Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No.

L-34655 March 5, 1932

SIY CONG BIENG & CO., INC., plaintiff-appellee, vs. HONGKONG & SHANGHAI BANKING CORPORATION, defendant-appellant. DeWitt, Perkins & Brandy for appellant. Feria & La O for appellee. OSTRAND, J.: This action was brought in the Court of First Instance of Manila to recover the sum of P31,645, the value of 464 bales of hemp deposited in certain bonded warehouses as evidenced by the quedans (warehouse receipts) described in the complaint, said quedans having been delivered as pledge by one Otto Ranft to the herein defendant, the Hongkong and Shanghai Banking Corporation, for the guarantee of a preexisting debt of the former to the latter. The record shows that both parties, through their respective counsel, subscriber and submitted to the court below the following agreement of facts: STIPULATION OF FACTS (Translated into English) Come now the parties, both the plaintiff and the defendant Hongkong & Shanghai Banking Corporation, through their respective counsel in the above entitled case, and respectfully submit to the court the following agreed statements of facts: 1. That both the plaintiff and the defendant Hongkong & Shanghai Banking Corporation are corporations domicile in the City of Manila and duly authorized to transact business in accordance with the laws of the Philippine Islands. 2. That the plaintiff is a corporation engaged in business generally, and that the defendant Hongkong & Shanghai Banking Corporation is a foreign bank authorized to engage in the banking business in the Philippines. 3. That on June 25, 1926, certain negotiable warehouse receipts described below were pledge by Otto Ranft to the defendant Hongkong & Shanghai Banking Corporation to secure the payment of his preexisting debts to the latter: No. Warehouseman Depositor Bales

1707 Public Warehouse Co 133 W.F. Stevenson Co 1722 Public Warehouse Co 1723 do

Siy Cong Bieng & Co., Inc. do do do do O. Ranft do

27 67 60 4 99 166 2 39

1634 The Philippine Warehouse Company 1918 Public Warehouse Co 2 Siy Cong Bieng & Co., Inc

1702 The Philippine Warehouse Company Siy Cong Bieng & Co., Inc.

And that the baled hemp covered by these warehouse receipts was worth P31,635; receipts number 1707,133,1722, 1723, 1634, and 1702 being endorsed in blank by the plaintiff and Otto Ranft, and numbers 1918 and 2, by Otto Ranft alone. 4. That in the night of June 25, 1926, said Otto Ranft died suddenly at his house in the City of Manila. 5. That both parties submit this agreed statement of facts, but reserve their right to have in evidence upon other points not included herein, and upon which they cannot come to an agreement. Manila, August 7, 1929. The evidence shows that on June 25, 1926, Ranft called at the office of the herein plaintiff to purchase hemp (abaca), and he was offered the bales of hemp as described in the quedans above mentioned. The parties agreed to the aforesaid price, and on the same date the quedans, together with the covering invoice, were sent to Ranft by the plaintiff, without having been paid for the hemp, but the plaintiff's understanding was that the payment would be made against the same quedans, and it appear that in previous transaction of the same kind between the bank and the plaintiff, quedans were paid one or two days after their delivery to them. In the evening of the day upon which the quedans in question were delivered to the herein defendant, Ranft died, and when the plaintiff found that such was the case, it immediately demanded the return of the quedans, or the payment of the value, but was told that the quedans had been sent to the herein defendant as soon as they were received by Ranft. Shortly thereafter the plaintiff filed a claim for the aforesaid sum of P31,645 in the intestate proceedings of the estate of the deceased Otto Ranft, which on an appeal form the decision of the committee on claims, was allowed by the Court of First Instance in case No. 31372 (City of Manila). In the meantime, demand had been made by the plaintiff on the defendant bank for the return of the quedans, or their value, which demand was refused by the bank on the ground that it was a holder of the quedans in due course. Thereupon the plaintiff filed its first complaint against

the defendant, wherein it alleged that it has "sold" the quedans in question to the deceased O. Ranft for cash, but that the said O. Ranft had not fulfilled the conditions of the sale. Later on, plaintiff filed an amended complaint, wherein they changed the word "sold" referred to in the first complaint to the words "attempted to sell". Upon trial the judge of the court below rendered judgment in favor of the plaintiff principally on the ground that in the opinion of the court the defendant bank "could not have acted in good faith for the reason that according to the statements of its own witness, Thiele, the quedans were delivered to the bank in order to secure the debts of Ranft for the payment of their value and from which it might be deduced that the said bank knew that the value of the said quedans was not as yet paid when the same were endorsed to it, and its alleged belief that Ranft was the owner of the said quedans was not in accordance with the facts proved at the time"; and that, moreover, the circumstances were such that "the bank knew, or should have known, that Ranft had not yet acquired the ownership of the said quedans and that it therefore could not invoke the presumption that it was acting in good faith and without negligence on its part". In our opinion the judgment of the court below is not tenable. It may be noted, first, that the quedans in question were negotiable in form; second, that they were pledge by Otto Ranft to the defendant bank to secure the payment of his preexisting debts to said bank (paragraph 3 of the Stipulation of Facts); third, that such of the quedans as were issued in the name of the plaintiff were duly endorsed in blank by the plaintiff and by Otto Ranft; and fourth, that the two remaining quedans which were duly endorsed in blank by him. When these quedans were thus negotiated, Otto Ranft was indebted to the Hongkong & Shanghai Banking Corporation in the sum of P622,753.22, which indebtedness was partly covered by quedans. He was also being pressed to deposit additional payments as a further security to the bank, and there is no doubt that the quedans here in question were received by the bank to secure the payment of Ranft's preexisting debts; it is so stated in paragraph 3 of the stipulation of the facts agreed on by the parties and hereinbefore quoted. It further appears that it has been the practice of the bank in its transactions with Ranft that the value of the quedans has been entered in the current accounts between Ranft and the bank, but there is no evidence to the effect that the bank was at any time bound to pay back to Ranft the amount of any of the quedans, and there is nothing in the record to show that the bank has promised to pay the values of the quedans neither to Ranft nor to the herein plaintiff; on the contrary, as stated in the stipulation of facts, the "negotiable warehouse receipts were pledged by Otto Ranft to the defendant Hongkong & Shanghai Banking Corporation secure the payment of his preexisting debts to the latter", and taking into consideration that the quedans were negotiable in form and duly endorsed in blank by the plaintiff and by Otto Ranft, it follows that on the delivery of the qeudans to the bank they were no longer the property of the indorser unless he liquidated his debt with the bank. In his brief the plaintiff insists that the defendant, before the delivery of the quedans, should have ascertained whether Ranft had any authority to negotiate the quedans.

We are unable to find anything in the record which in any manner would have compelled the bank to investigate the indorser. The bank had a perfect right to act as it did, and its action is in accordance with sections 47, 38, and 40 of the Warehouse Receipts Act (Act No. 2137), which read as follows: SEC. 47. When negotiation not impaired by fraud, mistake, or duress. The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the receipt was induced by fraud, mistake, or duress to intrust the possession or custody of the receipt was negotiated, or a person to whom the receipt was subsequent negotiated, paid value therefor, without notice of the breach of duty, or fraud, mistake, or duress. SEC. 38. Negotiation of negotiable receipts by indorsement. A negotiable receipt may be negotiated by the indorsement of the person to whose order the goods are, by the terms of the receipt, deliverable. Such indorsement may be in blank, to bearer or to a specified person. . . . Subsequent negotiation may be made in like manner. SEC. 40. Who may negotiate a receipt. A negotiable receipt may be negotiated: (a) By the owner thereof, or (b) By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of the person to whom the possession or custody of the receipt has been entrusted, or if at the time of such entrusting the receipt is in such form that it may be negotiated by delivery. The question as to the rights the defendant bank acquired over the aforesaid quedans after indorsement and delivery to it by Ranft, we find in section 41 of the Warehouse Receipts Act (Act No. 2137): SEC. 41. Rights of person to whom a receipt has been negotiated. A person to whom a negotiable receipt has been duly negotiated acquires thereby: (a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor of person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and. . . . In the case of the Commercial National Bank of New Orleans vs. Canal-Louisiana Bank & Trust Co. (239 U.S., 520), Chief Justice Hughes said in regard to negotiation of receipts: It will be observed that "one who takes by trespass or a finder is not included within the description of those who may negotiate." (Report of Commissioner on Uniform States Laws, January 1, 1910, p. 204.) Aside from this, the intention is plain to facilitate the use of warehouse receipts as documents of title. Under sec. 40, the person who may negotiate

the receipt is either the "owner thereof", or a "person to whom the possession or custody of the receipt has been intrusted by the owner" if the receipt is in the form described. The warehouse receipt represents the goods, but the intrustion of the receipt, as stated, is more than the mere delivery of the goods; it is a representation that the one to whom the possession of the receipt has been so intrusted has the title to the goods. By sec. 47, the negotiation of the receipt to a purchaser for value without notice is not impaired by the fact that it is a breach of duty, or that the owner of the receipt was induced "by fraud, mistake, or duree" to intrust the receipt to the person who negotiated it. And, under sec. 41, one to whom the negotiable receipt has been duly negotiated acquires such title to the goods as the person negotiating the receipt to him, or the depositor or person whose order the goods were delivered by the terms of the receipt, either had or "had ability to convey to a purchaser in good faith for value." The clear import of these provisions is that if the owner of the goods permit another to have the possession or custody of negotiable warehouse receipts running to the order of the latter, or to bearer, it is a representation of title upon which bona fide purchasers for value are entitled to rely, despite breaches of trust or violations of agreement on the part of the apparent owner. In its second assignment of error, the defendant-appellant maintains that the plaintiff-appellee is estopped to deny that the bank had a valid title to the quedans for the reason that the plaintiff had voluntarily clothed Ranft with all the attributes of ownership and upon which the defendant bank relied. In our opinion, the appellant's view is correct. In the National Safe Deposit vs. Hibbs (229 U.S., 391), certain certificates of stock were pledged as collateral by the defendant in error to the plaintiff bank, which certificates were converted by one of the trusted employees of the bank to his own use and sold by him. The stock certificates were unqualified endorsed in blank by the defendant when delivered to the bank. The Supreme Court of the United States through Justice Day applied the familiar rule of equitable estoppel that where one of two innocent persons must suffer a loss he who by his conduct made the loss possible must bear it, using the following language: We think this case correctly states the principle, and, applied to the case in hand, is decisive of it. Here one of two innocent person must suffer and the question at last is, Where shall the loss fall? It is undeniable that the broker obtained the stock certificates, containing all the indicia of ownership and possible of ready transfer, from one who had possession with the bank's consent, and who brought the certificates to him, apparently clothed with the full ownership thereof by all the tests usually applied by business men to gain knowledge upon the subject before making a purchase of such property. On the other hand, the bank, for a legitimate purpose, with confidence in one of its own employees, instrusted the certificates to him, with every evidence of title and transferability upon them. The bank's trusted agent, in gross breach of his duty, whether with technical criminality or not is unimportant, took such certificates, thus authenticated with evidence of title, to one who, in the ordinary course of business, sold them to parties who paid full value for them. In such case we think the principles which underlie equitable estoppel place the loss upon him whose misplaced confidence has made the wrong possible. . . .

We regret that the plaintiff in this case has suffered the loss of the quedans, but as far as we can see, there is now no remedy available to the plaintiff. The bank is not responsible for the loss; the negotiable quedans were duly negotiated to the bank and as far as the record shows, there has been no fraud on the part of the defendant. The appealed judgment is reversed and the appellant is absolved from the plaintiff's complaint. Without costs. So ordered. Johnson, Street, Malcolm, Villamor, Villa-Real and Imperial, JJ., concur.

Separate Opinions ROMUALDEZ, J., dissenting: With due respect for the majority opinion, I dissent and vote for the confirmation of the appealed judgment.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-17825 June 26, 1922

In the matter of the Involuntary insolvency of U. DE POLI. FELISA ROMAN, claimant-appellee, vs. ASIA BANKING CORPORATION, claimant-appellant. Wolfson, Wolfson and Schwarzkopf and Gibbs, McDonough & Johnson for appellant. Antonio V. Herrero for appellee. OSTRAND, J.: This is an appeal from an order entered by the Court of First Instance of Manila in civil No. 19240, the insolvency of Umberto de Poli, and declaring the lien claimed by the appellee Felisa

Roman upon a lot of leaf tobacco, consisting of 576 bales, and found in the possession of said insolvent, superior to that claimed by the appellant, the Asia Banking Corporation. The order appealed from is based upon the following stipulation of facts: It is hereby stipulated and agreed by and between Felisa Roman and Asia Banking Corporation, and on their behalf by their undersigned attorneys, that their respective rights, in relation to the 576 bultos of tobacco mentioned in the order of this court dated April 25, 1921, be, and hereby are, submitted to the court for decision upon the following: I. Felisa Roman claims the 576 bultos of tobacco under and by virtue of the instrument, a copy of which is hereto attached and made a part hereof and marked Exhibit A. II. That on November 25, 1920, said Felisa Roman notified the said Asia Banking Corporation of her contention, a copy of which notification is hereto attached and made a part hereof and marked Exhibit B. III. That on November 29, 1920, said Asia Banking Corporation replied as per copy hereto attached and marked Exhibit C. IV. That at the time the above entitled insolvency proceedings were filed the 576 bultos of tobacco were in possession of U. de Poli and now are in possession of the assignee. V. That on November 18, 1920, U. de Poli, for value received, issued a quedan, covering aforesaid 576 bultos of tobacco, to the Asia Banking Corporation as per copy of quedan attached and marked Exhibit D. VI. That aforesaid 576 bultos of tobacco are part and parcel of the 2,777 bultos purchased by U. de Poli from Felisa Roman. VII. The parties further stipulate and agree that any further evidence that either of the parties desire to submit shall be taken into consideration together with this stipulation. Manila, P. I., April 28, 1921. (Sgd.) ANTONIO V. HERRERO Attorney for Felisa Roman (Sgd.) WOLFSON, WOLFSON & SCHWARZKOPF Attorney for Asia Banking Corp. Exhibit A referred to in the foregoing stipulation reads: 1. Que la primera parte es duea de unos dos mil quinientos a tres mil quintales de tacabo de distintas clases, producidos en los municipios de San Isidro, Kabiaw y Gapan

adquiridos por compra con dinero perteneciente a sus bienes parafernales, de los cuales es ella administradora. 2. Que ha convenido la venta de dichos dos mil quinientos a tres mil quintales de tabaco mencionada con la Segunda Parte, cuya compraventa se regira por las condiciones siguientes: (a) La Primera Parte remitira a la Segunda debidamente enfardado el tabaco de que ella es propietaria en bultos no menores de cincuenta kilos, siendo de cuenta de dicha Primera Parte todos los gastos que origine dicha mercancja hasta la estacion de ferrocarril de Tutuban, en cuyo lugar se hara cargo la Segunda y desde cuyo instante seran de cuenta de esta los riesgos de la mercancia. (b) El precio en que la Primera Parte vende a la Segunda el tabaco mencionada es el de veintiseis pesos (P26), moneda filipina, por quintal, pagaderos en la forma que despues se establece. (c) La Segunda Parte sera la consignataria del tabaco en esta Ciudad de Manila quien se hara cargo de el cuando reciba la factura de embarque y la guia de Rentas Internas, trasladandolo a su bodega quedando en la misma en calidad de deposito hasta la fecha en que dicha Segunda Parte pague el precio del mismo, siendo de cuenta de dicha Segunda Parte el pago de almacenaje y seguro. (d) LLegada la ultima expedicion del tabaco, se procedera a pesar el mismo con intervencion de la Primera Parte o de un agente de ella, y conocido el numero total de quintales remitidos, se hara liquidacion del precio a cuenta del cual se pagaran quince mil pesos (P15,000), y el resto se dividira en cuatro pagares vencederos cada uno de ellos treinta dias despues del anterior pago; esto es, el primer pagare vencera a los treinta dias de la fecha en que se hayan pagado los quince mil pesos, el segundo a igual tiempo del anterior pago, y asi sucesivamente; conviniendose que el capital debido como precio del tabaco devengara un interes del diez por ciento anual. Los plazos concedidos al comprador para el pago del precio quedan sujetos a la condicion resolutoria de que si antes del vencimiento de cualquier plazo, el comprador vendiese parte del tabaco en proporcion al importe de cualquiera de los pagares que restasen por vencer, o caso de que vendiese, pues se conviene para este caso que desde el momento en que la Segunda Parte venda el tabaco, el deposito del mismo, como garantia del pago del precio, queda cancelado y simultaneamente es exigible el importe de la parte por pagar. Leido este documento por los otorgantes y encontrandolo conforme con lo por ellos convenido, lo firman la Primera Parte en el lugar de su residencia, San Isidro de Nueva Ecija, y la Segunda en esta Ciudad de Manila, en las fechas que respectivamente al pie de este documento aparecen. (Fdos.) FELISA ROMAN VDA. DE MORENO U. DE POLI

Firmado en presencia de: (Fdos.) ANTONIO V. HERRERO T. BARRETTO ("Acknowledged before Notary") Exhibit D is a warehouse receipt issued by the warehouse of U. de Poli for 576 bales of tobacco. The first paragraph of the receipt reads as follows: Quedan depositados en estos almacenes por orden del Sr. U. de Poli la cantidad de quinientos setenta y seis fardos de tabaco en rama segun marcas detalladas al margen, y con arreglo a las condiciones siguientes: In the left margin of the face of the receipts, U. de Poli certifies that he is the sole owner of the merchandise therein described. The receipt is endorced in blank "Umberto de Poli;" it is not marked "non-negotiable" or "not negotiable." Exhibit B and C referred to in the stipulation are not material to the issues and do not appear in the printed record. Though Exhibit A in its paragraph (c) states that the tobacco should remain in the warehouse of U. de Poli as a deposit until the price was paid, it appears clearly from the language of the exhibit as a whole that it evidences a contract of sale and the recitals in order of the Court of First Instance, dated January 18, 1921, which form part of the printed record, show that De Poli received from Felisa Roman, under this contract, 2,777 bales of tobacco of the total value of P78,815.69, of which he paid P15,000 in cash and executed four notes of P15,953.92 each for the balance. The sale having been thus consummated, the only lien upon the tobacco which Felisa Roman can claim is a vendor's lien. The order appealed from is based upon the theory that the tobacco was transferred to the Asia Banking Corporation as security for a loan and that as the transfer neither fulfilled the requirements of the Civil Code for a pledge nor constituted a chattel mortgage under Act No. 1508, the vendor's lien of Felisa Roman should be accorded preference over it. It is quite evident that the court below failed to take into consideration the provisions of section 49 of Act No. 2137 which reads: Where a negotiable receipts has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.

The term "purchaser" as used in the section quoted, includes mortgagee and pledgee. (See section 58 (a) of the same Act.) In view of the foregoing provisions, there can be no doubt whatever that if the warehouse receipt in question is negotiable, the vendor's lien of Felisa Roman cannot prevail against the rights of the Asia Banking Corporation as the indorse of the receipt. The only question of importance to be determined in this case is, therefore, whether the receipt before us is negotiable. The matter is not entirely free from doubt. The receipt is not perfect: It recites that the merchandise is deposited in the warehouse "por orden" instead of "a la orden" or "sujeto a la orden" of the depositor and it contain no other direct statement showing whether the goods received are to be delivered to the bearer, to a specified person, or to a specified person or his order. We think, however, that it must be considered a negotiable receipt. A warehouse receipt, like any other document, must be interpreted according to its evident intent (Civil Code, arts. 1281 et seq.) and it is quite obvious that the deposit evidenced by the receipt in this case was intended to be made subject to the order of the depositor and therefore negotiable. That the words "por orden" are used instead of "a la orden" is very evidently merely a clerical or grammatical error. If any intelligent meaning is to be attacked to the phrase "Quedan depositados en estos almacenes por orden del Sr. U. de Poli" it must be held to mean "Quedan depositados en estos almacenes a la orden del Sr. U. de Poli." The phrase must be construed to mean that U. de Poli was the person authorized to endorse and deliver the receipts; any other interpretation would mean that no one had such power and the clause, as well as the entire receipts, would be rendered nugatory. Moreover, the endorsement in blank of the receipt in controversy together with its delivery by U. de Poli to the appellant bank took place on the very of the issuance of the warehouse receipt, thereby immediately demonstrating the intention of U. de Poli and of the appellant bank, by the employment of the phrase "por orden del Sr. U. de Poli" to make the receipt negotiable and subject to the very transfer which he then and there made by such endorsement in blank and delivery of the receipt to the blank. As hereinbefore stated, the receipt was not marked "non-negotiable." Under modern statutes the negotiability of warehouse receipts has been enlarged, the statutes having the effect of making such receipts negotiable unless marked "non-negotiable." (27 R. C. L., 967 and cases cited.) Section 7 of the Uniform Warehouse Receipts Act, says: A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it 'non-negotiable,' or 'not negotiable.' In case of the warehouseman's failure so to do, a holder of the receipt who purchased it for value supposing it to be negotiable may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. This section shall not apply, however, to letters, memoranda, or written acknowledgments of an informal character.

This section appears to give any warehouse receipt not marked "non-negotiable" or "not negotiable" practically the same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it for value supposing it to be negotiable, circumstances which admittedly exist in the present case. We therefore hold that the warehouse receipts in controversy was negotiable and that the rights of the endorsee thereof, the appellant, are superior to the vendor's lien of the appellee and should be given preference over the latter. The order appealed from is therefore reversed without costs. So ordered. Araullo, C.J., Malcolm, Avancea, Villamor, Johns and Romualdez, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 90888 September 13, 1990 FRUCTUOSO R. CAPCO, petitioner, vs. MANUEL R. MACASAET, JACOBO FELICIANO, and HONORABLE COURT OF APPEALS, respondents. Florentino I. Capco for petitioner. Pacifico Sotelo for M.R. Macasaet. Edilberto Barot, Jr. for J. Feliciano.

GUTIERREZ, JR., J.: The petitioner submits to us for review the propriety of the Court of Appeals' disregarding the findings of fact and the award of damages made by the trial court.

This petition is an offshoot of an action for damages filed by the petitioner against the private respondents docketed as Civil Case No. 24105 and decided by the Regional Trial Court, National Capital Judicial Region, Branch 151 of Pasig, Metro Manila which ruled as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant Manuel Macasaet, sentencing the latter to pay the former, the following sums: a) Three Hundred Two Thousand Six Hundred Fifty-Eight Pesos and Twenty Centavos (P302,658.20) for and as actual damages; b) One Hundred Thousand Pesos (P100,000.00) for and as moral damages; c) Fifty Thousand Pesos (P50,000.00) for and as exemplary damages; and d) Fifty Thousand Pesos (P50,000.00) for and as attorney's fees and litigation expenses. The complaint and defendant Macasaet's cross claim against defendant Jacobo Feliciano are dismissed. Defendants Manuel Macasaet's and Jacobo Feliciano's counterclaims are likewise dismissed. Costs against defendant Manuel Macasaet. (Rollo, pp. 55-56)

The petitioner was a stockholder of record, director and executive vice-president of Monte Oro Mineral Resources, Inc. (Monte Oro for brevity'sake), a local mining company whose shares were traded in the stock market. He owned 56,588,358 shares of the capital stock of Monte Oro with par value of P0.01 per share or a total par value of P565,883.58 as evidenced by Stock Certificate No. 002 (Exhibit "A") for 14,159,583 shares and Stock Certificate No. 026 (Exhibit "B") for 42,428,775 shares. On February 18, 1976, the petitioner indorsed and delivered Stock Certificates Nos. 002 and 026 to private respondent Manuel Macasaet, board chairman and President of Monte Oro, who personally received the said certificate in the following tenor:
ACKNOWLEDGMENT RECEIPT I hereby certify that I have personally received from Mr. Fructuoso R. Capco the following Monte Oro Certificates in trust and for safe keeping only to be delivered and/or surrendered to him and/or his heirs or duly authorized representative on demand. (Exhibit "C") Cert. No. Amount Date Remarks 002 14,159,583 12/04/74 'Already Indorsed' 026 42,428,775 04/16/75 'Already Indorsed' ________

Total 56,588,358 Received as stated: [Sgd) MANUEL R. MACASAET' (Exhibit "C")

On April 26,1976, the petitioner demanded the return of his stock certificates from respondent Macasaet who failed to produce them because he had given them to the other private respondent Jacobo Feliciano, another officer of Monte Oro, allegedly in connection with a contemplated joint venture with the group of one Leonilo Esguerra. On April 28, 1976, respondent Macasaet replaced the petitioner's Stock Certificate No. 026 with his own Stock Certificate No. 025 covering 42,578,700 shares. The petitioner duly acknowledged the receipt of the said replacement (Exhibit "3"). On May 4, 1976, Stock Certificate No. 002 was returned by respondent Macasaet to the petitioner as evidenced by the handwritten receipt signed by the latter (Exhibit "2") who likewise made a handwritten notation stating "all cleared" at the left hand margin thereof. On August 12, 1976, the petitioner filed a complaint for damages against the private respondents alleging, among others, that at the time he demanded his Stock Certificate Nos. 002 and 026 totalling 56,588,358 shares from respondent Macasaet the petitioner had a ready buyer for 0.014 per share for all shares; that due to the private respondents' failure to return the said stock certificates upon demand, the petitioner lost P306,115.25 representing the difference between the amount of P792,237.01 which he would have realized had his stock certificates been promptly given back and the sum of P486,121.76, the actual net proceeds from the subsequent sale of P42,550,000 shares at various prices after respondent Macasaet delivered his own Stock Certificate No. 025 in exchange for the petitioners Stock Certificate No. 026; that the aforesaid amount of P 306,115.25 had long been overdue and unpaid and despite repeated demands from the private respondents for the payment thereof, the latter had failed and refused to pay the same to the petitioner's damage and prejudice; and that due to the private respondents' intentional, deliberate and malicious acts, moral and exemplary damages could be awarded to the petitioner. Respondent Macasaet counter-alleged, among others, that he had in turn entrusted Stock Certificate Nos. 002 and 026 of the petitioner to his co-defendant, respondent Feliciano to be shown to a certain group for the purpose of a joint venture; that respondent Macasaet had actually made several demands for the return of the said stock certificates from respondent Feliciano who refused and failed to do so; that two days after the petitioner made the demand, respondent Macasaet replaced the petitioner's Stock Certificate No. 026 with his own Stock Certificate No. 025 which covered 149,925 shares more than those of the petitioner's Stock Certificate No. 026;

that the respondent Macasaet returned the petitioner's Stock Certificate No. 002 on May 4, 1976 after he recovered the game from respondent Feliciano; and that the words "ALL CLEARED" written by the petitioner himself on his acknowledgment receipt as he received Stock Certificate No. 002 from respondent Macasaet undoubtedly meant to discharge private respondent Macasaet from any responsibility or liability regarding the petitioner's stock certificates. On August 8, 1983, the lower court rendered a judgment favorable to the petitioner. It also dismissed the complaint and respondent Macasaet's cross-claim against respondent Feliciano and likewise dismissed private respondents' counter-claims against the petitioner. On appeal by respondent Macasaet, the Court of Appeals on June 19, 1989, reversed and set aside the trial court's judgment for lack of merit and supporting proof. The petitioner's complaint as well as the cross-claims and counter-claims of private respondents were all dismissed. After the petitioner's subsequent motion for reconsideration was denied on October 23, 1989, the present petition was filed assigning as errors, to wit:
I THE HONORABLE COURT OF APPEALS GRAVELY ERRED BLINDLY SUPPORTING THE FIRST AND SECOND THEORY OF PRIVATE RESPONDENT THAT THE WRITTEN ANNOTATION OF 'ALL CLEARED IN STOCK CERTIFICATE NO. 002 NECESSARILY INCLUDED ANOTHER SEPARATE AND DIFFERENT STOCK CERTIFICATE NO. 026 AND ASSUMING THERETO 'PAYMENT' OF LIABILITY OF PRIVATE RESPONDENT TO PETITIONER. II THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN CLEARING PRIVATE RESPONDENT OF RESPONSIBILITIES BY DISREGARDING OR ABROGATING A VOLUNTARY CONTRACT OF TRUST, (ACKNOWLEDGMENT RECEIPT, DATED FEBRUARY 18,1976, ANNEX "C" PLAINTIFF'S COMPLAINT; EXH. "C"-PLAINTIFF) ALSO ON MERE ASSUMPTION THAT THE ENDORSEMENT ON THE SUBJECT STOCK CERTIFICATES CONSTITUTE FULL AUTHORITY TO PRIVATE RESPONDENT TO DELIVER, CONVEY AND SELL THE SAME. III THE HONORABLE COURT OF APPEALS LIKEWISE COMMITTED GROSS ERROR IN CLEARING THE PRIVATE RESPONDENT OF LIABILITY FOR ALL DAMAGES ALREADY SUFFERED AND INCURRED BY PETITIONER. IV THE HONORABLE COURT OF APPEALS ALSO COMMITTED GRAVE ERROR BY CONCLUDING LACK OF EVIDENCE TO SUPPORT CLAIM OF DAMAGES AND

DISREGARDING THE FACTS AND EVIDENCE DULY ADMITTED AND PROVEN AT A FORMAL TRIAL IN THE LOWER COURT." (Petition, pp. 5-6, Rollo, pp. 16-17)

The petitioner's main argument rests on the oft-repeated pronouncement that the conclusions and findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence as well as observe the demeanor of the witnesses while testifying citing the case of Chase v. Buencamino (136 SCRA 605 [1985]). The petitioner faults the respondent court for side-stepping the literal interpretation of the Acknowledgment Receipt dated February 18, 1972 signed by the respondent Macasaet which allegedly serves as a clear proof that Stock Certificate Nos. 002 and 026 were held by the latter in trust and for safekeeping only. The petitioner further labels as capricious the respondent court's act of completely ignoring all the established evidence, both documentary and testimonial, duly admitted and considered by the trial court. The rule that the trial court's findings of facts are accorded due respect on appeal is not without exceptions. It is not applicable where there are strong and cogent reasons as when the trial court's findings are not supported by the evidence or when the trial court failed to consider material facts which would have led to a conclusion different from what was stated in its judgment or when the trial court's decision was attended by grave abuse of discretion amounting to lack of jurisdiction. A review of the bases for the trial court's decision shows that the appellate court was justified in being skeptical as it went over both the facts and the law. The instant case was given due course to enable a more thorough presentation by the parties and review of the records considering the petitioner's stress on the disparity between the factual findings of the trial court which found respondent Macasaet liable for actual, moral and exemplary damages and the respondent appellate court which discharged the said respondent from any liability regarding the petitioner's Stock Certificate Nos. 002 and 026. It is true that when the petitioner delivered Stock Certificate Nos. 002 and 026 to respondent Macasaet the latter acknowledged receiving them "in trust and for safekeeping only." This acknowledgment, however, cannot outweigh the legal effects of the stock certificates having been "already indorsed". There is no dispute that respondent Macasaet received the petitioner's certificates in that condition as evidenced by the same Acknowledgment Receipt dated February 18, 1976. Certificates of stocks are considered as "quasi-negotiable" instruments. When the owner or shareholder of these certificates signs the printed form of sale or assignment at the back of every stock certificate without filling in the blanks provided for the name of the transferee as well as for the name of the attorney-in-fact, the said owner or shareholder, in effect, confers on another all the indicia of ownership of the said stock certificates. (Campos and Lopez-Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971 ed., p. 605). In the case at bar, the petitioner signed the printed form at the back of both Stock Certificate Nos. 002 and 026 without filling in the blanks

at the time the said stock certificates were delivered to respondent Macasaet. Hence, the petitioner's acts of indorsement and delivery conferred on respondent Macasaet the right to hold them as though they were his own. On account of this apparent transfer of ownership, it was not irregular on the part of respondent Macasaet to deliver the stock certificates in question to respondent Feliciano for consideration in connection with a contemplated tie-up between two business groups. At this juncture, it is worth noting that in view of the petitioner's concurrent positions as director, Executive Vice-President and General Manager of Monte Oro at the time of the incident under consideration, he could not have been unaware of the consequences of the delivery coupled with the indorsement of his two stock certificates to respondent Macasaet, notwithstanding the tenor of the Acknowledgment Receipt. Moreover, it is hard to believe that the petitioner's delivery of the subject stock certificates to respondent Macasaet was strictly for safe-keeping purposes only because if that were his real and only intention, there is neither logic nor reason for the indorsement of the said certificates. After a careful perusal and examination of the records of this case, we find no legal ground that will constrain us to depart from the rule that the Court of Appeals' findings of fact are deemed final, conclusive and binding on us if supported by substantial evidence. We reiterate our ruling in the case of Hermo v. Court of Appeals, (155 SCRA 24 [1987]) that:
At once apparent is that the factual findings of the Court of Appeals are diametrically at odds with those of the Trial Court,.... And basic is the rule that the conclusions of fact of a trial court are entitled to great weight, and should not generally be disturbed on appeal, because it is in a better position than the appellate tribunal to examine the evidence directly, and to observe the demeanor of the witnesses while testifying. Withal, its findings of fact, though entitled to great respect, are not conclusive on the Court of Appeals. In the exercise of its appellate jurisdiction, the Court of Appeals may affirm, reverse, or modify the judgment or order appealed from, and may direct a new trial or further proceeding to be had. It is indeed the duty of that Court chiefly though not exclusively to review a Trial Court's findings of fact and correct such serious errors affecting them as may have been properly assigned and as may be established by a reexamination of the recorded evidence. And it is the findings of fact of the Court of Appeals, not those of the trial court that are as a rule deemed final, and conclusive even on this Court. (Emphasis Supplied) (At p. 27)

We find no reversible error in the respondent Court's holding that the petitioner failed to support his claim that he suffered the claimed damages as a result of respondent Macasaet's failure to return Stock Certificate Nos. 002 and 026 upon demand. The alleged "unrealized profits" representing actual and compensatory damages must be supported by substantial and convincing proof. The records are bereft of such kind of proof. Mere allegation that there was a "ready and willing buyer' of all the petitioners shares covered by Stock Certificate Nos. 002 and 026 for P0.014 per share at the time the demand for the return of the said certificates was made cannot suffice to allow the petitioners claim for unrealized profits to prosper. Such claim is clearly speculative in nature.

Actual or compensatory damages are those recoverable because of pecuniary loss in business, trade, property, profession, job or occupation, and the same must be proved; otherwise, if the proof is flimsy and non-substantial, no damages will be given (Danao v. Court of Appeal, 154 SCRA 447 [19871]; Rubio v. Court of Appeals, 141 SCRA 488 [1986]; Perfecto v. Gonzales, 128 SCRA 635 [1984]). Actual and compensatory damages require evidentiary proof. They cannot be presumed. (Dee Hua Liong Electrical Equipment Corporation v. Reyes, 145 SCRA 713 [1986]) The good faith of respondent Macasaet is shown by the fact that after trying to recover the missing certificates, he immediately substituted Stock Certificate No. 026 with his own Stock Certificate No. 025 which covered more shares than the petitioner's replaced certificate. The petitioner's other Stock Certificate No. 002 was subsequently returned and received by the petitioner with the notation "All Cleared" on the acknowledgment receipt duly signed and personally written by him. We agree with the respondent court's ruling that the said notation meant to discharge respondent Macasaet' together with his co-respondent Feliciano) from any liability with respect to the stock certificates in question as there can be no other plausible interpretation therefor. He would not have written "all cleared" if he was unhappy at that time about the substitution of the higher value certificate for his other certificate. In fine, considering that in the absence of malice and bad faith, moral damages cannot be awarded (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [19881) and that the grant of moral and exemplary damages has no basis if not predicated upon any of the cases enumerated in the Civil Code (Bagumbayan Corporation v. Intermediate Appellate Court, 132 SCRA 441 [19841), we hold that the respondent court properly set aside the award of actual, moral and exemplary damages given by the trial court in favor of the petitioner. WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The assailed decision dated June 19, 1989 and the resolution dated October 23, 1989 of the Court of Appeals are AFFIRMED. SO ORDERED. Bidin and Cortes, JJ., concur. Fernan (Chairman), is on leave.

Separate Opinions

FELICIANO, J., concurring: I concur in the result reached by Mr. Justice Hugo E. Gutierrez, Jr. I should merely like to render a brief note in respect of his statement that: "it is hard to believe that petitioners' delivery of the subject stock certificates to respondent Macasaet was strictly for safekeeping purposes only because if that were his real and only intention. there is neither logic nor reason for the indorsement of the said certificates. Petitioner was very probably not unaware of the consequences of delivering stock certificates which had been indorsed in blank. However, awareness of such consequences may precisely explain why the Acknowledgment Receipt executed by private respondent Macasaet specifically stated that he had received the stock certificates in question "for safekeeping only to be delivered and/or surrendered to him ... on demand". In other words, there was here no unrestricted delivery of the stock certificates. On the contrary, the delivery of the stock certificates to private respondent Macasaet was clearly a limited or qualified delivery, for a specified purpose only. If the Acknowledgment Receipt had not been a restricted receipt, full authority or absolute ownership over the stock certificates would have been transferred to private respondent Macasaet. The restricted Acknowledgment Receipt thus had a qualifying and countervailing effect upon the indorsement in blank of the stock certificates involved. Although indorsed in blank, the stock certificates are not then intended to be transferred to and cannot be disposed of by petitioner-holder. There are a number of possible reasons why petitioner should have wanted to indorse the stock certificates in blank while delivering them to private respondent under a restricted receipt: for one thing, the petitioner could go out of town or out of the country on business or otherwise; during his trip, he would be in a position to instruct private respondent to sell the shares already indorsed in blank when it might be profitable or convenient to do so without need of executing and sending back a special power of attorney, by the simple expedient of lifting the restriction found in the Acknowledgment Receipt. Indorsement in blank of stock certificates facilitates the ready transferability of the stock certificates; at the same time, the restricted Acknowledgment Receipt effectively constituted private respondent a bailee or trustee vis-a-vis petitioner. The arrangement may be seen to have both a judiciary quality and a certain flexibility, a combination of substantial utility in the trading of corporate securities.

Separate Opinions FELICIANO, J., concurring: I concur in the result reached by Mr. Justice Hugo E. Gutierrez, Jr. I should merely like to render a brief note in respect of his statement that: "it is hard to believe that petitioners' delivery of the subject stock certificates to respondent Macasaet was strictly

for safekeeping purposes only because if that were his real and only intention. there is neither logic nor reason for the indorsement of the said certificates. Petitioner was very probably not unaware of the consequences of delivering stock certificates which had been indorsed in blank. However, awareness of such consequences may precisely explain why the Acknowledgment Receipt executed by private respondent Macasaet specifically stated that he had received the stock certificates in question "for safekeeping only to be delivered and/or surrendered to him ... on demand". In other words, there was here no unrestricted delivery of the stock certificates. On the contrary, the delivery of the stock certificates to private respondent Macasaet was clearly a limited or qualified delivery, for a specified purpose only. If the Acknowledgment Receipt had not been a restricted receipt, full authority or absolute ownership over the stock certificates would have been transferred to private respondent Macasaet. The restricted Acknowledgment Receipt thus had a qualifying and countervailing effect upon the indorsement in blank of the stock certificates involved. Although indorsed in blank, the stock certificates are not then intended to be transferred to and cannot be disposed of by petitioner-holder. There are a number of possible reasons why petitioner should have wanted to indorse the stock certificates in blank while delivering them to private respondent under a restricted receipt: for one thing, the petitioner could go out of town or out of the country on business or otherwise; during his trip, he would be in a position to instruct private respondent to sell the shares already indorsed in blank when it might be profitable or convenient to do so without need of executing and sending back a special power of attorney, by the simple expedient of lifting the restriction found in the Acknowledgment Receipt. Indorsement in blank of stock certificates facilitates the ready transferability of the stock certificates; at the same time, the restricted Acknowledgment Receipt effectively constituted private respondent a bailee or trustee vis-a-vis petitioner. The arrangement may be seen to have both a judiciary quality and a certain flexibility, a combination of substantial utility in the trading of corporate securities.

The Lawphil Project - Arellano Law Foun

Republic of the Philippines SUPREME COURT Manila

EN BANC G.R. No. L-4818 February 28, 1955

APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs-appellees, vs. J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE UNITED STATES, defendant-appellant. REPUBLIC OF THE PHILIPPINES, intervenor-appellant. Jose P. Laurel, Adolfo A. Scheerer, Antonio Quirino, and J. C. Orendain, for appellees. Harold I. Baynton, Stanley Gilbert, Juan T. Santos, and Lino M. Patajo, and Perkins, Ponce Enrile & Associates, for appellant. Office of the Solicitor General Pompeyo Diaz and Solicitor Pacifico P. de Castro for intervenorappellant. CONCEPCION, J.: This action involves the title to 1,600,000 shares of stock of the Lepanto Consolidated Mining Co., Inc., a corporation duly organized and existing under the laws of the Philippines, hereinafter referred to, for the sake of brevity, as the Lepanto. Originally, one-half of said shares of stock were claimed by plaintiff, Apolinario de los Santos, and the other half, by his co-plaintiff Isabelo Astraquillo. During the pendency of this case, the latter has allegedly conveyed and assigned his interest in and to said half claimed by him to the former. The shares of stock in question are covered by several stock certificates issued in favor of Vicente Madrigal, who is registered in the books of the Lepanto as owner of said stocks and whose indorsement in blank appears on the back of said certificates, all of which, except certificates No. 2279 marked Exhibit 2 covering 55,000 shares, are in plaintiffs' possession. So was said Exhibit 2, up to sometime in 1945 or 1946 when said possession was lost under the conditions set forth in subsequent pages. Briefly stated, plaintiffs contend that De los Santos bought 55,000 shares from Juan Campos, in Manila, early in December, 1942; that he bought 300,000 shares from Carl Hess, in the same city, several days later; and that, before Christmas of 1942, be bought 800,000 shares from Carl Hess, this time for the account and benefit of Astraquillo. By virtue of vesting P-12, dated February 18, 1945, title to the 1,600,000 shares of stock in dispute was, however, vested in the Alien Property Custodian of the U. S. (hereinafter referred to as the Property Custodian) as Japanese property. Hence, plaintiffs filed their respective claims with the Property Custodian. In due course, the Vested Property Claims Committee of the Philippine Alien Property Administration made a "determination," dated March 9, 1948, allowing said claims, which were considered and heard jointly as Claim No. 535, but, upon personal review, the Philippine Alien Property Administration made by said Committee and decreed that "title to the shares in question shall remain in the name of the Philippine Alien Property Administrator." Consequently, plaintiffs instituted the present action to establish title to the aforementioned shares of stock. In their complaint, they pray that judgment be rendered declaring them lawful owners of said shares of stock, with such dividends, profits and rights as may have accrued thereto; requiring the

defendant to render accounts and to transfer said shares of stock to plaintiffs' names; and sentencing the former to pay the costs. The defendant herein is the Attorney General of the U. S., successor to the "Administrator". He contends, substantially, that, prior to the outbreak of the war in the Pacific, said shares of stock were bought by Vicente Madrigal, in trust for, and for the benefit of, the Mitsui Bussan Kaisha (hereinafter referred to as the "Mitsuis"), a corporation organized in accordance with the laws of Japan, the true owner thereof, with branch office in the Philippines; that on or before March, 1942, Madrigal delivered the corresponding stock certificates, with his blank indorsement thereon, to the Mitsuis, which kept said certificates, in the files of its office in Manila, until the liberation of the latter by the American forces early in 1945; that the Mitsuis had never sold, or otherwise disposed of, said shares of stock; and that the stock certificates aforementioned must have been stolen or looted, therefore, during the emergency resulting from said liberation. Inasmuch as, pursuant to the Philippine Property Act, all property vested in the United States, or any of its officials, under the Trading with the Enemy Act, as amended, located in the Philippines at the time of such vesting, or the proceeds thereof, shall be transferred to the Republic of the Philippines, the latter sought permission, and was allowed, to intervene in this case and filed an answer adopting in substance the theory of the defendant. After due hearing, the Court of First Instance of Manila, presided over by Honorable Higinio B. Macadaeg, Judge, rendered a decision the dispositive part of which reads, as follows: In view of the foregoing consideration, judgment is hereby rendered in favor of the plaintiffs and against the defendant, declaring the former the absolute owners of the shares of stock of the Lepanto consolidated Mining Company, covered by the certificates of stock, respectively, in their (plaintiffs') possession. The transfer of said shares of stock in favor of the Alien Property Custodian of the U. S. of America, now Philippine Alien Property Administration, is hereby declared null and void and of no effect. Consequently, the Lepanto consolidated mining Company is ordered to cancel the certificates of stock issued in the name of the Philippine Alien Property Custodian or Philippine Alien Property Administrator, as the case may be. Defendant shall pay the cost of the proceeding. (p. 67, R.A.) The defendant and the intervenor have appealed from this decision. The main question for determination in this appeal is whether or not plaintiffs had purchased the shares of stock in question. In support of the negative answer, appellants have introduced the testimony of Vicente Madrigal, Matsune Kitajima, Kingy Miwa, Miguel Simon, E. A. Perkins and Victor E. Lednicky, as well as several pieces of documentary evidence. Mr. Madrigal, whose testimony before the claims Committee of the Philippine Alien Property Administration was admitted with plaintiffs' consent, stated that he purchased the shares of stock in question, among others, for the Mitsuis and at their request; that he paid with his own funds the corresponding price, which was later reimbursed to him by the Mitsuis; that he held the corresponding stock certificates, which were issued in his name, with the understanding that he would effect the necessary transfer, to the Mitsuis, upon demand; and that, shortly before the

outbreak of war, he delivered said stock certificates, with his blank endorsement thereon, to the Mitsuis, to whom said stock belonged. Matsune Kitajima declared that in June 1941 he relieved one Kobayashi, as manager of the branch office of the Mitsuis in Manila; that he then receive from Kobayashi the stock certificates for about 1,900,000 shares of the Lepanto, belonging to the Mitsuis, but issued in favor of the Vicente Madrigal, except the certificates for 200,000 shares, which were in the name of the Mitsuis; that all these certificates were in kept in a steel safe in said office of the Mitsuis; that, in July 1941, he returned the stock certificates to Madrigal, with the request that he buy for the Mitsuis, from time to time, some more shares of stock, in small lots; that Madrigal bought 200,000 additional shares of the Lepanto for the Mitsuis; that, late in November or early in December, 1941, the stock certificates of the aforementioned 2,100,000 shares were returned to the Mitsuis, which had decided to stop buying, in view of the strained international situation then prevailing; that, as branch manager of the Mitsuis, he was the only official authorized to dispose of the shares in question, none of which was alienated by him; and that he had the aforementioned stock certificates in his possession continuously until early in April 1943, when he delivered the same to his successor in office, Kingy Miwa. Apart from corroborating Kitajima's testimony relative to said delivery of stock certificates in April 1943, Kingy Miwa testified that he kept the latter in his possession, as branch manager of the Mitsuis; that said shares of stock were never sold or otherwise disposed of by the Mitsuis; that, late in September 1944, he bade his assistant, one Miyazawa, to transfer all important documents to their residence and headquarters, at Taft Avenue, Manila, although he did not know personally whether or not the transfer was actually carried out; and that in January 1945, when the Japanese were about to evacuate Manila, he told his Assistant Manager, one Shinoda, to burn all important papers before leaving the city. Miguel Simon, brother of Carl Hess, from whom plaintiffs claim to have purchased 1,100,000 shares of stock, affirmed that Hess lived in front of his (Simon's) house; that they were close to each other and had long been associated in business; that he was the office manager of "Hess and Zeitling" before the war; that Hess used to tell him his daily transactions during the occupation; that at that time, Hess did not have in possession any certificates of stock of the Lepanto in the name of Vicente Madrigal; that neither did Hess, during that period, operate as broker, for being American, he was under Japanese surveillance, and that Hess had made, during the occupation, no transaction involving mining shares, except when he sold 12,000 shares of the Benguet Consolidated, inherited from his mother, sometime in 1943. E. A. Perkins, a member of the law firm DeWitt, Perkins & Ponce Enrile testified substantially as follows: On October 27, 1945, Leonardo Recio brought stock certificate no. 2279 (Exhibit 2) and offered the same for sale to Clyde DeWitt, who in turn, asked Perkins, whose room adjoined that of DeWitt, to join them. Recio showed Exhibit 2 to DeWitt stating that he (Recio) wanted P0.13 per share. DeWitt handed Exhibit 2 over to Perkins, who, after examining the instrument, returned it to DeWitt. The latter, thereafter, checked it with a communication of the Property Custodian and then advised Recio that said Exhibit 2 was one of the stock certificates looted from the Mitsuis and that he (DeWitt) would have to report the matter to said official. As DeWitt, thereupon, telephoned one Mr. Erickson, of the Property Custodian's office, Recio

stepped out of the room without Exhibit 2, which neither he or plaintiffs had ever tried to recover. Victor E. Lednicky, one of the organizers and prewar directors of the Lepanto, and present vicepresident and member of its board of director, asserted that, having learned from a soldier of the existence of mining papers and securities of the Lepanto in the offices of the Mitsuis at the Ayala Building, formerly known as the National city Bank Building in Manila, he went thereto in February 1945 and saw many documents scattered on the desks and floor of said premises. Among said papers, he noticed two stock certificates of the Lepanto, one, in the name of either a Japanese or Chinese, and the other, in the name of Vicente Madrigal, endorsed in blank. Soon, however, he heard voices from the stairs, whereupon he departed hurriedly, for fear of being mistaken for a looter. After analyzing the foregoing evidence for the defense, the lower court found the same "inherently improbable" and seemingly concluded that, as a consequence, it should accept plaintiffs' version, for which reason judgment was rendered as above stated. It is well settled, in this jurisdiction, that the findings of fact particularly those relating to the credibility of the opposing witnesses made by the Judge a quo, should not be disturbed on appeal, in the absence of strong and cogent reasons therefor. This policy is predicated upon the circumstance that the trial court has had an opportunity, denied to the appellate court to observe the behaviour of the witnesses during the hearing, a potent factor in gauging their bias and veracity. In the case at bar, however, we notice that, rejecting the theory of the defense, the court of origin was guided, not by the conduct of the witnesses in the name course of their testimony, but by what His Honor, the trial Judge, regarded as the inherent weakness thereof, in the evaluation of which court does not enjoy the advantage already adverted to. Moreover, the decision appealed from appears to have assumed that plaintiffs' pretense must necessarily be relied upon, owing to the infirmities said to have been found in the theory of the defense. This view suffers from a fatal defect. It overlooks that fact that the burden of proof is upon the plaintiffs, and that, accordingly, a decision in their favor is not in order unless a preponderance of the evidence supports their claim. To put it differently, the alleged improbabilities in the testimony of the witnesses for the defense will not justify a judgment against the latter, if the evidence for the plaintiffs is more improbable than, or, at least, as improbable as, that of the defense. Such is the situation obtaining in the case at bar. Indeed, upon careful examination of the record before us, we find it impossible to share the conclusions, made in the decision appealed from, relative to the alleged flaws in the version of the defense. Let us, first, examine the evidence for the plaintiffs, consisting, mainly, of their own testimony and that of Primitivo Javier and Leonardo Recio. According to De los Santos, on or about December 8, 1942, he purchased from Juan Campos, in Manila, 500,000 shares of stock of the Lepanto, for the aggregate sum of P30,000.00, or about P0.06 each share, paid in cash, in exchange for the corresponding stock certificates, which were delivered to him. Several days later, he bought from Carl Hess, in Manila, 300,000 shares of the Lepanto, at the same rate. Soon after, he visited his daughter in Baguio, where he, likewise, saw his co-plaintiff, and former secretary, Isabelo Astraquillo. Before leaving Astraquillo's house, De

los Santos happened to mention his aforesaid purchases of Lepanto shares, at P0.06 each, whereupon, Astraquillo expressed the wish to buy 800,000 shares at the same price, the amount of which he delivered to De los Santos the next day. Upon his return to Manila, De los Santos purchased from Hess said 800,000 shares, the certificates of which were turned over by the former to Astraquillo, in Baguio, at about Christmas time. Over 3 years later, or in January 1946, De los Santos repaired to the offices of the Lepanto in Manila to ascertain whether it accepted certificates of stock for registration. He then received a negative answer. Upon further inquiry, he learned, in February 1946, that the shares in the name of Madrigal were blocked. So engaged the services of Atty. A. Scheerer, who secured an order of release from the Freezing Control Office of the United States Treasury Department. As he brought a copy of this order to the offices of the Lepanto, on or about May 1, 1946, he was advised that no transfer could be affected without the authority of Clyde DeWitt, the company president. Thereupon, De los Santos caused to be filed, with the offices of the Property Custodian, the corresponding claim for the shares of stock in question, with the result already adverted to. Astraquillo tried to corroborate the testimony of De los Santos, concerning the purchase of 800,000 shares of stock on behalf of the former. Moreover, Astraquillo declared that, being in need of money, he came to Manila in November or December 1945, and delivered to stock broker Leonardo Recio stock certificate No. 2279 (Exhibit 2) for 55,000 shares, with a view to disposing of the same at a price ranging from P0.13 to P0.15 each. He advised Recio that, in the absence of any buyer, hew could see Mr. DeWitt, who, probably, would be interested in purchasing the shares. Sometime later, Astraquillo learned that, according to Recio, upon seeing Exhibit 2, DeWitt retained it upon the ground that the shares represented therein had been blocked by the United States and that he (Recio) got therefor a receipt, which was subsequently lost in a fire that destroyed his (Recio's) dwelling. As Astraquillo hurried to Manila, he was told that representatives of the CIC would go to Baguio to investigate. So, he returned to Baguio, but he did not wait for the investigation in that city. Late in February or early in March, 1946, he came back to Manila and asked the assistance of De los Santos, whereupon both contacted Atty. Scheerer for the purpose already stated. Primitivo Javier narrated that, late in 1945, he received Exhibit 2 from his uncle, Astraquillo, who wanted to sell the 55,000 shares represented by said stock certificate (No. 2279) at a price ranging from P0.12 to P0.15 each share. He, in turn, delivered the certificate to Recio, a licensed broker. Subsequently, Recio reported to him that he (Recio) had brought Exhibit 2 to the office of Mr. DeWitt, whom he did not see on his first visit; that he then left Exhibit 2 in the hands of a person who worked in said office, one Atty. Orlina, who issued a receipt therefor; that, when Recio came back, later on, DeWitt told him that Exhibit 2 was defective; and that, accordingly, Exhibit 2 was left in the possession of Mr. DeWitt. Javier relayed this information to Astraquillo, who, thereupon, came to Manila. Both went to the temporary residence of Recio in Sampaloc, his house in San Juan del Monte, Rizal, having been destroyed by fire late in December 1945. Recio then advised them that said receipt had been burned with his house. Leonardo Recio said that sometime in 1945, Javier gave him Exhibit 2, stating that it belonged to his uncle, who wanted to alienate the corresponding shares of stock at P0.15, more or less, each, and suggesting that he offer the same to Mr. DeWitt: In the latter's office, Atty. Orlina told Recio that DeWitt was busy and bade him (Recio) to return later. Recio delivered Exhibit 2 to Orlina,

who gave him a receipt, which, subsequently, he showed to Javier. When, soon after, he went back to Orlina, the latter introduced him to Mr. DeWitt, who stated that the shares of stock covered by Exhibit 2 were included in the list of questioned shares. DeWitt, also, asked him whether he would leave the certificate, to which Recio replied affirmatively. While he was away, several months later, or shortly before Christmas, his house at Blumentrit Street, San Juan del Monte, Rizal, and everything contained therein, including the aforementioned receipt, which was in his wallet, were destroyed by fire. It thus appears that the only evidence on the alleged sale of the shares of stock in question to the plaintiffs the main issue in the case at bar is the testimony of Apolinario de los Santos, who now claims to be the sole owner thereof. Juan Campos and Carl Hess, the alleged vendors, could not take the witness stand, for Hess was executed by the Japanese, and Campos died during the liberation of Manila. Thus, death has sealed the lips of the only persons who could have positively corroborated or contradicted the aforementioned testimony of De los Santos. Was this a mere accident of fate, as plaintiffs would have us believe? Or were Campos and Hess named by the plaintiffs as their immediate predecessors in interest precisely because, as contended by appellants, said deceased persons could no longer said testimony? For obvious reasons, the Court can not answer these questions with absolute certainty. It can only explore the possibilities and probabilities of the case, in the light of human experience. And, viewed from this angle, it can not be denied that the demise of Campos and Hess before the filing of plaintiffs claim seriously impairs the weight thereof. That the Grim Reaper had chosen to strike at one of the alleged predecessors of the plaintiffs is a matter that may be attributed to sheer fortuitousness. When, as in the case at bar, not one, but both have thus been eliminated,, it is clear, however, that this circumstances is most unusual, and most place the Court on guard. The need for caution becomes more imperative when we bear in mind that an important piece of documentary evidence, which allegedly existed after liberation, and could have effectively corroborated one phase of the plaintiff's contention, had, according to their evidence, disappeared through still another unfortunate turn of the wheel of fate. It will be recalled that late in 1945, Leonardo Recio, allegedly acting on behalf of Astraquillo, offered to sell to Atty. DeWitt the 55,000 shares represented by stock certificate No. 2279 (Exhibit 2). Recio testified that, having been unable to see DeWitt, when he (Recio) went to the latter's office, for the first time, said Exhibit 2 was left by him (Recio) in the hands of Atty. Orlina who worked therein and gave him a receipt therefor. This receipt, if produced, would have surely afforded us tangible proof of the veracity of, at least this part of plaintiffs' story. Yet, we are now told that, one day in December, 1945, Recio's house accidentally caught fire, and that the latter consumed, also, said receipt, kept in a wallet, which, by accident, he had failed to bring with him. Aren't there too many accidents in plaintiffs' version? At any rate, we have thus been deprived of all means to check with reasonable certainty the truth of any of the controverted portions of their pretense. In other words, the same is based, and must stand or fall, therefore, upon the uncorroborated testimony of plaintiff Apolinario de los Santos, and the credence and weight that may be given thereto. Upon a review of the record, we find, however, that said testimony is highly improbable and inherently weak, for, among other things:

(1) De los Santos declared that, in December, 1942, he purchased 300,000 shares from Juan Campos and 1,300,000 shares from Carl Hess, at P0.06 each share. As an enterprise controlled by Americans, the Lepanto had been seized by the Japanese who, accordingly, were operating it. At that time, there were no clear, or, even, substantial, indications that changes would take place, either in the local or in the international situation in the near of foreseeable future. In deed, the morale of the population in democratic countries, particularly in the Philippines, was then at its lowest ebb. Both in Europe and in the Pacific, the Axis powers had reached in enemy territories the highest degree of penetration attained during the last war. Before the world had recovered from the shock produced by the German blitzkrieg operations in the low countries and in France, the Nazis were already knocking at the gates of Stalingrad entrenched in New Guinea and the Soloman Islands. The people had a hazy notion about the facts pertinent to the Battle of Midway (June 3-6, 1942) and the implications thereof were by and large unknown. In other words, the conditions were such as to warrant the general belief that the Lepanto would remain under the authority and management of the Japanese Imperial forces for an indefinite period of time. As a consequence, the Lepanto stock had not merely a doubtful value, but as admitted by Santos even, no market value at all (p. 132, t.s.n). Indeed, the stockholders could neither collect dividends nor exercise their voting power, or otherwise participate in the operation of the enterprise. Moreover, there was a possibility of its assets being fully confiscated, for all practical purposes, should Japan emerge victorious in the was in the Pacific, which it appeared to be winning easily up to that time (December, 1942). (2) Inasmuch as citizens of the United States held a majority of the shares of stock of the Lepanto, the same had from the view point of the Japanese, an enemy character, and the purchase of said stocks was, therefore, a hostile act. As a matter of fact, in the proceedings before the Vested Property Claims Committee, the parties including plaintiffs herein had stipulated "that such transfers and dealings in said stock were prohibited by the Japanese during the occupation and hence were dangerous." (Record on Appeal, p. 110). Said transactions could jeopardize the life of the parties thereto and De los Santos was aware of the "highly dangerous" or "very risky" nature of the "mere possession" of the stock certificates in question. (pp. 141, 143, t. s. n.) (3) Astraquillo is merely a former employee of De los Santos, who had, therefore, no reason to risk his neck, not only by allegedly buying 800,000 shares of stock for Astraquillo, but, also, by avowedly bringing with him (De los Santos) the corresponding stock certificates from Manila to Baguio, to make delivery thereof to Astraquillo, as the defense would have us believe, notwithstanding the many Japanese check points in the 250 kilometers highway connecting both cities and the absence of any monetary or other gain he could have derived from the acts he professes to have performed. (4) According to the Ballantyne schedule the accuracy of which has not been impugned by plaintiffs herein the Japanese war notes in the Philippines had the same exchange of purchase value as the currency of our legitimate government, in December, 1942 and this was conceded by De los Santos (p. 136, t. s. n.) when they claim to have purchased the Lepanto stocks. The P48,000 supposedly paid by the De los Santos, and the identical sum allegedly disbursed by Astraquillo, for their respective stock, represented, therefore, the same amount in legal tender of the Commonwealth of the Philippines. In fact, according to the evidence for the

plaintiffs, part of the price allegedly paid by Astraquillo, or P6,000, were in the genuine Philippine money, representing his savings for 25 years. Said sum of P6,000 being insufficient to cover the cost of 800,000 shares of stock, Astraquillo, it is urged, alienated other properties to raise the amount necessary thereof. It is very difficult to believe that the plaintiffs would have parted with P48,000 each precisely when, owing to the abnormal conditions brought about by the occupation, said funds might be needed, at any time, to meet unforeseen emergencies of the gravest and most vital nature for shares of stock of dubious value then and in the foreseeable future. (5) We are not satisfied that either De los Santos or Astraquillo possessed enough resources to have P48,000, in cash, each, in December 1942. Their evidence on this point is too general apart from being based exclusively upon their respective oral testimonies, which are absolutely uncorroborated to support their contention. At any rate, De los Santos admitted that he is "not yet" rich (p. 134, t. s. n.), and his testimony suggests that he did not even own the house in which he lived. (6) Campos offered to sell his stocks, according to De los Santos, at P0.06 each (although its par value was P0.10), stating that "he (Campos) needed money" (p. 43, t.s.n.), and advised him that Hess was, also, willing to dispose of his own stocks at the same price. Being, accordingly, aware that Campos and Hess were in need of money and considering the risks attending the transaction, it is but logical to expect De los Santos, an experienced trader in stocks, to bargain for a lower price. Yet, the evidence for the plaintiffs shows that neither he nor Astraquillo tried to do so, contrary to the normal course of events. (7) De los Santos could not have purchased 1,300,000 shares of stock, from Hess, and received from him the corresponding stock certificates, endorsed in blank by Vicente Madrigal, for Hess had never had such stock certificates in his possession during the occupation. There is no plausible reason to doubt the veracity of the testimony of Miguel Simon to this effect, for the latter had no possible motive to commit perjury, and was in a position to know what he was talking about. Apart from being a brother-in-law of Hess, Simon was manager of the firm Hess & Zeitling, of which Hess was the senior partner, who used to inform him (Simon) of his (Hess) business transactions. (8) Campos and Hess could not have delivered the stock certificates for the 1,600,000 shares of stock in question, and, consequently, said shares of stock could not have been sold by them, to De los Santos in December 1942, inasmuch as from December 1941 to April 1943, said stock certificates were continuously in the custody of Matsume Kitajima, manager of the Mitsuis in Manila, whose testimony was corroborated by his successor in office, Kingy Miwa, to whom Kitajima turned over the stock certificates in April 1943. The sincerity of Matsume Kitajima and Kingy Miwa can not doubted, for neither appears to have any possible reason to trifle with the facts. Indeed, their testimony, if accepted as true, would ultimately result in the confiscation, by the Republic of the Philippines, of the shares of stock in question and, thus, place the same beyond the reach of the Mitsuis. It has been intimated that Kitajima and Kingy may have testified as they did, either to protect themselves, because they might have disposed of the shares of stock in question for their

personal benefit, or because there had been undue influence or pressure from the authorities presumably officers of the government of the United States. But these are mere speculations, without sufficient basis. Besides, judicial notice may be taken of the circumstance that, during the occupation, even minor Japanese officials could easily make money, in the Japanese properties. Again, in December, 1942, the Japanese in the Philippines appeared to have no doubts that, in effect, Japan had already won the war. In short, Kitajima and Kingy must have thought that, sooner or later, Japan would own the Lepanto and that, therefore, they would have to account for the shares of stock under consideration. Consequently, it is most unlikely that neither would have misappropriated said shares of stock as suggested by the plaintiffs. The benefits which the Mitsuis and Japan may derive from a decision against the plaintiffs inasmuch as the value of the shares of stock in question would then be credited in payment of the reparation which may be demanded by the Philippines and/or the United States has been pointed out, in the dissenting opinion, as a possible motive for the commission of perjury by Kitajima and Kingy. Besides being purely conjectural in nature, this line of thought which not even the plaintiffs have taken would have no leg to stand on, unless we assume that the Mitsuis had sold or otherwise disposed of said stocks during the year 1942, but before the alleged transactions between Campos and Hess, on the one hand, and the plaintiffs on the other, in December of that year. It is inconceivable, however, that the Mitsuis would part with the stocks in question, precisely when Japanese was at the crest of its military and political victories. Indeed, even if its officers had already foreseen, at the time, the eventual defeat of the axis powers and everything then appeared to indicate the contrary the Mitsuis could not have disposed of said stocks without thereby revealing their own lack of faith in the ability of Japan to achieve final victory. Thus, the Mitsuis would have caused a grave injury upon the Japanese propaganda and thereby earned severe punishment from the Imperial Government. Nothing, absolutely nothing, in the record, or in contemporary history, warrants the belief that the Mitsuis, who were closely associated with the Japanese Government, could be guilty of such folly. Let us now turn our attention to the evidence for the defense, beginning with the testimony of Victor E. Lednicky. It will be recalled that this witness claimed to have gone to the premises of the Mitsuis, sometime in February 1945, including two (2) Lepanto certificates of stock, one of which was in the name of Vicente Madrigal, whose blank indorsement appeared thereon. Thus, the defense sought to prove that the certificates of the shares of stock involved in this case have probably been looted. The lower court found Lednicky's story inherently improbable and then concluded that the theory of the looting must, consequently, be "ruled out". To our mind, however, the testimony of Lednicky is not inherently improbable. Besides, it is a matter of common knowledge, of which judicial notice may be taken, that many offices and dwellings were looted during the liberation of Manila. The possibility that possession of the stock certificates in question may have been secured by looting should not be "ruled out," therefore, irrespective of the credence and weight given to the testimony of Lednicky. Actually, said certificates are included in the list of stocks certificates of the Lepanto which, soon after liberation, were reported and considered looted from the Mitsuis, and, accordingly, "blocked" or "frozen" by the authorities. Irrespective of the foregoing, De los Santos could not have obtained those certificates from Campos and Hess in December 1942, inasmuch, as, from December 1941 to April 1943, Kitajima had been continuously in possession of said documents, none of which had been held by Hess during the occupation.

The lower court considered against the defense the circumstance that Lednicky, Simon and Perkins had not testified before the Vested Property Claims Committee. There is no evidence, however, that any of them knew of the proceedings before said committee. Furthermore, none of them has any personal interest in the outcome of this action. Consequently, they have no possible motive to distort the truth, unlike De los Santos, who, as the present claimant of all shares of stock in dispute, will de directly affected by the outcome of the case at bar. His testimony, therefore, cannot be more weighty than that of the aforementioned witnesses for the defense. The decision appealed from criticizes the testimony of Perkins upon the following grounds: (1) Having taken no part in the alleged looting of Exhibit 2, Recio had nothing to fear in connection therewith and, so, he could not have left the office of Mr. DeWitt, while the latter was talking over the telephone with a representative of the Alien Property Custodian; . (2) Inasmuch as DeWitt had stated that Exhibit 2 was included in the list of looted stock certificates, Perkins should have known that, as holder of the certificate, Recio is presumed to be the one who stole the same. Why then plaintiffs inquire did Perkins fail to prevent Recio from leaving said office? As regards the first observation, suffice it to say that, as bearer of the Exhibit 2, Recio who, according to the lower court, is an intelligent man must have realized the danger, probably unforeseen by him, of being considered a privy to the looting of said stock certificates, of which he might have been unaware before the conference with Mr. DeWitt. Hence, Recio's fright and virtual flight. Verily, the testimony of Perkins on this point is borne out by the undisputed fact that Exhibit 2 was left by Recio in the hands of DeWitt, and that neither Astraquillo, nor his alleged successor in interest, De los Santos, has ever demand from DeWitt the return of said certificate, or even recriminated Recio for having voluntarily parted with its possession, as he would have us believe, without authority therefor, as a broker or agent who was supposed merely to find a buyer. As to the second observation, Perkins knew that Recio was acting solely as a broker or agent. As such, he was not the real holder of Exhibit 2, and, consequently, the presumption adverted to did not apply to him. Even if it did, however, what could Perkins have done? Use force or violence upon the person of Recio, or ask a policeman to detain him? Neither step, however, could have been taken without some risks. To begin with, Perkins could not have properly taken the law in his own hands. Had he done so, Recio could have legally used force against force. Moreover, said presumption is rebuttable and would have easily been offset by the undeniable fact that Recio had acted merely in a representative capacity. Again, why should Perkins take the initiative in the matter? Was it not being handled by his associate in the law firm, Mr. DeWitt, one of the most able members of the Philippine Bar? It may not be amiss to add that the record before us discloses absolutely nothing that may cast even a shadow of doubt upon the honesty of Mr. Perkins. The language of the lower court in commenting on the testimony of Miwa was:

. . . In general, the testimony of Miwa is unreliable. His behaviour in Court in denying first and then in accepting later his own signature throws him to a position where the Court must look upon him with suspicion and distrust. His prevarication before the Court as to the genuineness of his own signature was probably due to the conscience of a man who came to the Court with a mental reservation, but who may have been compelled under the circumstances to play the role of a willing tool. (p. 54, R.A.) The following portion of Miwa's testimony illustrates the point referred to in the decision appealed from: ATTY. QUIRINO: Q. Will you please go over this paper which for purposes of identification we request that it be marked as Exhibit M for the plaintiffs and which was marked Exhibit 6-b before the Vested Property Claims Committee, and tell us if you know that document? A. No. I do not remember this paper. Q. Mr. Miwa, at the bottom of this certificate or Exhibit M, which was Exhibit 6b in the committee and submitted by the Alien Property Administration, there is a typewritten name, Kingy Miwa, and above it is a signature. Will you kindly tell the Court if that is your signature or not? Please look over it again. A. No. It is not mine. Q. Please examine it carefully and tell the Court afterwards if you recognize that signature. Examine it carefully. A. It looks very similar to my signature. Q. But would you want or are you willing to go on record and say that it is not your signature? A. I can not say. I don't exactly remember that I signed this, but it looks very similar to my signature. Q. You will not testify under oath that this is your signature? A. Yes. sir.

Q. What do you mean to say by "yes, sir"? Do you swear that this is your signature or not your signature? A. I think this is my signature. Q. So, you are willing to go on record now that that signature appearing in Exhibit "M" is your signature? A. Yes, I think so. (pp. 125-126, t. s. n.) We do not agree with its appraisal by the lower court. It is clear that, as he did not remember the execution of Exhibit M several years before the hearing of this case, Miwa had doubts about the genuineness of the signature thereon, but the appearance thereof, similar or identical to that of his own signature, prevented him from denying its authenticity. This does not indicate lack of veracity on his part. At any rate, plaintiffs claim to have bought the shares of stock in question in December, 1942, or during the management of Kitajima, who held the corresponding stock certificates continuously from December, 1941, to April, 1943, when Miwa substituted him, so that neither Campos nor Hess could have delivered those certificates to De los Santos in December 1942. Apart from this, if there are flaws in the proof for the defense, those of the

evidence for the plaintiffs are much bigger and more substantial and vital. Consequently, we hold that plaintiffs have not established their pretense by a preponderance of the evidence. Even, however, if Juan Campos and Carl Hess had sold the shares of stock in question, as testified to by De los Santos, the result, insofar as plaintiffs are concerned, would be the same. It is not disputed that said shares of stock were registered, in the records of the Lepanto, in the name of Vicente Madrigal. Neither it is denied that the latter was, as regards said shares of stock, a mere trustee for the benefit of the Mitsuis. The record shows and there is no evidence to the contrary that Madrigal had never disposed of said shares of stock in any manner whatsoever, except by turning over the corresponding stock certificates, late in 1941, to the Mitsuis, the beneficial and true owners thereof. It has, moreover, been established,, by the uncontradicted testimony of Kitajima and Miwa, the managers of the Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares of stock, nor delivered the aforementioned stock certificates, to anybody during said period. Section 35 of the Corporation Law reads: The capital stock corporations shall be divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation. (Emphasis supplied.) Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. However, the transfer shall "not be valid, except as between the parties," until it is "entered and noted upon the books of the corporation." no such entry in the name of the plaintiffs herein having been made, it follows that the transfer allegedly effected by Juan Campos and Carl Hess in their favor is "not valid, except as between" themselves. It does not bind either Madrigal or the Mitsuis, who are not parties to said alleged transaction. What is more, the same is "not valid," or, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) which were quoted approval in Uson vs. Diosomito (61 Phil., 535) "absolutely void" and, hence, as good as non-existent, insofar as Madrigal and the Mitsuis are concerned. For this reason, although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel.

Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee under a forged assignment acquires no title which can be asserted against the true owner, unless his own negligence has been such as to create an estoppel against him (Clarke on Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412). As was said by the Supreme Court of the United States in a leading case (Western Union Telegraph Co. vs. Davenfort, 97 U. S. 369; 24 L. Ed. 1047) "Neither the absence of blame on the part of the officers of the company in allowing an unauthorized transfer of stock, nor the good faith of the purchaser of stolen property, will avail as an answer to the demand of the true owner. The great principle that no one can deprived of his property without his assent, except by processes of the law, requires, in the case mentioned, that the property wrongfully transferred or stolen should be restored to its rightful owner." (The Philippine Law of Stock Corporations by Fisher, p. 132.) (Emphasis supplied.) In the language of Fletcher's Cyclopedia Corporations (Vol. 12, pp. 521-534): The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer acquires no title as against the true owner does not apply where the circumstances are such as to estop the latter from asserting his title. . . . xxx xxx xxx

A reason often given for the rule is that it is a case for the application of the maxim that where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting such loss. But "negligence which will work an estoppel of this kind must be a proximate cause of the purchase or advancement of money by the holder of the property, and must enter into the transaction itself "; the negligence must be in or immediately connected with the transfer itself . Furthermore, "to establish this estoppel it must appear that the true owner had conferred upon the person who has diverted the security the indicia of ownership, or an apparent title or authority to transfer the title." So the owner is not guilty of negligence in merely entrusting another with the possession of his certificate of stock, if he does not, by assignment or otherwise, clothe him with the apparent title. Nor is he deprived of his title or his remedy against the corporation because he intrusts a third person with the key of a box in which the certificate are kept, where the latter takes them from the box and by forging the owner's name to a power of attorney procures their transfer on the corporate books. Nor is the mere indorsement of an assignment and power of attorney in blank on a certificate of stock, which is afterwards lost or stolen, such negligence as will estop the owner from asserting his title as against a bona fide purchaser from the finder or thief, or from holding the corporation liable for allowing a transfer on its books, where the loss or theft of the certificate was not due to any negligence on the part of the owner, although there is some dangerous and wholly unjustifiable dictum to the contrary. So it has been held that the fact that stock pledged to

a bank is endorsed in blank by the owner does not estop him from asserting title thereto as against a bona fide purchaser for value who derives his title from one who stole the certificate from the pledgee. And this has also been held to be true though the thief was an officer of the pledgee, since his act in wrongfully appropriating the certificate cannot be regarded as a misappropriation by the bank to whose custody the certificate was intrusted by the owner, even though the bank may be liable to the pledgor. . . . . A person is not guilty of negligence in leaving a certificate of stock endorsed in blank in a safe deposit box used by himself and another jointly, so as to be estopped from asserting his title after the certificate has been stolen by the other, and sold or pledged to a bona fide purchaser or pledgee. Nor is he negligent in putting a certificate so endorsed in a place to which an employee had access, where he has no reason to doubt the latter's honesty, . . . . (Emphasis supplied.) In the leading case of Knox vs. Eden Muscee American Co. (42 N. E. 988, 992-993), the rule has been forcefully stated as follows: The courts have been frequently importuned to extend the qualities of negotiability of stock certificates beyond the limits mentioned, and clothe them with the same character of complete negotiability as attaches to commercial paper, so as to make a transfer to a purchaser in good faith for value equivalent to actual title, although there was no agency in the transferor, and the certificate had been lost without the fault of the true owner, or had been obtained by theft or robbery. But the courts have refused to accede to this view, and we have found no case entitled to be regarded as authority which denies to the owner of a stock certificate which has been lost without his negligence, or stolen, the right to reclaim it from the hands of any person in whose possession it subsequently comes, although the holder may have taken it in good faith and for value. The precise question has not often been presented to the courts, for the reason, probably, that they have with great uniformity held that stock certificates were not negotiable instruments in the broad meaning of that phrase; but whenever the question has a risen it has been held that the title of the true owner of a lost or stolen certificate may be asserted against any one subsequently its possession although the holder may be bona fide purchaser. Anderson vs. Nicholas, 28 N. Y. 600; Power vs. Robinson, 52 Fed. 520; Biddle vs. Bayard, 13 Pa. St. 150; Barstow vs. mining Co., 64 Cal. 388, 1 Pac. 349. See Shaw vs. Railroad Co., 101 U. S. 557. . . . It is plain, we think, that the argument in support of the judgment in this case, base on the complete negotiability of stock certificates, is not supported by, but is contrary to, the decisions. If public policy requires that a further advance should be made in more completely assimilating them to commercial paper in the qualities of negotiability, the legislature, and not the courts, should so declare. Under the law as it has hitherto prevailed there does not seem to have been any serious hindrance in dealing with property of this character. It may, perhaps, be doubted, taking into consideration the interests of investors as well as dealers, whether it would be wise to remove the protection which the true owner of a stock certificate now has against accident, theft, or robbery. The system of registry of negotiable bonds, which prevails to a considerable extent, authorized by statutes of some of the states and of the United States, seems to indicate a tendency to restrict, rather than to extend, the range of negotiable instruments. (Emphasis supplied.)

The status of quasi-negotiability generally accorded to, and at present enjoyed by, certificates of stock, under the Philippine law, is in itself a recognition of the fact that the certificates are nonnegotiable. Instead of sustaining appellees' claim, section 5 of the uniform Stock Transfer Act, which "gives full negotiability to certificates of stock," refutes said claim and confirms the nonnegotiable character of stock certificates in the absence of said Unifrom Act, for, obviously, the same could not have given, negotiability to an instrument already possessing this attribute prior thereto. Again, apart from being distinct from the general Corporation Law, the aforementioned Uniform Act is not in force in the Philippines. In this connection, it should be noted that this special piece of legislation was adopted in some states of the union as early as the year 1910. The failure of the Philippine government to incorporate its provisions in our statute books, for a period of almost 45 years, is, to our mind, clear proof of the unwillingness of our department to change the policy set forth in section 35 of Act No. 1459. Needless to say, this fact negates our authority which is limited to the interpretation of the law, and its application, with all its imperfections to abandon what the dissenting opinion characterizes as the "civil law standpoint," and substitute, in lieu thereof, the commercial viewpoint, by applying said section 5 of the Uniform Stock Transfer Act, although not a part of the law of the land. Indeed, even in matters generally considered as falling within "commercial territory", the Roman Law concept has not given way in the Philippines to the Common Law approach, except when there is explicit statutory provision to the contrary. In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is not even claimed that either had, through negligence, given occasion for an improper or irregular disposition of the corresponding stock certificates. Plaintiffs merely argue without any evidence whatsoever thereon that Kitajima might have, or must have, assigned the certificates on or before December 1942, although, as above stated, this is, not only, improbable, under the conditions, then obtaining, but, also., impossible, considering that, in April 1943, Kitajima delivered the instruments to Miwa, who kept them in its possession until 1945. At any rate, such assignment by Miwa granting for the sake of argument the accuracy of the surmise of plaintiffs herein was unauthorized by the mitsuis, who, in the light of the precedents cited above, are not chargeable with negligence. In other words, assuming that Kitajima had been guilty of embezzlement, by negotiating the stock certificates in question for his personal benefit, as claimed by the plaintiffs, the title of his assignees and successors in interest would still be subject to the rights of the registered owner, namely, Madrigal, and consequently, of the party for whose benefit and account the latter held the corresponding shares of stock, that is to say, the Mitsuis. At any rate, at the time of the alleged sales in their favor, plaintiffs were aware of sufficient facts to put them on notice of the need of inquiring into the regularity of the transactions and the title of the supposed vendors. Indeed, the certificates of stock in question were in the name of madrigal. Obviously, therefore, the alleged sellers (Campos and Hess) were not registered owners of the corresponding shares of stock. Being presumed to know the law particularly the provisions of section 35 of Act No. 1459 and, as experienced traders in shares of stock, plaintiffs must have, accordingly, been conscious of the consequent infirmities in the title of the supposed vendors, or of the handicaps thereof. Moreover, the aforementioned sales were admittedly hostile to the Japanese, who had prohibited it and plaintiffs had actual knowledge of these facts and of the risks attendant to the alleged transaction. In other words, plaintiffs

advisedly assumed those risks and, hence, they can not validly claim, against the registered stockholder, the status of purchasers in good faith. The lower court held, and plaintiffs maintain that, not being the registered owners of the shares of stock in question, the Mitsuis can not assert a better right than said plaintiffs. This pretense is untenable. Inasmuch as Madrigal, the registered owner of said shares of stock, has always acknowledged that he held the same merely as an agent of, or trustee for, the mitsuis and this is not denied it follows that the latter are entitled to invoke such rights as Madrigal had as registered stockholder. Upon the other hand, even the alleged sale by Juan Campos and Carl Hess to plaintiffs herein is contested by the defense and, to our mind, has not been established by a preponderance of the evidence. Hence, as the undisputed principal or beneficiary of the registered owner (Madrigal), the Mitsuis may claim his rights, which cannot be exercised by the plaintiffs, not only because their alleged title is not derived either from madrigal or from the Mitsuis, but, also, because it is in derogation, of said rights. madrigal and the Mitsuis are not privies to the alleged sales by Campos and Hess to the plaintiffs, contrary to the latter's pretense. In conclusion, when the Property Custodian issued the Vesting Order complained of, the shares of stock in question belonged to the Mitsuis, admittedly an enemy corporation, so that Vesting Order is in conformity with law and should be upheld. Wherefore, the decision appealed from is hereby reversed, and the complaint, accordingly, dismissed, with costs against the plaintiffsappellees. It is so ordered. Paras, C. J., Pablo, Padilla, Montemayor, Reyes, A., Jugo and Labrador, JJ., concur.

Separate Opinions BENGZON, J., dissenting: Unable to agree with my distinguished colleagues, I find it necessary to write a rather extended dissent, due principally to the far-reaching effect of their ruling upon future operations of the local stock market and corporate business. A dissent at least indicate what is not the law. During the Japanese occupation two Filipinos the plaintiffs secretly purchased shares of an American corporation, whose assets had been seized by the enemy invader. Risking Japanese wrath, they staked their funds (perhaps their freedom or lives) on the eventual return of the American forces. After two years, these came back in victorious liberation; but oddly enough plaintiffs lose their money and the shares. Such anti-climax is brought about by this decision of the Philippine Supreme Court, upon the initiative or opposition of Americans and Filipinos, resulting ultimately to the benefit of the Japanese.1 Not that I believe property rights should be apportioned on the basis of nationality; but the impact of plaintiffs' misadventure may not be fully realized unless these details are described.

Just the luck of plaintiffs: They won the before the U. S. Treasury, and later before the Vested Property Aliens Committee but they lost before the Administrator because this officer applied an erroneous legal principle.2 Thereafter they resort to the courts, winning the first round. Now again they lose. Perspective, imperfect I believe, accounts for their second defeat. We take the viewpoint of a trial judge passing on conflicting testimony, and thusly adjudicate: "evidence for the plaintiffs is `as improbable as that of the defense'; yet the burden of proof is upon plaintiffs', therefore judgment for defendants." On appeal our coign of vantage lies on higher ground; and, following established practice, the issue credibility of witnesses, we should uphold the judgment for plaintiffs unless the trial judge unduly discarded significant evidentiary pieces for the defendants. Reading the testimony in black and white, we might disagree with his estimate of the factual probabilities; nevertheless we should, as usual, make allowance for his peculiar advantage of having seen the witnesses testifying on the chair; and then affirm, realizing that this distance we cannot perceive minor movements of the pointer in the judicial balance. The majority attempt to justify their deviation from accepted practice with the statement that "in rejecting the theory of the defense" His Honor "was guided not by the conduct of the witnesses in the course of their testimony", but by the inherent "weakness" of such theory. For the application of the principle recognizing the advantage of the trial judge, it is not necessary in my opinion-for the said officer to declare explicitly, that in appraising the witnesses' versions he was guided by their conduct on the witness-stand; normally, in matters of credibility he weighs their testimony against the background of the sense-images they produced, their demeanor, expression of their faces etc. Nevertheless, admitting arguendo, that this appeal must be decided upon the finding that plaintiffs' theory of purchase "is as improbable as defendant's theory" (of looting), I submit that, inasmuch as the plaintiffs have possession of the certificates which were endorsed in blank, and inasmuch as the burden of proof shifted to the defendants to prove the alleged looting, plaintiffs should receive the award. In addition to plaintiffs' testimony, it must be emphasized they have the certificates in proper order, endorsed in blank. Such documentary proof, speaking for itself, should tip the scales, whenever, as this court declares now the testimonial evidence "is even.". The presumption is that . . . stock which was endorsed in blank was delivered to the parties who had possession of stock (Hess and Campos) and transferred it to bona fide purchasers (plaintiffs). (See Lilley vs. First Federal Savings & Loan Association, La. App. 1940, 194 So. 901.) Furthermore, there are these presumptions: (1) Hess and Campos, and Plaintiffs are innocent of crime or wrong, and (2) things which a person possesses are owned by him. (Rule 123 sec. 69). Listed in the majority decision are eight grounds to disbelieve Santos' declarations. Let me comment briefly on them: Anent the first, Santos was positive the American forces would eventually return, and he bought the shares. As to the second; and the third, he braved the dangers, for the sake of sure financial gain. As to the fourth and fifth, it must be remembered that Santos had a monthly income of P6,000, and was co-owner of ten hectares of land in Tondo. His

living in a rented apartment does not imply financial inability; many landed provincial flow were ordinary tenants in Manila during the war. As to the price, Santos who had been dabbling in other stock knew that at P0.06 the Lepanto shares were a bargain; so did not hesitate and grabbed the chance. As to the seventh, Miguel Simon could not affirm under oath that Carl Hess "had imparted all his activities to me" (p. 29 s. n.) ; and because the handling of these shares was "dangerous" at that time, most probably Hess didn't inform him about it. And what about the shares Santos bought from Campos? Concerning the 8th, remember that although Kitajima and Miwa said the Lepanto certificates were in their possession, they didn't mean physical personal possession, but official possession, in the vaults or cabinets of the Mitsui office. Yet they admitted that other officials had access to the same certificates (p. 115 testimony of Miwa). Inference: such other officials could have and probably disposed of the certificates. As to Kitajima's testimony that in April 1943 he delivered these certificates to his successor Kenji Miwa, no satisfactory explanation exists for defendants' failure to present the inventory admittedly prepared at that time. the document was the best evidence, since Kitajima might not have been sincere, for he would be personally responsible to the Mitsui higher-ups for the certificates; and the temptation to palm off responsibility is great where opportunity offers. And Miwa could not have received and kept these shares, because he swore to having seen it when ordered to leave Manila in 1945 that the important documents including the Lepanto shares were burned. How come these shares are now in the possession of Santos? Obviously, because they were not among those shares burned, nor shares delivered to Miwa or kept by him in the Manila offices. The Mitsui Company it must be underscored stands to benefit from a declaration that these shares still belong to it. True, they will be confiscated now, for defendants. They are nevertheless Japanese assets which may ultimately have to be credited to the said corporation. Supposing Kitajima told the whole truth that he did not dispose of the shares, then the probabilities are that such shares had been disposed of by other Mitsui officials without his knowledge. Now then, the question arises, if the shares had been disposed of by unauthorized officials of Mitsui Bussan Kaisha do the plaintiffs have a valid title? They have acquired the shares for value and in good faith, without notice that Campos and Hess had defective titles. Parenthetically, the defendants and this decision doubt the plaintiffs' purchase partly because Campos died during the liberation of Manila and Hess was executed by the Japanese. That both of them died is quite a suspicious circumstance, says the majority. I might agree, if both occurred during normal times. Yet during the Japanese occupation and the battle of liberation, death was no unusual occurrence in the city. And then, who knows but that Hess was executed by the Japanese for having engaged in dangerous activities, such as the handling of this stock?

By the way, the Foreign Funds Control of the U. S. Treasury Department; the Vested Property Aliens Committee, the Alien Property Administrator and the court of first instance never doubted such sale by Campos and Hess. And this controversy would not have reached the courts had not the Alien Property Administrator held that admitting the sale, the plaintiffs failed to trace their chain of title to these shares, beginning from Madrigal (the registered owner) and Mitsui all the way down to Hess and Campos. Which is error, because as aptly pointed out in appellees' brief: A purchaser for value is not bound to show affirmatively that the certificates were delivered by a former owner to his own grantor. (Hellbrook vs. New Jersey Linc., 57 N. Y. 616) (Fletchers, Cyclopedia of the Law of Private Corporation, Vol. 12, Sec. 5474.) (Emphasis supplied). Such a contention is quite fallacious because neither the law nor the established custom of the trade requires a purchaser in good faith to trace back all its predecessors in interest. That would be requiring the purchaser to prove an utter impossibility, because as shown by the cases cited and also in the actual practice of trade, a certificate endorsed in blank may travel through different hands which may number 10, 20, 50 or 100. (p. 169 brief.) (cf. Hager vs. Bryan, infra.) The holder of corporate stock containing blank assignment and power of attorney to transfer stock of company, signed and endorsed on back thereof, has prima facie good title to the shares. (Jones vs. Courts (1940) Ga. App. 239, 12 S. E. 2d 446.) That the shares were disposed of by officers of the Mitsui in 1942, is not improbable, considering: (a) the shares were purposely kept endorsed in blank before and during the war; (b) the Mitsui did not report the shares to the American High Commissioner, violating the latter's order of July 1941; (c) the shares were valueless during the war because the Japanese government had seized the corporate property; (d) the officers of Mitsui possibly foresaw the final result of the Pacific War, and made the most of their belongings before the oncoming disaster; and (e) the only other alternative that may explain how the shares reached the hands of Hess and Campos in 1942 theft or loss before 1945 is not asserted nor proven. Against this probability which must be accepted,3 because the shares were subsequently found in the possession of Hess and Campos, who cannot be declared to have stolen them the defendants countered with a possibility that those shares had been looted after the arrival of the Americans in Manila in 1945. Interesting to note that no evidence supporting such possibility was given during the hearings before the American Claims Committee, that decided for herein plaintiffs. Moreover, the American Aliens Property Administrator, dismissed it too, although he decided against plaintiffs, on a mistaken view of the controlling legal principle, as hereinbefore indicated. However, when the matter was brought to the court, the defendants, perceiving the weakness of their stand, presented Victor Lednicky, Vice President of the Lepanto Consolidated, the Corporation that, without waiting for a court determination of plaintiffs' right to the shares issued

new certificates cancelling (prematurely and illegally) the certificate in plaintiffs' custody, with actual knowledge of the latter's claims. Lednicky testified that on or about February 12 or 13, 1945 he went to the office of Mitsui Bussan Kaisha on the Ayala Building, across the Pasig River and saw Lepanto papers and other documents scattered over the floor; that he picked up two certificates of the Lepanto, one in the name of Madrigal and the other in the name of a Japanese or Chinese; that upon hearing some noises, he threw the certificates away and left. The trial judge considered his testimony inherently improbable, giving among other reasons: Here is an old man who had been imprisoned in the concentration camp during the occupation, suffering brutalities at the hands of the Japanese, and whose escape from death may perhaps be even termed providential, yet when finally saved and liberated, he ventured into the areas where bombing, shelling and fighting were still going on, thus risking his dear life only to salvage the papers, document, and securities belonging to he Lepanto Consolidated Mining Company, which, according to the information of an American soldier, were all scattered on the floor of the offices of the Mitsui Bussan Kaisha in the Ayala Building. . . . . . . In explaining his failure to pick up the documents which was contrary to his avowed desire to save the records of the Lepanto Consolidated Mining Company, he said that he and the American soldier with him heard noises around, and fearing lest they be shot as looters, they took to their heels. . . . The fear of being taken for looters, likewise does not appear logical, because he was with an American soldier in uniform (pp. 41-43 Record on Appeal.) His Honor was right. Those who were in Manila remember that on February 12 or 13, 1945 and subsequent days, the battle of liberation was raging in Ermita and Malate; Intramuros was besieged; and unless compelled by absolute necessity nobody except looters dared to circulate around the places surrounding Intramuros or other points near the scene of fighting.4 It is hard to believe that Lednicky, a substantial resident of advanced age, would care to go sightseeing, to satisfy his curiosity about some Lepanto shares. Unless we yield to the uncharitable suspicion that he too wanted to lay hands on those Lepanto shares of the Japanese. Which would not, of course, exactly bolster his personal credibility. Anyway as plaintiff's reasoned out, Conceding, however, that Mr. Lednicky did find some certificates of the Lepanto Consolidated on the Third Floor of the Ayala Building it does not prove that the shares adjudicated to the plaintiffs were precisely the ones looted there, for the simple reason that the 1,600,000 shares in the possession of the plaintiffs were not the only certificates of the Lepanto Consolidated. And Lednickly saw only one4a if he saw anything at all. It will be remembered that Mitsui purchased a total of 1,900,000 shares in the name of Madrigal, all of them endorsed in blank. So conceding, arguendo, that Mr. Lednicky found some shares of the Lepanto on the Third Floor of the Ayala Building it is

nonetheless possible that the certificates he had seen were part of what might have been left of the 1,900,000 shares after the certificates of he plaintiffs had left the safe of the company. (pp. 56-57 brief.) On this issue, another line of thought suggests itself. Because of the Japanese war, Hess and Campos cannot now confirm the sale to plaintiffs nor help them trace their chain of title; because of war conditions, plaintiffs could not and did not ask from Hess and Campos who their predecessors were; because of war, looting occurred in the city and planted the seed of suspicion against plaintiffs' title; because of war, plaintiffs find themselves litigating with their own government. Should the Japanese profits from such mix-up? In fine, the probability of looting of these particular shares in 1945 ( to make it stronger for defendants should yield to the uncontradicted evidence of sale to plaintiffs in 1942 by Hess and Campos. Again, in support of their thesis of looting, the defendant presented Atty. Eugene E. Perkins who testified about the alleged unceremonious departure of Leonardo Recio when Atty. DeWitt (to whom he offered one of the certificates for sale) happened to mention looted certificates. Recio denied, and gave a plausible explanation of the incident. The matter is controversial. Yet supposing that facts were as Atty. Perkins had described, Recio's "flight" could at most demonstrate that he (Recio) had some doubts about the origin of said particular certificate one only (5). Looting was an ugly word and may be he wanted to avoid all discussion with big lawyers. Nevertheless, his private notions cannot legally reflect plaintiffs' state of mind. Recio's opinions were his own. And mark well, the shares were not placed in his hands by plaintiffs directly, but by Primitivo Javier. Once the theory of looting is discarded, defendants remaining line of defense would fall on the proposition that he shares must have been disposed of by officers of the Mitsui Company, who had no authority to sell. And plaintiffs would counter with the assertion that they bought the shares from Hess and Campos in good faith without knowledge of such breach of trust or excess of authority. What is then the governing principle? his is the last and decisive issue. At the outset it should be clear that the situation is the same as if Mitsui litigated with the plaintiffs, considering that, having paid nothing for the shares, defendants may not assert better rights than the Mitsui Company had. It should also be observed that the blank indorsements of these shares signed by V. Madrigal are worded as follows: For value received, ................................................ hereby sell, assign, and transfer unto .................................................................................. shares of the Capital Stock represented by the within Certificate, and to hereby irrevocably constitute and appoint ....................................................................................... to transfer the said Stock on the books of the within named Corporation with full power of

substitution in the premises. Dated .......................................... 19...... ............................................................................... V. Madrigal Stock-traders in this jurisdiction know (Hagar vs. Bryan, 19 Phil., 138) that through the above indorsement "by the usages of business of which the courts take judicial notice, the certificate may be passed from hand to hand;" and when "it reaches the hands of someone who desires o assume the legal rights of a shareholder . . . he fills up the blanks by inserting his own name as transferee", and "inserts in the second blank the name of the attorney in fact whom he wishes to make the transfer for him" on the corporate books. (And then such attorney-in-fact may compel the transfer.) According to Commissioner Cosio of the Securities and Exchange Commission, such indorsement increases the marketability of he certificate enhances he mobility of this form of wealth so that by mere delivery of the certificates endorsed in blank the ownership thereof is transferred. The certificates of stock when so endorsed, we said once, acquire quasi-negotiable character, (Bachrach Motor Co. vs. Ledesma, 38 Off. Gaz., 796); and parties who deal with them innocently have long been protected by the law upon principles analogous to those applicable to commercial paper. (Tolentino Commercial Laws of the Philippines Vol. II (5th Ed.) p. 796 citing cases). Under the Negotiable Instruments Law a bona fide purchaser for value (holder in due course) of an instrument would be protected, even if his seller had obtained the "bearer" instrument by theft. A holder in due course, it has been broadly held, both an common law and under the Negotiable Instruments Ac takes good title even from a thief; more strictly, if the instrument is made payable to bearer, or is endorsed in blank, or is otherwise negotiable by delivery, an innocent purchaser for value and before maturity who acquires it from a thief or finder acquires a good title and may recover thereon, and he may retain it even as against the true owner. (10 C. J. S., pp. 1117, 1118, citing lots of cases.) As a less serious defect in the seller's title would exist when he conveys the instrument in breach of faith or breach of trust, a fortiori, a bona fide purchaser of such instrument, without notice and for value, should likewise be protected. In this part of this dissent I will admit that the situation before us is a sale by Mitsui employees in excess of, or without, authority. Then I say, it is taken to sale or pledge in breach of trust. It should be validated, especially because he Misui Corporation purposely kept the shares endorsed in blank for a long time, notwithstanding its managers' actual knowledge that in such form the shares were easily negotiable (73, 74 s. n.) and even when the times were so topsy-turvy war that loss, theft, or misplacement of the papers were likely to occur.

This Court has already began applying principles of negotiability to corporate certificates in a recent case where the owner of the certificate pledged the same o a broker and the broker misused the certificate by pledging the same to guaranty his own account with a bank. We held, the owner of the certificate can not recover the same from the bank.6 Ours is now the opportunity, and duty, to carry this principle forward in line with the general tendency o regard shares endorsed in blank as in the nature of negotiable credits. After all, Commercial law is essentially "progressive".7 Thus we would be following the last word in the law governing transfers of stocks, as embodied in the Uniform Stock Transfer Act in force in all the States of the American Union, from Alabama, Arizona etc. all the way down to Wisconsin and Wyoming, some states having adopted it as recently as the year 1947. SECTION 1. How title to certificates and shares may be transferred. Title to a certificate and to the shares represented thereby can be transferred only, (a) By delivery of the certificate endorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or (b) By delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. . . . SEC. 5. Who may deliver a certificate. The delivery of a certificate to transfer title with the provisions of section 1, is effectual, except as provided in section 7, though made by one having no right of possession and having no authority from the owner of the certificate or from the person purporting to transfer the title. (Emphasis supplied.) SEC. 7. Rescission of transfer. If the endorsement of delivery of a certificate, (a) was procured by fraud or duress, or (b) was made under such mistake as to make the indorsement or delivery inequitable; or If the delivery of a certificate was made (c) without the authority from the owner, or (d) after the owner's death or legal incapacity, the possession of the certificate may be reclaimed and the transfer thereof rescinded, unless: (l) The certificate has been transferred to a purchaser for value in good faith without notice of any facts making the transfer wrongful, or . . . . (Emphasis supplied.)

The Uniform Act is a mere codification of common law principles. (Patterson vs. Fitzpatrick McElroy Co. (1927) 247 Ill. App. 1.) It necessarily reflects the prevailing opinion in all the States. And section 5 "gives full negotiability to certificate of stock," according to the Commissioners that drafted the Act (Uniform Laws Annotated Vol. 6 p. 10.) (Cases and authorities are to be found in the enclosed addenda.) Vis-a-vis the Uniform Stock Transfer Act, the authorities cited by the majority decision turn out to be dated, apart from the circumstance that at the time they were enunciated or published there were court decisions in the other direction.8 Now the Transfer Act unanimously adopted by all the states settled the conflicts, and declared the predominant doctrine to be, that a bona fide buyer for value of stock endorsed in blank acquires title even if his seller had no authority to sell from the owner. (Please read again the provisions of the Act above quoted, and the cases in addenda.). Such prevailing doctrine in the U.S. may properly be engrafted in our corporation law, of American origin, specially because our statute contains nothing contrary to it (cf. sec. 35 Corporation Law). Besides, it must be taken to represent the true sentiment of the commercial world, which the local community could not but echo. For as Commissioner Cosio explained, referring to local practice, mere delivery of the certificate endorsed in blank transferred ownership. And usages of commerce, or commercial practices, the Code says, are part of the Commercial Law. (Art. 2 Code of Commerce.) Therefore, on legal principles should prevail. Even if the certificate had been stolen9 and then sold to Hess and Campos (which is not the case.) At this juncture I may advert to the majority propositions allegedly supported by section 35 of the Corporation Law: Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. However, the transfer shall "not be valid, except as between the parties," until it is "entered and noted upon the books of the corporation." No such entry in the name of the plaintiffs heren having been made, it follows that the transfer allegedly effected by Juan Campos and Carl Hess in their favor is "not valid, except as between" themselves. It does not bind either Madrigal or the Mitsuis, ho are not parties to said alleged transaction. This argument, with due respect to the majority, is their weakest. The phrase "except as between the parties" means parties and their privies, their predecessors or successors in interest. The exception was meant to protect creditors of the parties, or the corporation itself, that may be paying dividends to the recorded stockholder even after said stock-holder had sold his stock recording the sale. Adoption of the majority view would have the effect of requiring every transfer of the stock to be entered on the books (contrary to what we said in Hager vs. Bryan, 19 Phil. 138 and the accepted practice). For if a certificate endorsed in blank has passed from A to B, then to C, then to D and then to E, but the transfers to B to C and

to D have not been recorded, therefore E gets no title and may not have it recorded in the books of the corporation, because his contract with D does not affect A, B and C. It is not the purpose, I hope, presently to overrule Hager vs. Bryan now. Peculiar thing about this Hager vs. Bryan case there is another decision between the same parties reported in vol. 21 p. 523; the unwary reader is apt to conclude that the decision in Vol. 21 overrules the decision in the previous volume, but it is just reverse; look at the dates. Even on grounds of equity 10, plaintiffs should win. Who caused these shares to be endorsed in blank? Who kept them thus even knowing the dangers of loss or confusion? Who allowed its officers to have access to those shares? Who appointed those officers?. Incidentally, these shares, I understand, are now worth much more than the amount invested by plaintiffs. I find no reluctance to validate their good fortune. For I have always maintained that in contracts involving speculation, the resultant profit to the purchaser, however sizable, can never of itself serve to becloud the genuineness of the transaction. (Gomez vs. Roo, 46 Off. Gaz., Supp. (11) 339.) One final paragraph: Overshadowing the deliberative process of the majority opinion, I perceive the guiding principle in civilian affairs that, the purchaser of goods acquires no better title than his seller had. It examined the problem from a civil law standpoint. Again, perspective, less than perfect, inasmuch as the issue arises on Commercial territory, wherein the need of promoting exchange of goods in business have often allowed purchasers for value in good faith to obtain a better title than their seller had, for instance, (1) purchasers of goods from stores open to the public (Art. 85 Code of Commerce, Art. 1505 New Civil Code) (2) purchasers for value in good faith of negotiable bearer instruments, see supra, and (3) purchasers in good faith for value of shares endorsed in blank, under the Uniform Stock Transfer Act.

Footnotes
1

Because if the shares belong to Mitsuis and are confiscated for the Government, in the liquidation of war reparations, they may be listed on the credit side of the Japanese.
2

As will be shown in this opinion. In the absence of certainty, probability is the best criterion. Stray bullets or shrapnel, even Japanese snipers, were terrifying contingencies. Plaintiffs hold 18 certificates.

4a

Plaintiffs hold no less than 18 certificates.

Santamaria vs. Hongkong, etc. (89 Phil., 780).

Es progresivo, porque la especulacion, que sin cesar busca esferas nuevas en donde poder desenvolverse, da tal movilidad a las necesidades del comercio, que de continuo reclama reglas juridicas nuevas, en armonia con su progresos. (Blanco Constans, Estudios Elementales de Derecho Mercantil, p. 86.)
8

The pages previous to those quoted from Fletcher's Cyclopedia by the majority, contain statements of contrary doctrines (also cases in addenda.)
9

Cf. C.J.S., Vol. 10.

10

Where one of two innocent persons is to suffer by the act of a third party, the loss fall on him who enabled such third party to perform the act.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-2808 August 31, 1951

JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO SANTAMARIA, Jr., plaintiff-appellee, vs. THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W. TAPLIN, defendants-appellant. Nicodemus L. Dasig and Sotto and Sotto for plaintiff and appellant. Quijano, Rosete and Tizon for defendants and appellants. BAUTISTA ANGELO, J.: This is an appeal from a decision of the Court of First Instance of Manila ordering the Hongkong and Shanghai Banking Corporation to pay the plaintiff the sum of P8,041.20 plus the costs of suit. The case was certified to this Court of Appeals.

The facts of this case found by the Court of Appeals are as follows: Sometime in February, 1937, Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore the sum of P8,041.20 as shown by receipt Exh. B. The buyer received Stock Certificate No. 517, Exh. "F", issued in the name of Woo, Uy-Tioco & Naftaly and indorsed in bank by this firm. On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of the Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and delivered Certificate No. 517 to the latter as security therefor with the understanding that said certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc. shares. Exh. D. is the receipt of the certificate in question signed by one Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc. According to certificate Exh. E, R. J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of P2,250. At the time of the delivery of a stock Certificate No. 517 to R.J. Campos & Co., Inc. this certificate was in the same condition as that when Mrs. Santamaria received from Woo, Uy-Tioco & Naftaly, with the sole difference that her name was later written in lead pencil on the upper right hand corner thereof. Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517. Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to transact business due to a prohibition order from Securities and Exchange Commission. She was also inform that her Stock certificate was in the possession of the Hongkong and Shanghai Banking Corporation. Certificate No. 517 came into possession of the Hongkong and Shanghai Banking Corporation because R.J. Campos & Co., Inc. had opened an overdraft account with this bank and to this effect it had executed on April 16, 1936 a document of hypothecation, Exhibit 1, by the term of which R.J. Campos & Co., Inc. pledged to the said bank "all stocks, shares and securities which I/we may hereafter come into their possession of my/our account and whether originally deposited for safe custody only or for any other purpose whatever or which may hereinafter be deposited by me/us in lieu of or in addition to the Stocks Shares and Securities now deposited or for any other purposes whatsoever." On March 11, 1937, as shown by Exhibit G. Certificate No. 517, already indorsed by R.J. Campos Co. Inc. to the Hongkong & Shanghai Banking Corporation, was sent by the latter to the office of the Batangas Minerals, Inc. with the request that the same be cancelled and a new certificate be issued in the name of R.W. Taplin as trustee and nominee of the banking corporation. Robert W. Taplin was an officer of this institution in charge of the securities belonging to or claimed by the bank. As per this request the Batangas Minerals, Inc. on March 12, 1937, issued Certificate No. 715 in lieu of

Certificate No. 517, in the name of Robert W. Taplin as trustee and nominee of the Hongkong & Shanghai Banking Corporation. (Exhibits G, H, I, J, 1, 4 and 5.) According to Mrs. Santamaria, she made the claim to the bank for her certificate, though she did not remember the exact date, but it was most likely on the following day of that when she went to Cosculluela for the purpose of paying her order for 10,000 shares of the Crown Mines, Inc., or else on March 13, 1937. In her interview with Taplin, the bank's representative, she informed him that the certificate belonged to her, and she demanded that it be returned to her. Taplin then replied that the bank did not know anything about the transaction had between her and R.J. Campos & Co., Inc., and that he could not do anything until the case of the bank with Campos shall have been terminated. This declaration was not contradicted by the adverse party. "In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent, and on July 12, 1937, the Hongkong & Shanghai Banking Corporation asked permission in the insolvency court to sell the R.J. Campos & Co., Inc., securities listed in its motion by virtue of the document of hypothecation Exhibit 1. In an order dated July 15, 1937, the insolvency court granted this motion. "On June 3, 1938, to 10,000 shares of Batangas Minerals, Inc. represented by Certificate No. 715, were sold to the same bank by the Sheriff for P300 at the foreclosure sale authorized by said order. (Exhibits F, 2 and 3.) R.J. Campos, the president of R.J. Campos & Co., Inc., was prosecuted for estafa and found guilty of this crime and was sentenced by the Manila Court of First Instance in Criminal Case No. 54428, to an imprisonment and to indemnify the offended party, Mrs. Josefa Santamaria, in the amount of P8,041.20 representing the value of the 10,000 shares of Batangas Minerals, Inc. (Exhibits I and J.) The decision was later confirmed by the Court of Appeals. (Exhibits J.) The offended party and R. W. Taplin were among the witnesses for the prosecution in this criminal case No. 54428. (Exhibits 4.). When Mrs. Santamaria failed in her efforts to force the civil judgment rendered in her favor in the criminal case because the accused became insolvent, she filed her complaint in this case on October 11, 1940. At the trial both parties agreed that the 10,000 Batangas Minerals shares formerly represented by Certificate No. 517 and thereafter by Certificate No. 715, have no actual market value. The errors assigned by the defendants-appellants as committed by the lower court are: I The trial court erred in finding that the plaintiff-appellee was not chargeable with negligence in the transaction which gave rise to this case. II

The trial court erred in holding that it was the obligation of the bank to have inquired into the ownership of the certificate when it received it from R.J. Campos & Company and in concluding that the bank was negligent for not having done so. III The trial court erred on ordering defendants-appellants to pay to plaintiff the sum of P8,041.20. 1. Defendants-appellants contend in the first place that the trial court erred in finding that the plaintiff-appellee was not chargeable with negligence in the transaction which gave rise to this case. A careful analysis of the facts seems to justify this contention. Certificate of stock No. 517 was made out in the name of Wo, Uy-Tioco & Naftaly, brokers, and was duly indorsed in bank by said brokers. This certificate of stock was delivered by plaintiff to R.J. Campos & Co., Inc. to comply with a requirement that she deposit something on account if she wanted to buy 10,000 shares of Crown Mines Inc. In making said deposit, plaintiff did not take any precaution to protect herself against the possible misuse of the shares represented by the certificate of stock. Plaintiff could have asked the corporation that had issued said certificate to cancel it and issue another in lieu thereof in her name to apprise the holder that she was the owner of said certificate. This she failed to do, and instead she delivered said certificate, as it was, to R.J. Campos & Co., Inc., thereby clothing the latter with apparent title to the shares represented by said certificate including apparent authority to negotiate it by delivering it to said company while it was indorsed in blank by the person or firm appearing on its face as the owner thereof. The defendant Bank had no knowledge of the circumstances under which the certificate of stock was delivered to R.J. Campos & Co., Inc., and had a perfect right to assume that R.J. Campos & Co., Inc. was lawfully in possession of the certificate in view of the fact that it was a street certificate, and was in such form as would entitle any possessor thereof to a transfer of the stock on the books of the corporation concerned. There is no question that, in this case, plaintiff made the negotiation of the certificate of stock to other parties possible and the confidence she placed in R.J. Campos & Co., Inc. made the wrong done possible. This was the proximate cause of the damage suffered by her. She is, therefore, estopped from claiming further title to or interest therein as against a bona fide pledge or transferee thereof, for it is a well-known rule that a bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of the limitations placed on it by the real owner, or of any secret agreement relating to the use which might be made of the stock by the holder (Fletcher, Cyclopedia of Corporations, section 5562, Vol. 12, p. 521). On the other hand, it appears that this certificate of stock, indorsed as it was in blank by Woo, Uy-Tioco & Naftaly, stock brokers, was delivered to The Hongkong and Shanghai Banking Corporation by R.J. Campos & Co., Inc., duly indorsed by the latter, pursuant to a letter of hypothecation executed by R.J. Campos & Co., Inc., in favor of said Bank (Exhibit "1"). The said certificate was delivered to the Bank in the ordinary course of business, together with many other securities, and at the time it was delivered, the Bank had no Knowledge that the shares represented by the certificate belonged to the plaintiff for, as already said, it was in the form of

street certificate which was transferable by mere delivery. The rule is "where one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrong doer and put in his hands the means of inflicting such loss" (Fletcher Cyclopedia of Corporations, supra). It is therefore clear that plaintiff, in failing to take the necessary precautions upon delivering the certificate of stock to her broker, was chargeable with negligence in the transaction which resulted to her own prejudice, and as such, she is estopped from asserting title to it as against the defendant Bank. 2. The next contention of the defendant is that the trial court erred in holding that it was the obligation of the defendant Bank to have inquired into the ownership of the certificate when it received it from R.J. Campos & Co., Inc. and in concluding that the Bank was negligent for not having done so, contrary to the claim of the plaintiff that defendant Bank acted negligently, if not in bad faith, in accepting delivery of said certificate from RJ. Campos & Co., Inc. Let us now see the material facts on this point. Certificate No. 517 came into the possession of the defendant Bank because R.J. Campos & Co., Inc. had opened an overdraft account with said Bank and to this effect it had executed on April 16, 1946, a letter of hypothecation by the terms of which R.J. Campos & Co., Inc. pledged to the said Bank "all Stocks, Shares and Securities which I/we may hereafter come into their possession on my/our account and whether originally deposited for safe custody only or for any other purpose whatever or which may hereafter be deposited by me/us in lieu of or in addition to the Stocks, Shares, and Securities now deposited or for any other purpose whatsoever." On March 13, 1937, plaintiff went to the office of the Bank to claim for her certificate. In her interview with one Robert W. Taplin, the officer in charge of the securities of that institution, she informed him that the certificate belonged to her and she demanded that it be returned to her. Taplin then replied that the Bank did not know anything about the transaction had between her and that he could not do anything until the case of the Bank with R.J. Campos & Co., Inc. had been terminated. It further appears that when the certificate of stock was delivered by plaintiff to R.J. Campos & Co., Inc., the manager thereof, Sebastian Cosculluela, wrote in pencil on the right margin the name of Josefa T. Santamaria, pursuant to the practice followed by said firm to write on that part of the certificate the name of the owner for purposes of identification. Upon the facts thus stated, the question that asserts itself is: was the defendants Bank obligated to inquire who was the real owner of the shares represented by the certificate of stock, and could it be charged with negligence for having failed to do so? It should be noted that the certificate of stock in question was issued in the name of the brokerage firm-Woo, Uy-Tioco & Naftaly and that it was duly indorsed in blank by said firm, and that said indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is what it is known as street certificate. Upon its face, the holder was entitled to demand its transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos & Co., Inc., for it was given to the Bank pursuant to their letter of hypothecation. Even if said certificate had been in the name of the plaintiff but indorsed in blank, the Bank would still have been justified in believing that R.J. Campos & Co., Inc. had

title thereto for the reason that it is a well-known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor (Heyman vs. Hamilton National Bank, 266 S.W. 1043; Fletcher, Cyclopedia of Corporations, Vol. 12, pp. 521-524, 525-527; McNeil vs. Tenth National Bank, 7 Am. Rep. 341). The only evidence in the record to show that the certificate of stock in question may not have belonged to R.J. Campos & Co., Inc. is the testimony of the plaintiff to the effect that she had approached Robert W. Taplin on March 13, 1937, and informed him that she was the true owner of said certificate and demanded the return thereof, or its value, but even assuming for the sake of argument that what plaintiff has stated is true, such an incident would merely show that plaintiff has an adverse claim to the ownership of said certificate of stock, but that would not necessarily place the Bank in the position to inquire as to the real basis of her claim, nor would it place the Bank in the obligation to recognize her claim and return to her the certificate outright. A mere claim and of ownership does not establish the fact of ownership. The right of the plaintiff in such a case would be against the transferor. In fact, this is the attitude plaintiff has adopted when she filed a charge for estafa against Rafael J. Campos, which culminated in his prosecution and conviction, and it is only when she found him to be insolvent that she decided to go against the Bank. The fact that on the right margin of the said certificate the name of the plaintiff appeared written, granting it to be true, can not be considered sufficient reason to indicate that its owner was the plaintiff considering that said certificate was indorsed in blank by her brokers Woo, Uy-Tioco & Naftaly, was guaranteed by indorsement in blank by R.J. Campos & Co., Inc., and was transferred in due course by the latter to the Bank under their letter of hypothecation. Said indicium could at best give the impression that the plaintiff was the original holder of the certificate. The Court has noticed that the defendant Bank was willing from the very beginning to compromise this case by delivering to the plaintiff certificate of stock No. 715 that was issued to said Bank by the issuer corporation in lieu of the original as alleged and prayed for in its amended answer to the complaint dated April 2, 1941. Considering that in the light of the law and precedents applicable in this case, the most that plaintiff could claim is the return to her of the said certificate of stock (Howson vs. Mechanics Sav. Bank, 183 Atl., p. 697), the Court, regardless of the conclusions arrived at as above stated, is inclined to grant the formal tender made by the defendant to the plaintiff of said certificate. Wherefore, the decision of the lower court is hereby modified in the sense of ordering the defendant to deliver to the plaintiff certificate of stock No. 715, without pronouncement as to costs. Paras, C.J., Feria, Bengzon and Jugo, JJ., concur. Padilla, J., concurs in the result.

Separate Opinions

PABLO, M., disidente: En mi opinion, la devolucion a la demandante del certificado No. 715 de 10,000 acciones de Batangas Minerals Inc. es una burla sangrienta. Esas acciones ya no valen nada. Cuando valian aun, los demandados las retruvieron; cuando ya no tenian valor, los demandados ya estaban dispuestos a entregarlas ala demandante. Ordenar en una decision su devolucion es administrar justicia huera. R. J. Campos ha sido condenado por estafa por haber transferido ilegalmente, en perjuicio de la demandante, estas acciones al Hongkong & Shanghai Banking Corporation. En esa cuasa criminal se debio de haber ordenado la devolucion de las acciones valian P8,041.20 y, por eso, se condeno a Campos a pagar a la demandente dicha cantidad. La buena fe del adquirente de una cosa estafada no es razon bastante para que se le prive al verdadero dueno. En asuntos de robo, hurto o estafa, el dueno del objeto del delito no queda privado de la propiedad. Es principio axiomatico de conocimiento general: "doquiera que se halle la cosa, clama por su dueno." La adquisicion del efecto hurtado, robado o estafado, es nula: la cosa continua siendo de la propiedad del dueo que fue victima del delito. En tales casos, se ordena la restitucion de la cosa a su legitimo dueno. Si el Hongkong & Shanghai Banking Corporation obro de buena fe en la obtencion de la posesion del certificado de acciones No. 517 de R. J. Campos & Co., Inc., esa buena fe desaparecio cuando las retuvo a pesar de la reclamacion de la demandante al siguiente dia dandole cuenta de la estafa de que fue victima. Desde aquel momento ya dejo de ser poseedor de buena fe porque ya se entero de que tal certificado no habia sido cedido a R. J. Campos & Co., Inc., sino depositido solamente. El depositario no tiene derecho a ser propietario de la cosa depositada y, como corolario forzoso, no tiene derecho a disponer de la misma. No podia, por tanto, R. J. Campos & Co., Inc. ceder, ni hipotecar (hipoteca Exhibit 1) a Hongkong & Shanghai Banking Corporation el certificado de acciones No. 517. Como dicho certificado de acciones fue vendido en publica subasta en 3 de junio de 1938, en el expediente de insolvencia (causa civil No. 51224) de R. J. Campos & Co., Inc. por la cantidad de P300, y el Hongkong & Shanghai Banking Corporation lo compro, solamente desde dicho dia el banco se ha hecho dueno. Antes de dicho dia era solamente acreedor hipotecario de las acciones; pero acreedor de una hipoteca nula porque se trataba de unas acciones estafadas. Por obtener la posesion de esas acciones, el Hongkong & Shanghai Banking Corporation no gasto un solo centino: las recibo como garantia adicional de una antigua deuda. Cuando el Hongkong & Shanghai Banking Corporation pidio a la oficina de Batangas Minerals, Inc. la cancelacion del certificado de las acciones y en su lugar se expidiera, como en efecto se expidio, un certificado a nombre de R. W. Taplin, como fideicomisario del banco, obro de mala fe. Un acreedor hipotecario no puede ser dueno de la cosa pignorada. Lo mas que podia pedir era la anotacion de la hipoteca, y no la inscripcion del Hongkong & Shanghai Banking Corporation como dueno de las acciones en los libros de Batangas Minerals, Inc. El banco retuvo ilegalmente esas acciones; por su retencion, la demandante perdio la oportunidad de aprovecharse de ellas, vendiendolas, por ejemplo, cuando tenian aun valor en el mercado. Es justo que la demandante reclame del banco el pago de su valor que, segun pronunciamiento

judicial en la causa criminal de estafa, monta a P8,041.20. El demandado debe pagar a la demandante dicha cantidad.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION 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.

DECISION

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)8 each 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 2000 advised 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. 04332, 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. 04332. 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 thirdparty 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.46 A 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.55 Indeed, 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 nonissuance 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. 04-332 wherein 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. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Footnotes
1

Penned by Justice Candido V. Rivera, concurred in by Justices Conchita CarpioMorales and Rebecca de Guia-Salvador.
2

Rollo, pp. 52-61. Id. at 62-252. Id. at 75-76. Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81. 20.3 Dispute Resolution.

If at anytime any dispute or difference shall arise between the Employer and the Contractor in connection with or arising out of this Contract or the carrying out of the Works, the parties together shall in good faith exert all efforts to resolve such dispute or difference by whatever means they deem appropriate, including conciliation, mediation and seeking the assistance of technical, accounting or other experts. At the request of any party, the chief executives of the Employer and the Contractor shall meet in a good-faith effort to reach an amicable settlement of the dispute or difference. Any dispute or difference that the parties are unable to resolve within a reasonable time may, at the option of either party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179)
7

Annex "C," Rollo, pp. 254-256. Annex "D," Id. at 257-259. Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94. Id. at 261-265. Id. at 359-382. Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132. Annex "H," Rollo, pp. 287-289; Annex "H-1," Rollo, pp. 320-322. Clause 8.2. Time for Completion.

10

11

12

13

14

The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the Program on or before the Target Completion Date. (Rollo, p. 125)

15

Vol. 1, Rollo, pp. 355-357.

16

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.
17

Annex "L," Rollo, pp. 383-402. Annex "N," Id. at 406-409. Annex "O," Id. at 412-423. Docketed as CA-G.R. SP No. 61901. Rollo, pp. 25-26. Vol. II; Id. at 2-78. Id. at 79-92. Id. at 95-98 Id. at 109-113. Id. at 666-671. Id. at 598-607. Id. at 619-630.

18

19

20

21

22

23

24

25

26

27

28

29

Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking Law Journal 850-851 [1977] cited in M. Kurkela, Letters of Credit under International Trade Law, 321 (1985).
30

Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S. Shaterian, Export-Import Banking: The Instruments and Operations Utilized by American Exporters and Importers and Their Banks in Financing Foreign Trade, 284-374 (1947).
31

E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http://www.westlaw.com>.

32

J. Dolan, The Law of Letters of Credit, Revised Ed. (2000). 24 A Words and Phrases 590, Permanent Edition. Ibid. Jackson & Davey, International Economic Relations, 53 (2nd ed.). ICC Publication No. 500. 146 Phil. 269 (1970). G.R. No. 105395, 10 December 1993, 228 SCRA 357. Article 15, UCP. Kurkela, Letters of Credit Under International Trade Law, 286-287 (1985). Art. 10, UCP. Supra note 32 at 1-27. Rollo, pp. 604 and 624. Underscoring supplied; Id. at 94. Underscoring supplied; Id. at 132. Art. 1315, Civil Code. Clause 20.4.1, Turnkey Contract, Rollo, p. 179. Supra note 32 at 2-63. M. Kurkela, Letters of Credit Under International Trade Law, 309 (1985). Rollo, p. 391. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43. Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352

SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365 (2001).
54

Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001). Rollo, p. 31. Underscoring supplied; Id. at 94-95. Id. at 132. Vide Annex "L," Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.

55

56

57

58

59

Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184.
60

Article 1159, Civil Code.

61

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
62

Rollo, p. 493.

63

Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals, G.R. No. G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837 (1999).
64

389 Phil. 20 (2000).

65

Black's Law Dictionary, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.
66

Vol. II, Rollo, pp. 666-669. Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329. Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).

67

68

69

Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70

Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.