ellas contra el deudor con la imposicion de las molestias y
gastos consiguientes.
No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno
u otro de dichos derechos, el de indemnizacion por el deudor y el del reintegro por
los cofiadores, indudablemente optaria siempre y en todo caso por el segundo,
puesto que mucha mas garantias de solvencia y mucha mas seguridad del cobro ha
de encontrar en los fiadores que en el deudor; y en la practica quedaria reducido el
primero a la indemnizacion por el deudor a los confiadores que hubieran hecho el
reintegro, obligando a estos, sin excepcion alguna, a soportar siempre los gastos y
las molestias que anteriormente homos indicado. Y para evitar estos perjuicios, la
ley no ha podido menos de reducir el ejercicio de ese derecho a los casos en que
absolutamente sea indispensable.13
6. All of the foregoing postulate the following rules: (1) A joint and several accommodation
maker of a negotiable promissory note may demand from the principal debtor reimbursement
for the amount that he paid to the payee; and (2) a joint and several accommodation maker
who pays on the said promissory note may directly demand reimbursement from his co-
accommodation maker without first directing his action against the principal debtor provided
that (a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is
insolvent.
The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and
without any judicial demand," and that "there is an absolute absence of evidence showing
that Varona is insolvent". This combination of fact and lack of fact epitomizes the fatal
distance between payment by Sadaya and Sadaya's right to demand of Sevilla "the share
which is proportionately owing from him."
For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed.
No costs. So ordered.

































G.R. No. 80599 September 15, 1989
ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and RICARDO S.
SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises,
Inc., respondents.
REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals,
promulgated on September 8, 1987, which reversed the decision of the trial
Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos,
Jr.
The parties are substantially agreed on the following facts as found by both lower courts:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover
Enterprises, Inc. in-charge of marketing and sales; and the president of the
said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant
Ernestina Crisologo-Jose. Since the check was under the account of Mover
Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z.
Benares, and the treasurer of the said corporation. However, since at that
time, the treasurer of Mover Enterprises was not available, Atty. Benares
prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid
chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the
check.
It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said defendant
over a certain property which the Government Service Insurance System
(GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses
Jaime and Clarita Ong, with the understanding that upon approval by the
GSIS of the compromise agreement with the spouses Ong, the check will be
encashed accordingly. However, since the compromise agreement was not
approved within the expected period of time, the aforesaid check for
P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders
Royal Bank cheek bearing No. 379299 dated August 10, 1980, in the same
amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant
Jose. This replacement check was also signed by Atty. Oscar Z. Benares
and by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this
replacement check (Exhs. 'A' and '2') with her account at Family Savings
Bank, Mayon Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise dishonored by the
bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa Blg.
22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and
plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal,
Alfonso Llamas, accordingly filed an amended information with the court
charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of
Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then
Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge
against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso
T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC
160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina
Crisologo-Jose, the complainant in that criminal case. The defendant refused
to receive the cashier's check in payment of the dishonored check in the
amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's
check and subsequently deposited said amount of P45,000.00 with the Clerk
of Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's
check adverted to above was purchased by Atty. Oscar Z. Benares and
given to the plaintiff herein to be applied in payment of the dishonored
check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation
referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal and
revived the complaint for consignation, directing the trial court to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that
private respondent, one of the signatories of the check issued under the
account of Mover Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the extent of the
amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not
private respondent who merely signed the check in question in a representative capacity, that
is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable
Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the instrument,
knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party to the
instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor,
and (3) sign for the purpose of lending his name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party did
not receive any valuable consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary concept of a debtor therein in the
sense that he has not received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation 5in whatever capacity such accommodation party signed the instrument,
whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as
petitioner suggests, the inevitable question is whether or not it may be held liable on the
accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an accommodation
party liable on the instrument to a holder for value, although such holder at the time of taking
the instrument knew him to be only an accommodation party, does not include nor apply to
corporations which are accommodation parties. 7 This is because the issue or indorsement
of negotiable paper by a corporation without consideration and for the accommodation of
another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation where it is only an
accommodation party. If the form of the instrument, or the nature of the transaction, is such
as to charge the indorsee with knowledge that the issue or indorsement of the instrument by
the corporation is for the accommodation of another, he cannot recover against the
corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute or
indorse a negotiable paper in the name of the corporation for the accommodation of a third
person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the
president and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or transactions arising from
or in relation to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation, especially since it is
not involved in any aspect of the corporate business or operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be personally liable therefor,
as well as the consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we
indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering
from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not
without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation paper
does not thereby absolve, but should render personally liable, the signatories of said
instrument where the facts show that the accommodation involved was for their personal
account, undertaking or purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the
cheek was issued at the instance and for the personal account of Atty. Benares who merely
prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement
of the corporation with its depository bank. That it was a personal undertaking of said
corporate officers was apparent to petitioner by reason of her personal involvement in the
financial arrangement and the fact that, while it was the corporation's check which was issued
to her for the amount involved, she actually had no transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed personally
against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-
president, respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of
Appeals erred in holding that the consignation of the sum of P45,000.00,
made by private respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties,
hence consignation is not proper. Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is,
therefore, liable for the value of the check. The fact that he was only a co-signatory does not
detract from his personal liability. A co-maker or co-drawer under the circumstances in this
case is as much an accommodation party as the other co-signatory or, for that matter, as a
lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of
Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with
whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the
debt involved. With the dishonor of the check, there was created a debtor-creditor
relationship, as between Atty. Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables respondent Santos to resort to an action
of consignation where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is proper
under the given circumstances, we do not thereby rule that all the operative facts for
consignation which would produce the effect of payment are present in this case. Those are
factual issues that are not clear in the records before us and which are for the Regional Trial
Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has
advisedly been directed by respondent court to give due course to the complaint for
consignation, and which would be subject to such issues or claims as may be raised by
defendant and the counterclaim filed therein which is hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of
the Regional Trial Court of Quezon City filed against private respondent for
violation of Batas Pambansa Blg. 22, by holding that no criminal liability had
yet attached to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-
G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the
question of whether an accommodation party can validly consign the amount of the debt due
with the court after his tender of payment was refused by the creditor." Yet, from the
commercial and civil law aspects determinative of said issue, it digressed into the merits of
the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of
such insufficiency of funds or credit. Thus, the making, drawing and issuance
of a check, payment of which is refused by the drawee because of
insufficient funds in or credit with such bank is prima facie evidence of
knowledge of insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the
element of knowledge of insufficiency of funds or credit is not present and,
therefore, the crime does not exist, when the drawer pays the holder the
amount due or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the plaintiff-
appellant acted within Ms legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date when
plaintiff-appellant receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the Clerk of Court (a
Saturday and a Sunday which are not banking days) intervened. The fifth
banking day fell on August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount of P45,000.00
with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of the
criminal case pending in another court are improper do not have to be belabored. In the latter
case, the criminal trial court has to grapple with such factual issues as, for instance, whether
or not the period of five banking days had expired, in the process determining whether notice
of dishonor should be reckoned from any prior notice if any has been given or from receipt by
private respondents of the subpoena therein with supporting affidavits, if any, or from the first
day of actual preliminary investigation; and whether there was a justification for not making
the requisite arrangements for payment in full of such check by the drawee bank within the
said period. These are matters alien to the present controversy on tender and consignation of
payment, where no such period and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether or not there was
knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil
liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of
evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case
No. Q-14867, the resolution of which should not be interfered with by respondent Court of
Appeals at the present posture of said case, much less preempted by the inappropriate and
unnecessary holdings in the aforequoted portion of the decision of said respondent court.
Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by
setting aside and declaring without force and effect its pronouncements and findings insofar
as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are
concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of
Appeals is AFFIRMED.
SO ORDERED.























G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs. ANITA GATCHALIAN, ET
AL., defendants-appellants.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest
from September 10, 1953 until paid, and to pay the costs.
The action is for the recovery of the value of a check for P600 payable to the plaintiff and
drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that
plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt
of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value
of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the
check but they allege in their answer, as affirmative defense, that it was issued subject to a
condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking
steps to protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
Plaintiff and defendants through their respective undersigned attorney's respectfully
submit the following Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening, defendant Anita C.
Gatchalian who was then interested in looking for a car for the use of her husband
and the family, was shown and offered a car by Manuel Gonzales who was
accompanied by Emil Fajardo, the latter being personally known to defendant Anita
C. Gatchalian;
Second. That Manuel Gonzales represented to defend Anita C. Gatchalian that he
was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of
said car and to negotiate for and accomplish said sale, but which facts were not
known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the price of the car quoted by
Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the
day following together with the certificate of registration of the car, so that her
husband would be able to see same; that on this request of defendant Anita C.
Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing
to give the certificate of registration unless there is a showing that the party
interested in the purchase of said car is ready and willing to make such purchase
and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian
to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said
check to be for safekeeping only of Manuel Gonzales and to be returned to
defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the
car and the certificate of registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel Gonzales and with his
assurance that said check will be only for safekeeping and which will be returned to
said defendant the following day when the car and its certificate of registration will be
brought by Manuel Gonzales to defendants, but which facts were not known to
plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that
Manuel Gonzales executed and issued a receipt for said check, Exh. "1";
Fifth. That on the failure of Manuel Gonzales to appear the day following and on
his failure to bring the car and its certificate of registration and to return the check,
Exh. "B", on the following day as previously agreed upon, defendant Anita C.
Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee
bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who furthermore had no reason to
know check was given to plaintiff;
Sixth. That defendants, both or either of them, did not know personally Manuel
Gonzales or any member of his family at any time prior to September 1953, but that
defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no arrangements or
agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953
for the hospitalization of the wife of Manuel Gonzales and neither or both of said
defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no obligation or liability,
directly or indirectly with the Ocampo Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check Exh. "B" from defendant
Anita C. Gatchalian under the representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the fees and expenses
arising from the hospitalization of his wife;
Tenth. That plaintiff for and in consideration of fees and expenses of
hospitalization and the release of the wife of Manuel Gonzales from its hospital,
accepted said check, applying P441.75 (Exhibit "A") thereof to payment of said fees
and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per
receipt, Exhibit "D") representing the balance on the amount of the said check, Exh.
"B";
Eleventh. That the acts of acceptance of the check and application of its proceeds
in the manner specified above were made without previous inquiry by plaintiff from
defendants:
Twelfth. That plaintiff filed or caused to be filed with the Office of the City Fiscal of
Manila, a complaint for estafa against Manuel Gonzales based on and arising from
the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving
the cash balance of the check, Exh. "B" and that said complaint was subsequently
dropped;
Thirteenth. That the exhibits mentioned in this stipulation and the other exhibits
submitted previously, be considered as parts of this stipulation, without necessity of
formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be
admitted and that the parties hereto be given fifteen days from today within which to
submit simultaneously their memorandum to discuss the issues of law arising from
the facts, reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda. (pp. 21-25,
Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the judgment
already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable instrument,
under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a
holder in due course. In support of the first contention, it is argued that defendant Gatchalian
had no intention to transfer her property in the instrument as it was for safekeeping merely
and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments
Law); that assuming for the sake of argument that delivery was not for safekeeping merely,
delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the appellant
argues that plaintiff-appellee cannot be a holder in due course because there was no
negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in
due course presupposes a prior party from whose hands negotiation proceeded, and in the
case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It
is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the
check with notice of defect in the title of the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there were circumstances that brought
suspicion about Gonzales' possession and negotiation, which circumstances should have
placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth,
Stipulation of Facts). Plaintiff could have inquired why a person would use the check
of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge"
inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr.
V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales.
(Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted
only to P441.75. The check is in the amount of P600.00, which is in excess of the
amount due plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25
(Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay,
plaintiff should have been more cautious and wary in accepting a piece of paper and
disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should have been made by
plaintiff. (Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in
accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may
be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th
edition, page 252. On this issue Brannan holds that a payee may be a holder in due course
and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at
common law, is a question upon which the courts are in serious conflict. There can
be no doubt that a proper interpretation of the act read as a whole leads to the
conclusion that a payee may be a holder in due course under any circumstance in
which he meets the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due
course as "a holder who has taken the instrument under the following conditions: 1.
That it is complete and regular on its face. 2. 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. 3. That he took it in good faith and for value. 4. 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."
Since "holder", as defined in sec. 191, includes a payee who is in possession the
word holder in the first clause of sec. 52 and in the second subsection may be
replaced by the definition in sec. 191 so as to read "a holder in due course is a payee
or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law,
6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial
that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument,
because the drawer did not deliver the instrument to Manuel Gonzales with the intention of
negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts
declares the check was to remain in the possession Manuel Gonzales, and was not to be
negotiated, but was to serve merely as evidence of good faith of defendants in their desire to
purchase the car being sold to them. Admitting that such was the intention of the drawer of
the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee
drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to
the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to
Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel
Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the
check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check
with the intention of getting its value from plaintiff-appellee, negotiation took place through no
fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be
considered as having notice of the defect in the possession of the holder Manuel Gonzales.
Our resolution of this issue leads us to a consideration of the last question presented by the
appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
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 stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we agree with
the defendants-appellants that the circumstances indicated by them in their briefs, such as
the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of
the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which
practice means that the check could only be deposited but may not be converted into cash
all these circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay
Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the
nature of the latter's title to the check was or the nature of his possession. Having failed in
this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding
out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of
good faith, and it may not be considered as a holder of the check in good faith. To such effect
is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant's assignor, it being sufficient to show that the defendant had notice that
there was something wrong about his assignor's acquisition of title, although he did
not have notice of the particular wrong that was committed. Paika v. Perry, 225
Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the particulars
or even the nature of the fraud, since all that is required is knowledge of such facts
that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo.
App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years
old, less than five feet tall, immature in appearance and bearing on his face the
stamp a degenerate, to the defendants' clerk for sale. The boy stated that they
belonged to his mother. The defendants paid the boy for the bonds without any
further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad
faith' does not necessarily involve furtive motives, but means bad faith in a
commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It was
a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The
circumstances thrust the duty upon the defendants to make further inquiries and they
had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc.
Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp.
945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee
should not be allowed to recover the value of the check. Let us now examine the express
provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling
conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie
to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in
due course it is necessary that "at the time the instrument was negotiated to him "he had no
notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that
every holder is deemed prima facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder in due
course does not apply because there was a defect in the title of the holder (Manuel
Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the
stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had
no account with the payee; that the holder did not show or tell the payee why he had the
check in his possession and why he was using it for the payment of his own personal account
show that holder's title was defective or suspicious, to say the least. As holder's title was
defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is a
holder in due course or that it acquired the instrument in good faith does not exist. And
having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case,
instead of the presumption that payee was a holder in good faith, the fact is that it acquired
possession of the instrument under circumstances that should have put it to inquiry as to the
title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to
show that notwithstanding the suspicious circumstances, it acquired the check in actual good
faith.
The rule applicable to the case at bar is that described in the case of Howard National Bank
v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made
the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in
this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215,
where the rule was distinctly laid down by the court of King's Bench that the
purchaser of negotiable paper must exercise reasonable prudence and caution, and
that, if the circumstances were such as ought to have excited the suspicion of a
prudent and careful man, and he made no inquiry, he did not stand in the legal
position of a bona fide holder. The rule was adopted by the courts of this country
generally and seem to have become a fixed rule in the law of negotiable paper. Later
in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned
its former position and adopted the rule that nothing short of actual bad faith or fraud
in the purchaser would deprive him of the character of a bona fide purchaser and let
in defenses existing between prior parties, that no circumstances of suspicion
merely, or want of proper caution in the purchaser, would have this effect, and that
even gross negligence would have no effect, except as evidence tending to establish
bad faith or fraud. Some of the American courts adhered to the earlier rule, while
others followed the change inaugurated in Goodman v. Harvey. The question was
before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the
question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which
has been adhered to in subsequent cases, including those cited above. Stated
briefly, one line of cases including our own had adopted the test of the reasonably
prudent man and the other that of actual good faith. It would seem that it was the
intent of the Negotiable Instruments Act to harmonize this disagreement by adopting
the latter test. That such is the view generally accepted by the courts appears from a
recent review of the cases concerning what constitutes notice of defect. Brannan on
Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to make
uniform the Negotiable Instruments Law of those states which should enact it, we are
constrained to hold (contrary to the rule adopted in our former decisions) that
negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a
prudent man on inquiry, will not of themselves prevent a recovery, but are to be
considered merely as evidence bearing on the question of bad faith. See G. L. 3113,
3172, where such a course is required in construing other uniform acts.
It comes to this then: When the case has taken such shape that the plaintiff is called
upon to prove himself a holder in due course to be entitled to recover, he is required
to establish the conditions entitling him to standing as such, including good faith in
taking the instrument. It devolves upon him to disclose the facts and circumstances
attending the transfer, from which good or bad faith in the transaction may be
inferred.
In the case at bar as the payee acquired the check under circumstances which should have
put it to inquiry, why the holder had the check and used it to pay his own personal account,
the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in
good faith. The stipulation of facts contains no statement of such good faith, hence we are
forced to the conclusion that plaintiff payee has not proved that it acquired the check in good
faith and may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs against plaintiff-
appellee.














G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B.
MOULIC, respondents.
BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for Review of the Decision of
respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks
in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and
the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner
State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before
maturity of the checks. The checks, however, could no longer be retrieved as they had
already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her
funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and
requested that it be paid in cash instead, although MOULIC avers that no such notice was
given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the
jewelry was never sold and the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed
full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party
Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court
affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made
beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did
serve such notice on MOULIC within the reglementary period it would be of no consequence
as the checks should never have been presented for payment. The sale of the jewelry was
never effected; the checks, therefore, ceased to serve their purpose as security for the
jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at
the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the
checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides
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: (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 was 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.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is
not a holder in due course lies in the person who disputes the presumption. In this regard,
MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their
due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a
discounted price; and, (d) petitioner was never informed nor made aware that these checks
were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
from any defect of title of prior parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge
of the instrument as against a holder in due course. For the only grounds are those outlined
in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is
discharged: (a) By payment in due course by or on behalf of the principal
debtor; (b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation; (c) By the intentional
cancellation thereof by the holder; (d) By any other act which will discharge a
simple contract for the payment of money; (e) When the principal debtor
becomes the holder of the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph
(c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning
it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument
must also be made by the holder of the instrument intentionally. Since MOULIC failed to get
back possession of the post-dated checks, the intentional cancellation of the said checks is
altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money
under paragraph (d) are determined by other existing legislations since Sec. 119 does not
specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes
of extinguishing obligations. Again, none of the modes outlined therein is applicable in the
instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the
creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano,
was no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the
mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she
has no legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
The need for such notice is not absolute; there are exceptions under Sec. 114 of the
Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is
not required to be given to the drawer in the following cases: (a) Where the
drawer and the drawee are the same person; (b) When the drawee is a
fictitious person or a person not having capacity to contract; (c) When the
drawer is the person to whom the instrument is presented for payment: (d)
Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument; (e) Where the drawer had
countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks
when she returned the jewelry. She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After withdrawing her funds, she could not
have expected her checks to be honored. In other words, she was responsible for the
dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is
simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally
or by writing, the fact that a specified instrument, upon proper proceedings taken, has not
been accepted or has not been paid, and that the party notified is expected to pay it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute should not
be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title or
the incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in
the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the
drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due
course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to
STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with
the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would
be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation
of Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only
P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the
debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the
debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the property and its action cannot
be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while
Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it
does not contain any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from foreclosure of a security given to guarantee an obligation, it so
expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does
not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in
the case of a chattel mortgage, or a thing sold on installment basis, in the event of
foreclosure, the vendor "shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary will be void". 16
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it
cannot be concluded that the creditor loses his right recognized by the Rules of Court to take
action for the recovery of any unpaid balance on the principal obligation simply because he
has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power
of Attorney given him by the mortgagor in the contract of mortgage. 17
The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering
the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in
due course, STATE, without prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-
Party Defendants.
Costs against private respondent.
SO ORDERED.





















G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF
APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled "State Investment
House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional
Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to
as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory,
Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of
SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette
Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one
of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver
2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July
13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of
P820,000.00. 3
Relying on the supplier's representation that he would complete delivery within three months
from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco
leaves, despite the supplier's failure to deliver in accordance with their earlier agreement.
Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00,
payable sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI.
On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of
P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee
to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos.
608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30,
1979 respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite
petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks
payable to George King, including check TCBT 551826. Subsequently, stop payment was
also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979,
respectively, due to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only
BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a
holder in due course. It further said that the non-inclusion of King Tim Pua George as party
defendant is immaterial in this case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a
holder in due course, to be able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 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.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or some person under
whom he claims, acquired the title as holder in due course.
The facts in this present case are on all fours to the case of State Investment House, Inc. (the
very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse
on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on
demand. 8 There are a variety of checks, the more popular of which are the memorandum
check, cashier's check, traveler's check and crossed check. Crossed check is one where two
parallel lines are drawn across its face or across a corner thereof. It may be crossed
generally or specially.
A check is crossed specially when the name of a particular banker or a company is written
between the parallel lines drawn. It is crossed generally when only the words "and company"
are written or nothing is written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL)
does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers
to such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed,
whether specially or generally. It may legally be negotiated from one person to another as
long as the one who encashes the check with the drawee bank is another bank, or if it is
specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true
in England where the Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset with bouncing checks,
forging of checks, and so forth that banks have become quite guarded in encashing checks,
particularly those which name a specific payee. Unless one is a valued client, a bank will not
even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that
crossing of a check should have the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once to one who has an
account with a bank; (c) and the act of crossing the check serves as warning to the holder
that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna
Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued
by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI
was not a holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Industries, Inc. which could only mean that
the drawer had intended the same for deposit only by the rightful person, i.e.
the payee named therein. Apparently, it was not the payee who presented
the same for payment and therefore, there was no proper presentment, and
the liability did not attach to the drawer. Thus, in the absence of due
presentment, the drawer did not become liable. Consequently, no right of
recourse is available to petitioner (SIHI) against the drawer of the subject
checks, private respondent wife (Anita), considering that petitioner is not the
proper party authorized to make presentment of the checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private
respondents (Anita and her husband) on due date would make the back up
deposit for said checks but which condition apparently was not made, thus
resulting in the non-consummation of the loan intended to be granted by
private respondents to New Sikatuna Wood Industries, Inc., constitutes a
good defense against petitioner who is not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser's title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as
such the consensus of authority is to the effect that the holder of the check is not a holder in
due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to
George King. Because, really, the checks were issued with the intention that George King
would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI
is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks.
The only disadvantage of a holder who is not a holder in due course is that the instrument is
subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case,
George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition
is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.

G.R. No. 138074 August 15, 2003
CELY YANG, Petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING
CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, Respondents.
D E C I S I O N
QUISUMBING, J.:
For review on certiorari is the decision1 of the Court of Appeals, dated March 25, 1999, in
CA-G.R. CV No. 52398, which affirmed with modification the joint decision of the Regional
Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos.
54792 and 5492.3 The trial court dismissed the complaint against herein respondents Far
East Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and
Philippine Commercial International Bank (PCIB) and ruled in favor of respondent Fernando
David as to the proceeds of the two cashiers checks, including the earnings thereof
pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00
and attorneys fees also in the amount of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent Prem
Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB
managers check in the amount of P4.2 million in exchange for two (2) of Yangs managers
checks, each in the amount of P2.087 million, both payable to the order of private respondent
Fernando David. Yang and Chandiramani agreed that the difference of P26,000.00 in the
exchange would be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a
dollar draft in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-
01165-2, which Chandiramani would exchange for another dollar draft in the same amount to
be issued by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00,
dated December 22, 1987, payable to the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated
December 22, 1987, likewise payable to the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount
of US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No.
4195-01165-2.
At about one oclock in the afternoon of the same day, Yang gave the aforementioned
cashiers checks and dollar drafts to her business associate, Albert Liong, to be delivered to
Chandiramani by Liongs messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at
Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over
Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to
Ranigo a PCIB managers check in the sum of P4.2 million and a Hang Seng Bank dollar
draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers
checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the
checks and the dollar draft to Liong at half past four in the afternoon of December 22, 1987.
Liong, in turn, informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani
was able to get hold of said instruments, without delivering the exchange consideration
consisting of the PCIB managers check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were
to meet in Makati City, Chandiramani delivered to respondent Fernando David at China
Banking Corporation branch in San Fernando City, Pampanga, the following: (a) FEBTC
Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087 million; and
(b) Equitable Cashiers Check No. CCPS 14-009467, dated December 22, 1987, also in the
amount of P2.087 million. In exchange, Chandiramani got US$360,000.00 from David, which
Chandiramani deposited in the savings account of his wife, Pushpa Chandiramani; and his
mother, Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters
Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC
Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York
for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she
believed to be lost. Both banks complied with her request, but upon the representation of
PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771,
thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of
US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction and
damages against Equitable, Chandiramani, and David, with prayer for a temporary
restraining order, with the Regional Trial Court of Pasay City. The Complaint was docketed
as Civil Case No. 5479. The Complaint was subsequently amended to include a prayer for
Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully
paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for
a writ of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC
of Pasay City, docketed as Civil Case No. 5492. This complaint was later amended to include
a prayer that defendants therein return to Yang the amount of P2.087 million, the value of
FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of
preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction was
subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions
were denied. David then elevated the matter to the Court of Appeals in a special civil action
for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate
court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were
consolidated. The trial court then conducted pre-trial and trial of the two cases, but the
proceedings had to be suspended after a fire gutted the Pasay City Hall and destroyed the
records of the courts.
After the records were reconstituted, the proceedings resumed and the parties agreed that
the money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing
side. It was also agreed by the parties to limit the issues at the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of Equitable
Banking Corporation (EBC) Cashiers Check No. CCPS 14-009467 in the sum
of P2,087,000.00 dated December 22, 1987, and Far East Bank and Trust Company
(FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated December
22, 1987, together with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed
the encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus
interest thereon despite the stop payment order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492,
to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the
plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashiers
checks, together with the earnings derived therefrom pendente lite; ordering the plaintiff to
pay the defendant Fernando David moral damages in the amount of P100,000.00; attorneys
fees in the amount of P100,000.00 and to pay the costs. The complaint against Far East
Bank and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and
Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice to
whatever action plaintiff Cely Yang will file against defendant Prem Chandiramani for
reimbursement of the amounts received by him from defendant Fernando David.
SO ORDERED.8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the reason that the
cashiers checks were complete on their face when they were negotiated to him. They were
not yet overdue when he became the holder thereof and he had no notice that said checks
were previously dishonored; he took the cashiers checks in good faith and for value. He
parted some $200,000.00 for the two (2) cashiers checks which were given to defendant
Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the
title of the drawer. As a matter of fact, he asked the manager of the China Banking
Corporation to inquire as to the genuineness of the cashiers checks (tsn, February 5, 1988,
p. 21, September 20, 1991, pp. 13-14). Another proof that defendant David is a holder in due
course is the fact that the stop payment order on [the] FEBTC cashiers check was lifted upon
his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for
lifting the stop payment order was because of the fact that FEBTC realized that the checks
were not actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her
motion in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of
Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and
hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of
Twenty-Five Thousand Pesos (P25,000.00).
SO ORDERED.10
In affirming the trial courts judgment with respect to herein respondent David, the appellate
court found that:
In this case, defendant-appellee had taken the necessary precautions to verify, through his
bank, China Banking Corporation, the genuineness of whether (sic) the cashiers checks he
received from Chandiramani. As no stop payment order was made yet (at) the time of the
inquiry, defendant-appellee had no notice of what had transpired earlier between the plaintiff-
appellant and Chandiramani. All he knew was that the checks were issued to Chandiramani
with whom he was he had (sic) a transaction. Further on, David received the checks in
question in due course because Chandiramani, who at the time the checks were delivered to
David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any
infirmity in the instrument(s) and defect of title of the holder. To mandate that each holder
inquire about every aspect on how the instrument came about will unduly impede commercial
transactions, Although negotiable instruments do not constitute legal tender, they often
take the place of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient
to establish that they connived with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory.11
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed
by Yang against said bank to be "clearly unfounded and baseless." Since PCIB was
compelled to litigate to protect itself, then it was entitled under Article 220812 of the Civil
Code to attorneys fees and litigation expenses.
Hence, the instant recourse wherein petitioner submits the following issues for resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY
PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI
AND FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE
RESPONDENTS TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00
OR JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE
LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE
ENTITLED TO DAMAGES AND ATTORNEYS FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules
of Civil Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this
Court is limited to reviewing questions of law, questions of fact are not entertained absent a
showing that the factual findings complained of are totally devoid of support in the record or
are glaringly erroneous.14 Given the facts in the instant case, despite petitioners formulation,
we find that the following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent Fernando David
to be a holder in due course; and
b) Whether the appellate court committed a reversible error in awarding damages
and attorneys fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David is not a
holder in due course of the checks in question. While it is true that he was named the payee
thereof, David failed to inquire from Chandiramani about how the latter acquired possession
of said checks. Given his failure to do so, it cannot be said that David was unaware of any
defect or infirmity in the title of Chandiramani to the checks at the time of their negotiation.
Moreover, inasmuch as the checks were crossed, then David should have, pursuant to our
ruling inBataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3,
1994, 230 SCRA 643, been put on guard that the checks were issued for a definite purpose
and accordingly, made inquiries to determine if he received the checks pursuant to that
purpose. His failure to do so negates the finding in the proceedings below that he was a
holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave
Chandiramani any consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when
he received the checks, he verified their genuineness with his bank, and only after said
verification did he deposit them. David stresses that he had no notice of previous dishonor or
any infirmity that would have aroused his suspicions, the instruments being complete and
regular upon their face. David stresses that the checks in question were cashiers checks.
From the very nature of cashiers checks, it is highly unlikely that he would have suspected
that something was amiss. David also stresses negotiable instruments are presumed to have
been issued for valuable consideration, and he who alleges otherwise must controvert the
presumption with sufficient evidence. The petitioner failed to discharge this burden, according
to David. He points out that the checks were delivered to him as the payee, and he took them
as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder
in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due course.
However, this presumption arises only in favor of a person who is a holder as defined in
Section 191 of the Negotiable Instruments Law,15meaning a "payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof."
In the present case, it is not disputed that David was the payee of the checks in question.
The weight of authority sustains the view that a payee may be a holder in due
course.16 Hence, the presumption that he is a prima facieholder in due course applies in his
favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of
this issue is whether David took possession of the checks under the conditions provided for
in Section 5217 of the Negotiable Instruments Law. All the requisites provided for in Section
52 must concur in Davids case, otherwise he cannot be deemed a holder in due course.
We find that the petitioners challenge to Davids status as a holder in due course hinges on
two arguments: (1) the lack of proof to show that David tendered any valuable consideration
for the disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the
latter acquired possession of the checks, thus resulting in Davids intentional ignorance
tantamount to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are
missing, thereby preventing David from being considered a holder in due course.
Unfortunately for the petitioner, her arguments on this score are less than meritorious and far
from persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments Law creates
a presumption that every party to an instrument acquired the same for a consideration19 or
for value.20 Thus, the law itself creates a presumption in Davids favor that he gave valuable
consideration for the checks in question. In alleging otherwise, the petitioner has the onus to
prove that David got hold of the checks absent said consideration. In other words, the
petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of
the records, however, shows that the petitioner failed to discharge her burden of proof. The
petitioners averment that David did not give valuable consideration when he took possession
of the checks is unsupported, devoid of any concrete proof to sustain it. Note that both the
trial court and the appellate court found that David did not receive the checksgratis, but
instead gave Chandiramani US$360,000.00 as consideration for the said instruments.
Factual findings of the Court of Appeals are conclusive on the parties and not reviewable by
this Court; they carry great weight when the factual findings of the trial court are affirmed by
the appellate court.21
Second, petitioner fails to point any circumstance which should have put David on inquiry as
to the why and wherefore of the possession of the checks by Chandiramani. David was not
privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and
David had a separate dealing in which it was precisely Chandiramanis duty to deliver the
checks to David as payee. The evidence shows that Chandiramani performed said task to
the letter. Petitioner admits that David took the step of asking the manager of his bank to
verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the
same after being assured that there was nothing wrong with said checks. At that time, David
was not aware of any "stop payment" order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the nature of the latters title to the checks
was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect
amounting to legal absence of good faith, absent any showing that there was something
amiss about Chandiramanis acquisition or possession of the checks. David did not close his
eyes deliberately to the nature or the particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking
the instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings
below, petitioner now claims that David should have been put on alert as the instruments in
question were crossed checks. Pursuant toBataan Cigar & Cigarette Factory, Inc. v. Court of
Appeals, David should at least have inquired as to whether he was acquiring said checks for
the purpose for which they were issued, according to petitioners submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the
present case are not on all fours with Bataan Cigar. In the latter case, the crossed checks
were negotiated and sold at a discount by the payee, while in the instant case, the payee did
not negotiate further the checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although the Code
of Commerce23makes reference to such instruments. Nonetheless, this Court has taken
judicial cognizance of the practice that a check with two parallel lines in the upper left hand
corner means that it could only be deposited and not converted into cash.24 The effects of
crossing a check, thus, relates to the mode of payment, meaning that the drawer had
intended the check for deposit only by the rightful person, i.e., the payee named therein.
In Bataan Cigar, the rediscounting of the check by the payee knowingly violated the avowed
intention of crossing the check. Thus, in accepting the cross checks and paying cash for
them, despite the warning of the crossing, the subsequent holder could not be considered in
good faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that
in De Ocampo & Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case.
For here, there is no dispute that the crossed checks were delivered and duly deposited by
David, the payee named therein, in his bank account. In other words, the purpose behind the
crossing of the checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents David and
PCIB are not entitled to damages, attorneys fees, and costs of suit as both acted in bad faith
towards her, as shown by her version of the facts which gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously dragged into this
suit for reasons which have nothing to do with him at all, but which arose from petitioners
failure to receive her share of the profit promised her by Chandiramani.1wphi1 Moreover, in
filing this suit which has lasted for over a decade now, the petitioner deprived David of the
rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to
hire the services of counsel to vindicate his rights, and subjected him to social humiliation
and besmirched reputation, thus harming his standing as a person of good repute in the
business community of Pampanga. David thus contends that it is but proper that moral
damages, attorneys fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the
appellate court that it was needlessly dragged into this case. Hence, no error was committed
by the appellate court in declaring PCIB entitled to attorneys fees as it was compelled to
litigate to protect itself.
We have thoroughly perused the records of this case and find no reason to disagree with the
finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the
plaintiff and defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and appellate court
clearly shows that the petitioner, in including David as a party in these proceedings, is
barking up the wrong tree. It is apparent from the factual findings that David had no dealings
with the petitioner and was not privy to the agreement of the latter with Chandiramani.
Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions
of Chandiramani, and hence, her recourse should have been against him and not against
David. By needlessly dragging David into this case all because he and Chandiramani knew
each other, the petitioner not only unduly delayed David from obtaining the value of the
checks, but also caused him anxiety and injured his business reputation while waiting for its
outcome. Recall that under Article 221727 of the Civil Code, moral damages include mental
anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and
similar injury. Hence, we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this case on
unfounded and baseless grounds. Both were thus compelled to litigate to protect their
interests, which makes an award of attorneys fees justified under Article 2208 (2)28 of the
Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals,
dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY
DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
decision dated April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and
its resolution dated September 16, 1992, denying petitioner Philippine National Bank's motion
for reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00
was issued by the Ministry of Education and Culture (now Department of Education, Culture
and Sports [DECS]) payable to F. Abante Marketing. This check was drawn against
Philippine National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank
(Capitol), deposited the questioned check in its savings account with said bank. In turn,
Capitol deposited the same in its account with the Philippine Bank of Communications
(PBCom) which, in turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol's account for
the amount stated in the check. However, on October 19, 1981, petitioner returned the check
to PBCom and debited PBCom's account for the amount covered by the check, the reason
being that there was a "material alteration" of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter's account for the
same amount, and subsequently, sent the check back to petitioner. Petitioner, however,
returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing's account since the
latter had already withdrawn the amount of the check as of October 15, 1981. Capitol sought
clarification from PBCom and demanded the re-crediting of the amount. PBCom followed suit
by requesting an explanation and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial
Court of Manila against PBCom which, in turn, filed a third-party complaint against petitioner
for reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed
a fourth-party complaint against F. Abante Marketing.
On October 3, 1989; the Regional Trial Court rendered its decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is
ordered to re-credit or reimburse plaintiff Capitol City Development Bank the
amount of P97,650.00, plus interest of 12 percent thereto from October 19,
1981 until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint third-party
defendant PNB is ordered to reimburse and indemnify Philippine Bank of
Communications for whatever amount PBCom pays to plaintiff;
3.) On Philippine National Bank's fourth-party complaint, F. Abante
Marketing is ordered to reimburse and indemnify PNB for whatever amount
PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank of Communications is ordered to pay
Capitol City Development Bank attorney's fees in the amount of Ten
Thousand (P10,000.00) Pesos; but PBCom is entitled to
reimbursement/indemnity from PNB; and Philippine National Bank to be, in
turn reimbursed or indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of Appeals which rendered its
decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting
PBCom from liability to plaintiff-appellee for attorney's fees and ordering
PNB to honor the check for P97,650.00, with interest as declared by the trial
court, and pay plaintiff-appellee attorney's fees of P10,000.00. After the
check shall have been honored by PNB, PBCom shall re-credit plaintiff-
appellee's account with it with the amount. No pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied by the respondent Court in its
resolution dated September 16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises the following issues:
I
WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A
CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE
INSTRUMENTS LAW.
II
WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE
MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN EVIDENCE.
III
WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A.
CHECK WITHIN THE TWENTY FOUR (24) HOUR CLEARING PERIOD
MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING
BANK.
IV
WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL
PETITIONER PNB MAY BE HELD LIABLE FOR ATTORNEY'S FEES. 4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of
the check in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No.
2031) 5 which provides:
Sec. 225. What constitutes a material alteration. Any alteration which
changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted
provision of the Negotiable Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material alteration. 6
We do not agree.
An alteration is said to be material if it alters the effect of the
instrument. 7 It means an unauthorized change in an instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party. 8 In other
words, a material alteration is one which changes the items which are required to be stated
under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug
opines that "an innocent alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only according to its original tenor." 9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
(1) Substituting the words "or bearer" for "order."
(2) Writing "protest waived" above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: "Iron County Bank, Crystal Falls,
Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR" The insertion of
the figure 5 before the figure 9, the instrument being otherwise unchanged.
(5) Adding the words "with interest" with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is
thereby curtailed or extended.
(7) An instrument was payable "First Nat'l Bank" the plaintiff added the word
"Marion."
(8) Plaintiff, without consent of the defendant, struck out the name of the
defendant as payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person
who actually discounted the note.
(10) Substituting the address of the maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We promise to pay", where there are two
makers.
(2) Adding the word "annual" after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it
with the date in blank, "July ____."
(5) An alteration of the marginal figures of a note where the sum stated in
words in the body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision
for "interest at _______ per cent."
(7) A printed form of promissory note had on the margin the printed words,
"Extended to ________." The holder on or after maturity wrote in the blank
space the words "May 1, 1913," as a reference memorandum of a promise
made by him to the principal maker at the time the words were written to
extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with
the place desired.
(9) Adding to an indorsee's name the abbreviation "Cash" when it had been
agreed that the draft should be discounted by the trust company of which the
indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee
at the time the note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal
maker, without the consent of a surety co-maker. 11
The case at bench is unique in the sense that what was altered is the serial number of the
check in question, an item which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of the drawer and the
drawee were not altered. The intended payee was the same. The sum of money due to the
payee remained the same. Despite these findings, however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being a negotiable instrument itself, that a
TCAA check by its very nature is the medium of exchange of governments
(sic) instrumentalities of agencies. And as (a) safety measure, every
government office o(r) agency (is) assigned TCAA checks bearing different
number series.
A concrete example is that of the disbursements of the Ministry of Education
and Culture. It is issued by the Bureau of Treasury sizeable bundles of
checks in booklet form with serial numbers different from other government
office or agency. Now, for fictitious payee to succeed in its malicious
intentions to defraud the government, all it need do is to get hold of a TCAA
Check and have the serial numbers of portion (sic) thereof changed or
altered to make it appear that the same was issued by the MEG.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is
determined to have been issued by a particular office or agency of the
government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial number is not the sole indication of
its origin.. As succinctly found by the Court of Appeals, the name of the government agency
which issued the subject check was prominently printed therein. The check's issuer was
therefore sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is merely to identify the issuing
government office or agency, its alteration in this case had no material effect
whatsoever on the integrity of the check. The identity of the issuing
government office or agency was not changed thereby and the amount of
the check was not charged against the account of another government office
or agency which had no liability under the check. The owner and issuer of
the check is boldly and clearly printed on its face, second line from the
top: "MINISTRY OF EDUCATION AND CULTURE," and below the name of
the payee are the rubber-stamped words: "Ministry of Educ. &
Culture." These words are not alleged to have been falsely or fraudulently
intercalated into the check. The ownership of the check is established
without the necessity of recourse to the serial number. Neither there any
proof that the amount of the check was erroneously charged against the
account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did
not affect or change the liability of the Ministry of Education and Culture
under the check and, therefore, is immaterial. The genuineness of the
amount and the signatures therein of then Deputy Minister of Education
Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez
are not challenged. Neither is the authenticity of the different codes
appearing therein questioned . . . 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's submission that the certification issued by
Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the check was altered.
Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB
Check Mo. SN7-3666223-3 dated August 7, 1981 drawn in favor of F.
Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX
HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this Office
nor released to the payee concerned. The series number of said check was
not included among those requisition by this Office from the Bureau of
Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III 14
Petitioner claims that even if the author of the certification issued by the Ministry of Education
and Culture (MEG) was not presented, still the best evidence of the material alteration would
be the disputed check itself and the serial number thereon. Petitioner thus assails the refusal
of respondent court to give weight to the certification because the author thereof was not
presented to identify it and to be cross-examined thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the
said document was really the document he prepared and that the signature below the said
document is his own signature. Neither did petitioner present an eyewitness to the execution
of the questioned document who could possibly identify it. 16 Absent this proof, we cannot
rule on the authenticity of the contents of the certification. Moreover, as we previously
emphasized, there was no material alteration on the check, the change of its serial number
not being substantial to its negotiability.
Anent the third issue whether or not the drawee bank may still recover the value of the
check from the collecting bank even if it failed to return the check within the twenty-four (24)
hour clearing period because the check was tampered suffice it to state that since there is
no material alteration in the check, petitioner has no right to dishonor it and return it to
PBCom, the same being in all respects negotiable.
However, the amount of P10,000.00 as attorney's fees is hereby deleted. In their respective
decisions, the trial court and the Court of Appeals failed to explicitly state the rationale for the
said award. The trial court merely ruled as follows:
With respect to Capitol's claim for damages consisting of alleged loss of
opportunity, this Court finds that Capitol failed to adequately substantiate its
claim. What Capitol had presented was a self-serving, unsubstantiated and
speculative computation of what it allegedly could have earned or realized
were it not for the debit made by PBCom which was triggered by the return
and debit made by PNB. However, this Court finds that it would be fair and
reasonable to impose interest at 12% per annum on the principal amount of
the check computed from October 19, 1981 (the date PBCom debited
Capitol's account) until the amount is fully paid and reasonable attorney's
fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution, petitioner unambiguously questioned before
it the award of attorney's fees, assigning the latter as one of the errors committed by the trial
court. 18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and
reiterated recently inConsolidated Bank & Trust Corporation (Solidbank) v. Court of
Appeals: 19
The award of attorney's fees lies within the discretion of the court and
depends upon the circumstances of each case. However, the discretion of
the court to award attorney's fees under Article 2208 of the Civil Code of the
Philippines demands factual, legal and equitable justification, without which
the award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the proscription against
the imposition of a penalty on the right to litigate (Universal Shipping Lines,
Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for
the award must be stated in the text of the court's decision. If it is stated only
in the dispositive portion of the decision, the same shall be disallowed. As to
the award of attorney's fees being an exception rather than the rule, it is
necessary for the court to make findings of fact and law that would bring the
case within the exception and justify the grant of the award (Refractories
Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA
539 [176 SCRA 539]).
WHEREFORE, premises considered, except for the deletion of the award of attorney's fees,
the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
































G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners, vs. HON. COURT OF APPEALS,
and MERLE V. REYES, doing business under the name and style "Melissa's
RTW," respondents.
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of
action against the petitioners for their encashment and payment to another person of certain
crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm
name "Melissa's RTW." She deals with, among other customers, Robinson's Department
Store, Payless Department Store, Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to
Melissa's RTW in the amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982
Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid
accounts, she was informed of the issuance of the above-listed crossed checks. Further
inquiry revealed that the said checks had been deposited with the Associated Bank
(hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its "trusted
depositors," in the words of its branch manager and co-petitioner, Conrado Cruz, Sayson had
not been authorized by the private respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for
recovery of the total value of the checks plus damages. After trial, judgment was rendered
requiring them to pay the private respondent the total value of the subject checks in the
amount of P15,805.00 plus 12% interest, P50,000.00 actual damages, P25,000.00
exemplary damages, P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private
respondent had no cause of action against them and should have proceeded instead against
the companies that issued the checks. In disposing of this contention, the Court of
Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal,
anomalous and irregular acts of the appellants in violating common banking
practices to the damage and prejudice of the appellees, in allowing to be
deposited and encashed as well as paying to improper parties without the
knowledge, consent, authority or endorsement of the appellee which totalled
P15,805.00, the six (6) checks in dispute which were "crossed checks" or
"for payee's account only," the appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar,
namely: (1) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation on the part of the
named defendant to respect or not to violate such right; and (3) an act or
omission on the part of such defendant violative of the right of the plaintiff or
constituting a breach thereof. (Republic Planters Bank vs. Intermediate
Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great weight. The
contents of the said checks issued by the customers of the appellee had not
been questioned. There is no dispute that the same are crossed checks or
for payee's account only, which is Melissa's RTW. The appellee had clearly
shown that she had never authorized anyone to deposit the said checks nor
to encash the same; that the appellants had allowed all said checks to be
deposited, cleared and paid to one Rafael Sayson in violation of the
instructions in the said crossed checks that the same were for payee's
account only; and that the appellee maintained a savings account with the
Prudential Bank, Cubao Branch, Quezon City which never cleared the said
checks and the appellee had been damaged by such encashment of the
same.
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special where the name of a
bank or a business institution is written between the two parallel lines, which means that the
drawee should pay only with the intervention of that company.3 The crossing is general
where the words written between the two parallel lines are "and Co." or "for payee's account
only," as in the case at bar. This means that the drawee bank should not encash the check
but merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check
are: (1) that the check may not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once to one who has an account with a bank; and (3) that
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment.
Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient,
must be made by the holder or by some person authorized to receive payment on his behalf.
Who the holder or authorized person is depends on the instruction stated on the face of the
check.
The six checks in the case at bar had been crossed and issued "for payee's account only."
This could only signify that the drawers had intended the same for deposit only by the person
indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction found
on the face of the checks exclusively belongs to the issuers thereof and not to the payee.
Moreover, having acted in good faith as they merely facilitated the encashment of the checks,
they cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson
although they were crossed checks and the payee was not Sayson but Melissa's RTW. The
Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had for all
legal intents and purposes treated the said checks as negotiable instruments and,
accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or
unauthorized indorsement is wrongful, and when the money is collected on the check, the
bank can be held 'for moneys had and received." 6The proceeds are held for the rightful
owner of the payment and may be recovered by him. The position of the bank taking the
check on the forged or unauthorized indorsement is the same as if it had taken the check and
collected without indorsement at all. The act of the bank amounts to conversion of the
check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent.
As she had not at any time authorized Rafael Sayson to endorse or encash them, there was
conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the payee for the value of the checks. This
liability attached whether or not the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by
Sayson. The Bank should have first verified his right to endorse the crossed checks, of which
he was not the payee, and to deposit the proceeds of the checks to his own account. The
Bank was by reason of the nature of the checks put upon notice that they were issued for
deposit only to the private respondent's account. Its failure to inquire into Sayson's authority
was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it, for the purpose of determining their genuineness