G.R. No.
158312 November 14, 2008 20, 1992, and which took five (5) banking days to clear. Hence,
JOHN DY, petitioner,
vs.
PEOPLE OF THE PHILIPPINES and The HONORABLE
COURT OF APPEALS, respondents.
DECISION
QUISUMBING, Acting C.J.:
This appeal prays for the reversal of the Decision1 dated
January 23, 2003 and the Resolution2 dated May 14, 2003 of
the Court of Appeals in CA-G.R. CR No. 23802. The appellate
court affirmed with modification the Decision3 dated November
17, 1999 of the Regional Trial Court (RTC), Branch 82 of
Quezon City, which had convicted petitioner John Dy of two
counts of estafa in Criminal Cases Nos. Q-93-46711 and Q-93-
46713, and two counts of violation of Batas Pambansa Bilang
224 (B.P. Blg. 22) in Criminal Cases Nos. Q-93-46712 and Q-
93-46714.
The facts are undisputed:
Since 1990, John Dy has been the distributor of W.L. Food
Products (W.L. Foods) in Naga City, Bicol, under the business
name Dyna Marketing. Dy would pay W.L. Foods in either cash
or check upon pick up of stocks of snack foods at the latter's
branch or main office in Quezon City. At times, he would
entrust the payment to one of his drivers.
On June 24, 1992, Dy's driver went to the branch office of W.L.
Foods to pick up stocks of snack foods. He introduced himself
to the checker, Mary Jane D. Maraca, who upon confirming
Dy's credit with the main office, gave him merchandise worth
P106,579.60. In return, the driver handed her a blank Far East
Bank and Trust Company (FEBTC) Check with Check No.
553602 postdated July 22, 1992. The check was signed by Dy
though it did not indicate a specific amount.
Yet again, on July 1, 1992, the same driver obtained snack
foods from Maraca in the amount of P226,794.36 in exchange
for a blank FEBTC Check with Check No. 553615 postdated
July 31, 1992.
In both instances, the driver was issued an unsigned delivery
receipt. The amounts for the purchases were filled in later by
Evelyn Ong, accountant of W.L. Foods, based on the value of
the goods delivered.
When presented for payment, FEBTC dishonored the checks
for insufficiency of funds. Raul D. Gonzales, manager of
FEBTC-Naga Branch, notified Atty. Rita Linda Jimeno, counsel
of W.L. Foods, of the dishonor. Apparently, Dy only had an
available balance of P2,000 as of July 22, 1992 and July 31,
1992.
Later, Gonzales sent Atty. Jimeno another letter 5 advising her
that FEBTC Check No. 553602 for P106,579.60 was returned
to the drawee bank for the reasons stop payment order and
drawn against uncollected deposit (DAUD), and not because it
was drawn against insufficient funds as stated in the first letter.
Dy's savings deposit account ledger reflected a balance of
P160,659.39 as of July 22, 1992. This, however, included a
regional clearing check for P55,000 which he deposited on July
the inward check was drawn against the yet uncollected
deposit.
When William Lim, owner of W.L. Foods, phoned Dy about the
matter, the latter explained that he could not pay since he had
no funds yet. This prompted the former to send petitioner a
demand letter, which the latter ignored.
On July 16, 1993, Lim charged Dy with two counts of estafa
under Article 315, paragraph 2(d)6 of the Revised Penal Code
in two Informations, which except for the dates and amounts
involved, similarly read as follows:
That on or about the 24th day of June, 1992,
in Quezon City, Philippines, the said
accused, did then and there [willfully] and
feloniously defraud W.L. PRODUCTS, a
corporation duly organized and existing
under the laws of the Republic of the
Philippines with business address at No. 531
Gen. Luis St., Novaliches, this City, in the
following manner, to wit: the said accused,
by means of false manifestations and
fraudulent representation which he made to
complainant to the effect that Far East Bank
and Trust Co. check No. 553602 dated July
22, 1992 in the amount of P106,579.60,
payable to W.L. Products is a good check
and will be honored by the bank on its
maturity date, and by means of other deceit
of similar import, induced and succeeded in
inducing the said complainant to receive and
accept the aforesaid check in payment of
snack foods, the said accused knowing fully
well that all his manifestations and
representations were false and untrue and
were made solely for the purpose of
obtaining, as in fact he did obtain the
aforesaid snack foods valued at
P106,579.60 from said complainant as upon
presentation of said check to the bank for
payment, the same was dishonored and
payment thereof refused for the reason stop
payment and the said accused, once in
possession of the aforesaid snack foods,
with intent to defraud, [willfully], unlawfully
and feloniously misapplied, misappropriated
and converted the same or the value thereof
to his own personal use and benefit, to the
damage and prejudice of said W.L. Products,
herein represented by RODOLFO BORJAL,
in the aforementioned amount of
P106,579.60, Philippine Currency.
Contrary to law.7
On even date, Lim also charged Dy with two counts of violation
of B.P. Blg. 22 in two Informations which likewise save for the
dates and amounts involved similarly read as follows:
That on or about the 24th day of June, 1992,
the said accused, did then and there
[willfully], unlawfully and feloniously make or
draw and issue to W.L. FOOD PRODUCTS
to apply on account or for value a Far East
Bank and Trust Co. Check no. 553602 dated
 July 22, 1992 payable to W.L. FOOD
PRODUCTS in the amount of P106,579.60
Philippine Currency, said accused knowing
fully well that at the time of issue he/she/they
did not have sufficient funds in or credit with
the drawee bank for payment of such check
in full upon its presentment, which check
when presented 90 days from the date
thereof was subsequently dishonored by the
drawee bank for the reason "Payment
stopped" but the same would have been
dishonored for insufficient funds had not the
accused without any valid reason, ordered
the bank to stop payment, the said accused
despite receipt of notice of such dishonor,
failed to pay said W.L. Food Products the
amount of said check or to make
arrangement for payment in full of the same
within five (5) banking days after receiving
said notice.
CONTRARY TO LAW.8
On November 23, 1994, Dy was arrested in Naga City. On
arraignment, he pleaded not guilty to all charges. Thereafter,
the cases against him were tried jointly.
On November 17, 1999 the RTC convicted Dy on two counts
each of estafa and violation of B.P. Blg. 22. The trial court
disposed of the case as follows:
WHEREFORE, accused JOHN JERRY DY
ALDEN (JOHN DY) is hereby found GUILTY
beyond reasonable doubt of swindling
(ESTAFA) as charged in the Informations in
Criminal Case No. 93-46711 and in Criminal
Case No. Q-93-46713, respectively.
Accordingly, after applying the provisions of
the Indeterminate Sentence Law and P.D.
No. 818, said accused is hereby sentenced
to suffer the indeterminate penalty of ten (10)
years and one (1) day to twelve (12) years of
prision mayor, as minimum, to twenty (20)
years of reclusion temporal, as maximum, in
Criminal Case No. Q-93-46711 and of ten
(10) years and one (1) day to twelve (12)
years of prision mayor, as minimum, to thirty
(30) years of reclusion perpetua, as
maximum, in Criminal Case No. Q-93-46713.
Likewise, said accused is hereby found
GUILTY beyond reasonable doubt of
Violation of B.P. 22 as charged in the
Informations in Criminal Case No. Q-93-
46712 and in Criminal Case No. Q-93-46714
and is accordingly sentenced to
imprisonment of one (1) year for each of the
said offense and to pay a fine in the total
amount of P333,373.96, with subsidiary
imprisonment in case of insolvency.
FINALLY, judgment is hereby rendered in
favor of private complainant, W. L. Food
Products, herein represented by Rodolfo
Borjal, and against herein accused JOHN
JERRY DY ALDEN (JOHN DY), ordering the
latter to pay to the former the total sum of
P333,373.96 plus interest thereon at the rate
of 12% per annum from September 28, 1992
until fully paid; and, (2) the costs of this suit.
SO ORDERED.9
Dy brought the case to the Court of Appeals. In the assailed
Decision of January 23, 2003, the appellate court affirmed the
RTC. It, however, modified the sentence and deleted the
payment of interests in this wise:
WHEREFORE, in view of the foregoing, the
decision appealed from is hereby
AFFIRMED with MODIFICATION. In
Criminal Case No. Q-93-46711 (for estafa),
the accused-appellant JOHN JERRY DY
ALDEN (JOHN DY) is hereby sentenced to
suffer an indeterminate penalty of
imprisonment ranging from six (6) years and
one (1) day of prision mayor as minimum to
twenty (20) years of reclusion temporal as
maximum plus eight (8) years in excess of
[P]22,000.00. In Criminal Case No. Q-93-
46712 (for violation of BP 22), accused-
appellant is sentenced to suffer an
imprisonment of one (1) year and to
indemnify W.L. Food Products, represented
by Rodolfo Borjal, the amount of ONE
HUNDRED SIX THOUSAND FIVE
HUNDRED SEVENTY NINE PESOS and
60/100 ([P]106,579.60). In Criminal Case
No. Q-93-46713 (for estafa), accused-
appellant is hereby sentenced to suffer an
indeterminate penalty of imprisonment
ranging from eight (8) years and one (1) day
of prision mayor as minimum to thirty (30)
years as maximum. Finally, in Criminal
Case No. Q-93-46714 (for violation of BP
22), accused-appellant is sentenced to suffer
an imprisonment of one (1) year and to
indemnify W.L. Food Products, represented
by Rodolfo Borjal, the amount of TWO
HUNDRED TWENTY SIX THOUSAND
SEVEN HUNDRED NINETY FOUR PESOS
AND 36/100 ([P]226,794.36).
SO ORDERED.10
Dy moved for reconsideration, but his motion was denied in the
Resolution dated May 14, 2003.
Hence, this petition which raises the following issues:
I.
WHETHER OR NOT THE HONORABLE
COURT OF APPEALS GRAVELY ERRED
IN FINDING THAT THE PROSECUTION
HAS PROVEN THE GUILT OF ACCUSED
BEYOND REASONABLE DOUBT OF
ESTAFA ON TWO (2) COUNTS?
II.
WHETHER OR NOT THE HONORABLE
COURT OF APPEALS GRAVELY ERRED
 IN FINDING THAT THE PROSECUTION
HAS PROVEN THE GUILT OF ACCUSED
BEYOND REASONABLE DOUBT OF
VIOLATION OF BP 22 ON TWO (2)
COUNTS?
III.
WHETHER OR NOT THE HONORABLE
COURT OF APPEALS GRAVELY ERRED
IN AWARDING DAMAGES TO PRIVATE
COMPLAINANT, W.L. FOOD PRODUCTS,
THE TOTAL SUM OF [P]333,373.96?11
Essentially, the issue is whether John Dy is liable for estafa
and for violation of B.P. Blg. 22.
First, is petitioner guilty of estafa?
Mainly, petitioner contends that the checks were ineffectively
issued. He stresses that not only were the checks blank, but
also that W.L. Foods' accountant had no authority to fill the
amounts. Dy also claims failure of consideration to negate any
obligation to W.L. Foods. Ultimately, petitioner denies having
deceived Lim inasmuch as only the two checks bounced since
he began dealing with him. He maintains that it was his long
established business relationship with Lim that enabled him to
obtain the goods, and not the checks issued in payment for
them. Petitioner renounces personal liability on the checks
since he was absent when the goods were delivered.
The Office of the Solicitor General (OSG), for the State, avers
that the delivery of the checks by Dy's driver to Maraca,
constituted valid issuance. The OSG sustains Ong's prima
facie authority to fill the checks based on the value of goods
taken. It observes that nothing in the records showed that W.L.
Foods' accountant filled up the checks in violation of Dy's
instructions or their previous agreement. Finally, the OSG
challenges the present petition as an inappropriate remedy to
review the factual findings of the trial court.
We find that the petition is partly meritorious.
Before an accused can be held liable for estafa under Article
315, paragraph 2(d) of the Revised Penal Code, as amended
by Republic Act No. 4885,12 the following elements must
concur: (1) postdating or issuance of a check in payment of an
obligation contracted at the time the check was issued; (2)
insufficiency of funds to cover the check; and (3) damage to
the payee thereof.13 These elements are present in the instant
case.
Section 191 of the Negotiable Instruments Law14 defines
"issue" as the first delivery of an instrument, complete in form,
to a person who takes it as a holder. Significantly, delivery is
the final act essential to the negotiability of an instrument.
Delivery denotes physical transfer of the instrument by the
maker or drawer coupled with an intention to convey title to the
payee and recognize him as a holder.15 It means more than
handing over to another; it imports such transfer of the
instrument to another as to enable the latter to hold it for
himself.16
In this case, even if the checks were given to W.L. Foods in
blank, this alone did not make its issuance invalid. When the
checks were delivered to Lim, through his employee, he
became a holder with prima facie authority to fill the blanks.
This was, in fact, accomplished by Lim's accountant.
The pertinent provisions of Section 14 of the Negotiable
Instruments Law are instructive:
SEC. 14. Blanks; when may be filled.-Where
the instrument is wanting in any material
particular, the person in possession
thereof has a prima facie authority to
complete it by filling up the blanks
therein. And a signature on a blank paper
delivered by the person making the signature
in order that the paper may be converted into
a negotiable instrument operates as a prima
facie authority to fill it up as such for any
amount. …. (Emphasis supplied.)
Hence, the law merely requires that the instrument be in the
possession of a person other than the drawer or maker. From
such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill
up the blanks.17 Because of this, the burden of proving want of
authority or that the authority granted was exceeded, is placed
on the person questioning such authority.18 Petitioner failed to
fulfill this requirement.
Next, petitioner claims failure of consideration. Nevertheless, in
a letter19 dated November 10, 1992, he expressed willingness
to pay W.L. Foods, or to replace the dishonored checks. This
was a clear acknowledgment of receipt of the goods, which
gave rise to his duty to maintain or deposit sufficient funds to
cover the amount of the checks.
More significantly, we are not swayed by petitioner's
arguments that the single incident of dishonor and his absence
when the checks were delivered belie fraud. Indeed damage
and deceit are essential elements of the offense and must be
established with satisfactory proof to warrant conviction. 20
Deceit as an element of estafa is a specie of fraud. It is actual
fraud which consists in any misrepresentation or contrivance
where a person deludes another, to his hurt. There is deceit
when one is misled -- by guile, trickery or by other means -- to
believe as true what is really false. 21
Prima facie evidence of deceit was established against
petitioner with regard to FEBTC Check No. 553615 which was
dishonored for insufficiency of funds. The letter 22 of petitioner's
counsel dated November 10, 1992 shows beyond reasonable
doubt that petitioner received notice of the dishonor of the said
check for insufficiency of funds. Petitioner, however, failed to
deposit the amounts necessary to cover his check within three
banking days from receipt of the notice of dishonor. Hence, as
provided for by law,23 the presence of deceit was sufficiently
proven.
Petitioner failed to overcome the said proof of deceit. The trial
court found no pre-existing obligation between the parties. The
existence of prior transactions between Lim and Dy alone did
not rule out deceit because each transaction was separate,
and had a different consideration from the others. Even as
petitioner was absent when the goods were delivered, by the
principle of agency, delivery of the checks by his driver was
deemed as his act as the employer. The evidence shows that
as a matter of course, Dy, or his employee, would pay W.L.
Foods in either cash or check upon pick up of the stocks of
snack foods at the latter's branch or main office. Despite their
two-year standing business relations prior to the issuance of
the subject check, W.L Foods employees would not have
parted with the stocks were it not for the simultaneous delivery
of the check issued by petitioner.24 Aside from the existing
business relations between petitioner and W.L. Foods, the
primary inducement for the latter to part with its stocks of snack
foods was the issuance of the check in payment of the value of
the said stocks.
In a number of cases,25 the Court has considered good faith as
a defense to a charge of estafa by postdating a check. This
good faith may be manifested by making arrangements for
payment with the creditor and exerting best efforts to make
good the value of the checks. In the instant case petitioner
presented no proof of good faith. Noticeably absent from the
records is sufficient proof of sincere and best efforts on the part
of petitioner for the payment of the value of the check that
would constitute good faith and negate deceit.
With the foregoing circumstances established, we find
petitioner guilty of estafa with regard to FEBTC Check No.
553615 for P226,794.36.
The same, however, does not hold true with respect to FEBTC
Check No. 553602 for P106,579.60. This check was
dishonored for the reason that it was drawn against
uncollected deposit. Petitioner had P160,659.39 in his savings
deposit account ledger as of July 22, 1992. We disagree with
the conclusion of the RTC that since the balance included a
regional clearing check worth P55,000 deposited on July 20,
1992, which cleared only five (5) days later, then petitioner had
inadequate funds in this instance. Since petitioner technically
and retroactively had sufficient funds at the time Check No.
553602 was presented for payment then the second element
(insufficiency of funds to cover the check) of the crime is
absent. Also there is no prima facie evidence of deceit in this
instance because the check was not dishonored for lack or
insufficiency of funds. Uncollected deposits are not the same
as insufficient funds. The prima facie presumption of deceit
arises only when a check has been dishonored for lack or
insufficiency of funds. Notably, the law speaks of insufficiency
of funds but not of uncollected deposits. Jurisprudence teaches
that criminal laws are strictly construed against the
Government and liberally in favor of the accused.26 Hence, in
the instant case, the law cannot be interpreted or applied in
such a way as to expand its provision to encompass the
situation of uncollected deposits because it would make the
law more onerous on the part of the accused.
Clearly, the estafa punished under Article 315, paragraph 2(d)
of the Revised Penal Code is committed when a check is
dishonored for being drawn against insufficient funds or closed
account, and not against uncollected deposit.27 Corollarily, the
issuer of the check is not liable for estafa if the remaining
balance and the uncollected deposit, which was duly collected,
could satisfy the amount of the check when presented for
payment.
Second, did petitioner violate B.P. Blg. 22?
Petitioner argues that the blank checks were not valid orders
for the bank to pay the holder of such checks. He reiterates
lack of knowledge of the insufficiency of funds and reasons
that the checks could not have been issued to apply on
account or for value as he did not obtain delivery of the goods.
The OSG maintains that the guilt of petitioner has been proven
beyond reasonable doubt. It cites pieces of evidence that point
to Dy's culpability: Maraca's acknowledgment that the checks
were issued to W.L. Foods as consideration for the snacks;
Lim's testimony proving that Dy received a copy of the demand
letter; the bank manager's confirmation that petitioner had
insufficient balance to cover the checks; and Dy's failure to
settle his obligation within five (5) days from dishonor of the
checks.
Once again, we find the petition to be meritorious in part.
The elements of the offense penalized under B.P. Blg. 22 are
as follows: (1) the making, drawing and issuance of any check
to apply to account or for value; (2) the knowledge of the
maker, drawer or issuer that at the time of issue he does not
have sufficient funds in or credit with the drawee bank for the
payment of such check in full upon its presentment; and (3)
subsequent dishonor of the check by the drawee bank for
insufficiency of funds or credit or dishonor for the same reason
had not the drawer, without any valid cause, ordered the bank
to stop payment.28 The case at bar satisfies all these elements.
During the joint pre-trial conference of this case, Dy admitted
that he issued the checks, and that the signatures appearing
on them were his.29 The facts reveal that the checks were
issued in blank because of the uncertainty of the volume of
products to be retrieved, the discount that can be availed of,
and the deduction for bad orders. Nevertheless, we must
stress that what the law punishes is simply the issuance of a
bouncing check and not the purpose for which it was issued
nor the terms and conditions relating thereto. 30 If inquiry into
the reason for which the checks are issued, or the terms and
conditions of their issuance is required, the public's faith in the
stability and commercial value of checks as currency
substitutes will certainly erode.31
Moreover, the gravamen of the offense under B.P. Blg. 22 is
the act of making or issuing a worthless check or a check that
is dishonored upon presentment for payment. The act
effectively declares the offense to be one of malum prohibitum.
The only valid query, then, is whether the law has been
breached, i.e., by the mere act of issuing a bad check, without
so much regard as to the criminal intent of the issuer.32 Indeed,
non-fulfillment of the obligation is immaterial. Thus, petitioner's
defense of failure of consideration must likewise fall. This is
especially so since as stated above, Dy has acknowledged
receipt of the goods.
On the second element, petitioner disputes notice of
insufficiency of funds on the basis of the check being issued in
blank. He relies on Dingle v. Intermediate Appellate Court33
and Lao v. Court of Appeals34 as his authorities. In both
actions, however, the accused were co-signatories, who were
neither apprised of the particular transactions on which the
blank checks were issued, nor given notice of their dishonor. In
the latter case, Lao signed the checks without knowledge of
the insufficiency of funds, knowledge she was not expected or
obliged to possess under the organizational structure of the
corporation.35 Lao was only a minor employee who had nothing
to do with the issuance, funding and delivery of checks. 36 In
contrast, petitioner was the proprietor of Dyna Marketing and
the sole signatory of the checks who received notice of their
dishonor.
Significantly, under Section 237 of B.P. Blg. 22, petitioner was
prima facie presumed to know of the inadequacy of his funds
with the bank when he did not pay the value of the goods or We therefore sustain the appellate court's award of damages
make arrangements for their payment in full within five (5) to W.L. Foods in the total amount of P333,373.96, representing
banking days upon notice. His letter dated November 10, 1992 the sum of the checks petitioner issued for goods admittedly
to Lim fortified such presumption. delivered to his company.

Undoubtedly, Dy violated B.P. Blg. 22 for issuing FEBTC
Check No. 553615. When said check was dishonored for
insufficient funds and stop payment order, petitioner did not
pay or make arrangements with the bank for its payment in full
within five (5) banking days.
Petitioner should be exonerated, however, for issuing FEBTC
Check No. 553602, which was dishonored for the reason
DAUD or drawn against uncollected deposit. When the check
was presented for payment, it was dishonored by the bank
because the check deposit made by petitioner, which would
make petitioner's bank account balance more than enough to
cover the face value of the subject check, had not been
collected by the bank.
In Tan v. People,38 this Court acquitted the petitioner therein
who was indicted under B.P. Blg. 22, upon a check which was
dishonored for the reason DAUD, among others. We observed
that:
As to the appropriate penalty, petitioner was charged with
estafa under Article 315, paragraph 2(d) of the Revised Penal
Code, as amended by Presidential Decree No. 81845 (P.D. No.
818).
Under Section 146 of P.D. No. 818, if the amount of the fraud
exceeds P22,000, the penalty of reclusión temporal is imposed
in its maximum period, adding one year for each additional
P10,000 but the total penalty shall not exceed thirty (30) years,
which shall be termed reclusión perpetua.47 Reclusión
perpetua is not the prescribed penalty for the offense, but
merely describes the penalty actually imposed on account of
the amount of the fraud involved.
WHEREFORE, the petition is PARTLY GRANTED. John Dy is
hereby ACQUITTED in Criminal Case No. Q-93-46711 for
estafa, and Criminal Case No. Q-93-46712 for violation of B.P.
Blg. 22, but he is ORDERED to pay W.L. Foods the amount of
P106,579.60 for goods delivered to his company.

In the second place, even without relying on In Criminal Case No. Q-93-46713 for estafa, the Decision of
the credit line, petitioner's bank account the Court of Appeals is AFFIRMED with MODIFICATION.
covered the check she issued because even Petitioner is sentenced to suffer an indeterminate penalty of
though there were some deposits that were twelve (12) years of prisión mayor, as minimum, to thirty (30)
still uncollected the deposits became "good" years of reclusión perpetua, as maximum.
and the bank certified that the check was
"funded."39 In Criminal Case No. Q-93-46714 for violation of B.P. Blg. 22,
the Decision of the Court of Appeals is AFFIRMED, and John
To be liable under Section 140 of B.P. Blg. 22, the check must Dy is hereby sentenced to one (1) year imprisonment and
be dishonored by the drawee bank for insufficiency of funds or ordered to indemnify W.L. Foods in the amount of
credit or dishonored for the same reason had not the drawer, P226,794.36.
without any valid cause, ordered the bank to stop payment.
SO ORDERED.
In the instant case, even though the check which petitioner
deposited on July 20, 1992 became good only five (5) days
later, he was considered by the bank to retroactively have had
P160,659.39 in his account on July 22, 1992. This was more
than enough to cover the check he issued to respondent in the
amount of P106,579.60. Under the circumstance obtaining in
this case, we find the petitioner had issued the check, with full
ability to abide by his commitment41 to pay his purchases.

Significantly, like Article 315 of the Revised Penal Code, B.P.

Blg. 22 also speaks only of insufficiency of funds and does not
treat of uncollected deposits. To repeat, we cannot interpret
the law in such a way as to expand its provision to encompass
the situation of uncollected deposits because it would make the
law more onerous on the part of the accused. Again, criminal
statutes are strictly construed against the Government and
liberally in favor of the accused.42

As regards petitioner's civil liability, this Court has previously

ruled that an accused may be held civilly liable where the facts
established by the evidence so warrant.43 The rationale for this
is simple. The criminal and civil liabilities of an accused are
separate and distinct from each other. One is meant to punish
the offender while the other is intended to repair the damage
suffered by the aggrieved party. So, for the purpose of
indemnifying the latter, the offense need not be proved beyond
reasonable doubt but only by preponderance of evidence. 44
 Makati Stock Exchange Bldg.,

G.R. No. 89252 May 24, 1993 Ayala Avenue, Makati,

Metro Manila

RAUL SESBREÑO, petitioner,

vs. February 9, 1981

HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND ———————

PILIPINAS BANK, respondents.
VALUE DATE

Salva, Villanueva & Associates for Delta Motors Corporation.

TO Raul Sesbreño

Reyes, Salazar & Associates for Pilipinas Bank.

April 6, 1981

————————

MATURITY DATE
FELICIANO, J.:

NO. 10805
On 9 February 1981, petitioner Raul Sesbreño made a money market
placement in the amount of P300,000.00 with the Philippine
Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
DENOMINATED CUSTODIAN RECEIPT
placement, with a term of thirty-two (32) days, would mature on 13
March 1981, Philfinance, also on 9 February 1981, issued the
following documents to petitioner:
This confirms that as a duly Custodian Bank, and upon instruction of
PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our
custody the following securities to you [sic] the extent herein
(a) the Certificate of Confirmation of Sale, "without recourse," No.
indicated.
20496 of one (1) Delta Motors Corporation Promissory Note ("DMC
PN") No. 2731 for a term of 32 days at 17.0% per annum;

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

(b) the Certificate of securities Delivery Receipt No. 16587 indicating NUMBER DATE VALUE BY HOLDER PAYEE
the sale of DMC PN No. 2731 to petitioner, with the notation that
the said security was in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805 dated 9
February 1981; and 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity
date of petitioner's investment), with petitioner as payee,
Philfinance as drawer, and Insular Bank of Asia and America as
drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated
checks issued by Philfinance. However, the checks were dishonored
for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No.
10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It
reads as follows:
FINANCE CORP.
We further certify that these securities may be inspected by you or
your duly authorized representative at any time during regular
banking hours.
Upon your written instructions we shall undertake physical delivery
of the above securities fully assigned to you should this
Denominated Custodianship Receipt remain outstanding in your
favor thirty (30) days after its maturity.
PILIPINAS BANK

(By Elizabeth De Villa

PILIPINAS BANK
Illegible Signature)1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of
private respondent Pilipinas, Makati Branch, and handed her a
demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had
remained unpaid and outstanding, and that he in effect was asking
for the physical delivery of the underlying promissory note.
Petitioner then examined the original of the DMC PN No. 2731 and
found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private
respondent Delta Motors Corporation ("Delta") as "maker;" and that
on face of the promissory note was stamped "NON NEGOTIABLE."
Pilipinas did not deliver the Note, nor any certificate of participation
in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and
3 August 1981,2 again asking private respondent Pilipinas for
physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for
written instructions, as has been supposedly agreed upon in
"Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions;
Pilipinas never released DMC PN No. 2731, nor any other instrument
in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 19813 upon
private respondent Delta for the partial satisfaction of DMC PN No.
2731, explaining that Philfinance, as payee thereof, had assigned to
him said Note to the extent of P307,933.33. Delta, however, denied
any liability to petitioner on the promissory note, and explained in
turn that it had previously agreed with Philfinance to offset its DMC
PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN
No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under
the joint management of the Securities and exchange commission
("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN
No. 2731, which to date apparently remains in the custody of the
SEC.4
As petitioner had failed to collect his investment and interest
thereon, he filed on 28 September 1982 an action for damages with
the Regional Trial Court ("RTC") of Cebu City, Branch 21, against
private respondents Delta and Pilipinas.5 The trial court, in a
decision dated 5 August 1987, dismissed the complaint and
counterclaims for lack of merit and for lack of cause of action, with
costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV
No. 15195. In a Decision dated 21 March 1989, the Court of Appeals
denied the appeal and held:6
Be that as it may, from the evidence on record, if there is anyone
that appears liable for the travails of plaintiff-appellant, it is
Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and
charging it against DMC PN No. 2731 when its entire face value was
already obligated or earmarked for set-off or compensation is
difficult to comprehend and may have been motivated with bad
faith. Philfinance, therefore, is solely and legally obligated to return
the investment of plaintiff, together with its earnings, and to answer
all the damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not impleaded as one of
the defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed
from, the same is hereby affirmed in toto. Cost against plaintiff-
appellant.
Petitioner moved for reconsideration of the above Decision, without
success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in
the pleadings, the Court resolved to give due course to the petition
and required the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial
court decision, and contends that respondent court of Appeals
gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the
DMC PN No. 2731 in view of the provisions stipulated in DCR No.
10805 issued in favor r of petitioner, and (iii) in refusing to pierce the
veil of corporate entity between Philfinance, and private
respondents Delta and Pilipinas, considering that the three (3)
entities belong to the "Silverio Group of Companies" under the
leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to
address: firstly, the relationship of petitioner vis-a-vis Delta;
secondly, the relationship of petitioner in respect of Pilipinas.
Actually, of course, there is a third relationship that is of critical
importance: the relationship of petitioner and Philfinance. However,
since Philfinance has not been impleaded in this case, neither the
trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present
purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second
relationships.
I.

We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights
vis-a-vis Delta in respect of the Delta promissory note (DMC PN No.
2731) which Philfinance sold "without recourse" to petitioner, to the
extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN
No. 2731 as the same is "non-negotiable" as stamped on its face
(Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the
transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment
(Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but
contends that the Note had been validly transferred, in part to him
by assignment and that as a result of such transfer, Delta as debtor-
maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word
"non-negotiable" stamp across the face of the Note10 and because
maker Delta and payee Philfinance intended that this Note would be
offset against the outstanding obligation of Philfinance represented
by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was
without Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took the Note subject to the
defenses available to Delta, in particular, the offsetting of DMC PN
No. 2731 against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a
negotiable instrument must be distinguished from the assignment or
transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement
thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument
may, however, instead of being negotiated, also be assigned or
transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different.
A non-negotiable instrument may, obviously, not be negotiated; but
it may be assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a
bill, though not negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the original
parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the
same time stamped "non-transferable" or "non-assignable." It
contained no stipulation which prohibited Philfinance from assigning
or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into
with Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as
evidenced by your Promissory Note No. 143-A, dated April 10, 1980,
to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note
No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to
be offsetted [sic] against your PN No. 143-A upon co-terminal
maturity.
Please deliver the proceeds of our PNs to our representative, Mr.
Eric Castillo.
Very Truly Yours,
(Sgd.) considerations. "The market mechanism is intended to provide quick
mobility of money and securities."
Florencio B. Biagan

Senior Vice President13

The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper
in the money market necessarily knows in advance that it would be
We find nothing in his "Letter of Agreement" which can be
expenditiously transacted and transferred to any investor/lender
reasonably construed as a prohibition upon Philfinance assigning or
without need of notice to said issuer. In practice, no notification is
transferring all or part of DMC PN No. 2731, before the maturity
given to the borrower or issuer of commercial paper of the sale or
thereof. It is scarcely necessary to add that, even had this "Letter of
transfer to the investor.
Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an
assignee or transferee of the Note who parted with valuable
consideration in good faith and without notice of such prohibition. It xxx xxx xxx
is not disputed that petitioner was such an assignee or transferee.
Our conclusion on this point is reinforced by the fact that what
Philfinance and Delta were doing by their exchange of their
There is need to individuate a money market transaction, a relatively
promissory notes was this: Delta invested, by making a money
novel institution in the Philippine commercial scene. It has been
market placement with Philfinance, approximately P4,600,000.00 on
intended to facilitate the flow and acquisition of capital on an
10 April 1980; but promptly, on the same day, borrowed back the
impersonal basis. And as specifically required by Presidential Decree
bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
No. 678, the investing public must be given adequate and effective
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both
protection in availing of the credit of a borrower in the commercial
also dated 10 April 1980. Thus, Philfinance was left with not
paper market.18 (Citations omitted; emphasis supplied)
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.

We turn to Delta's arguments concerning alleged compensation or

offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A.
Apropos Delta's complaint that the partial assignment by Philfinance
It is important to note that at the time Philfinance sold part of its
of DMC PN No. 2731 had been effected without the consent of
rights under DMC PN No. 2731 to petitioner on 9 February 1981, no
Delta, we note that such consent was not necessary for the validity
compensation had as yet taken place and indeed none could have
and enforceability of the assignment in favor of petitioner.14 Delta's
taken place. The essential requirements of compensation are listed
argument that Philfinance's sale or assignment of part of its rights to
in the Civil Code as follows:
DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional
subrogation, which in the first place is never lightly inferred,15 must
be clearly established by the unequivocal terms of the substituting Art. 1279. In order that compensation may be proper, it is necessary:
obligation or by the evident incompatibility of the new and old
obligations on every point.16 Nothing of the sort is present in the
instant case. (1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;

It is in fact difficult to be impressed with Delta's complaint, since it

released its DMC PN No. 2731 to Philfinance, an entity engaged in
the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In
Perez v. Court of Appeals,17 the Court, speaking through Mme.
Justice Herrera, made the following important statement:
(2) That both debts consists in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) That the two debts are due;

There is another aspect to this case. What is involved here is a
money market transaction. As defined by Lawrence Smith "the
money market is a market dealing in standardized short-term credit (4) That they be liquidated and demandable;
instruments (involving large amounts) where lenders and borrowers
do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which (5) That over neither of them there be any retention or controversy,
are instruments "evidencing indebtness of any person or entity. . ., commenced by third persons and communicated in due time to the
which are issued, endorsed, sold or transferred or in any manner debtor. (Emphasis supplied)
conveyed to another person or entity, with or without recourse".
The fundamental function of the money market device in its
operation is to match and bring together in a most impersonal
manner both the "fund users" and the "fund suppliers." The money On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN
market is an "impersonal market", free from personal No. 143-A was due. This was explicitly recognized by Delta in its 10
April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal
maturity."
As noted, the assignment to petitioner was made on 9 February
1981 or from forty-nine (49) days before the "co-terminal maturity"
date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented
compensation had taken place between Philfinance and Delta, to
the extent of P304,533.33, because upon execution of the
assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right
to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in
favor of petitioner was a valid one and that petitioner accordingly
became owner of DMC PN No. 2731 to the extent of the portion
thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact
of the assignment to him only on 14 July 1981, 19 that is, after the
maturity not only of the money market placement made by
petitioner but also of both DMC PN No. 2731 and Philfinance PN No.
143-A. In other words, petitioner notified Delta of his rights as
assignee after compensation had taken place by operation of law
because the offsetting instruments had both reached maturity. It is a
firmly settled doctrine that the rights of an assignee are not any
greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee
acquires his rights subject to the equities — i.e., the defenses —
which the debtor could have set up against the original assignor
before notice of the assignment was given to the debtor. Article
1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against
the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the
compensation.
If the creditor communicated the cession to him but the debtor did
not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he
may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment. (Emphasis
supplied)
Article 1626 of the same code states that: "the debtor who, before
having knowledge of the assignment, pays his creditor shall be
released from the obligation." In Sison v. Yap-Tico,21 the Court
explained that:
[n]o man is bound to remain a debtor; he may pay to him with
whom he contacted to pay; and if he pay before notice that his debt
has been assigned, the law holds him exonerated, for the reason
that it is the duty of the person who has acquired a title by transfer
to demand payment of the debt, to give his debt or notice.22
At the time that Delta was first put to notice of the assignment in
petitioner's favor on 14 July 1981, DMC PN No. 2731 had already
been discharged by compensation. Since the assignor Philfinance
could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled
from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of
the assignment or sale was effected on 9 February 1981. He could
have notified Delta as soon as his money market placement matured
on 13 March 1981 without payment thereof being made by
Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again petitioner could have notified
Delta on 26 March 1981 when petitioner received from Philfinance
the Denominated Custodianship Receipt ("DCR") No. 10805 issued
by private respondent Pilipinas in favor of petitioner. Petitioner
could, in fine, have notified Delta at any time before the maturity
date of DMC PN No. 2731. Because petitioner failed to do so, and
because the record is bare of any indication that Philfinance had
itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner
under the terms of the assignment made by Philfinance to
petitioner.
II.
We turn now to the relationship between petitioner and private
respondent Pilipinas. Petitioner contends that Pilipinas became
solidarily liable with Philfinance and Delta when Pilipinas issued DCR
No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that
establishes an obligation on the part of Pilipinas to pay petitioner
the amount of P307,933.33 nor any assumption of liability in
solidum with Philfinance and Delta under DMC PN No. 2731. We
read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN
No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February 1981), holding that Note on
behalf and for the benefit of petitioner, at least to the extent it had
been assigned to petitioner by payee Philfinance;24
(3) petitioner may inspect the Note either "personally or by
authorized representative", at any time during regular bank hours;
and
(4) upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to the
extent of P307,933.33) "should this Denominated Custodianship
receipt remain outstanding in [petitioner's] favor thirty (30) days
after its maturity."
Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the
terms of DMC PN No. 2731 assigned to petitioner, either upon
maturity thereof or any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner
referred merely to the obligation of private respondent Pilipinas to
effect the physical delivery to him of DMC PN No. 2731.25
Accordingly, petitioner's theory that Pilipinas had assumed a solidary
obligation to pay the amount represented by a portion of the Note
assigned to him by Philfinance, appears to be a new theory
constructed only after the trial court had ruled against him. The
solidary liability that petitioner seeks to impute Pilipinas cannot,
however, be lightly inferred. Under article 1207 of the Civil Code,
"there is a solidary liability only when the law or the nature of the
obligation requires solidarity," The record here exhibits no express
assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed
such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of
which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent
Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no
responsibility and liability in respect of petitioner under the terms of
the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its
undertaking under the DCR to petitioner Sesbreño.
We believe and so hold that a contract of deposit was constituted by
the act of Philfinance in designating Pilipinas as custodian or
depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner
Sesbreño as beneficiary of the custodianship or depository
agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement
was established as an integral part of the money market transaction
entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor
deposited that Note with Pilipinas in order that the thing sold would
be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to
constructive delivery of the Note (to the extent it had been sold or
assigned to petitioner) to petitioner. It will be seen that
custodianship agreements are designed to facilitate transactions in
the money market by providing a basis for confidence on the part of
the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and
placed safely beyond their reach, that those instruments will be
there available to the placers of funds should they have need of
them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in
the presented case, of the beneficiary) of the contract, even though
a term for such return may have been established in the said
contract.26 Accordingly, any stipulation in the contract of deposit or
custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted
by the placer-beneficiary, cannot be enforced as against such
beneficiary-placer.
We believe that the position taken above is supported by
considerations of public policy. If there is any party that needs the
equalizing protection of the law in money market transactions, it is
the members of the general public whom place their savings in such
market for the purpose of generating interest revenues.27 The
custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or
the commercial paper dealer, is normally a preferred or traditional
banker of such borrower or dealer (here, Philfinance). The custodian
bank would have every incentive to protect the interest of its client
the borrower or dealer as against the placer of funds. The providers
of such funds must be safeguarded from the impact of stipulations
privately made between the borrowers or dealers and the custodian
banks, and disclosed to fund-providers only after trouble has
erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to
deliver the security deposited with it when petitioner first
demanded physical delivery thereof on 2 April 1981. We must again
note, in this connection, that on 2 April 1981, DMC PN No. 2731 had
not yet matured and therefore, compensation or offsetting against
Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical
delivery of the Note upon receipt of "written instructions" from
petitioner Sesbreño. The ostensible term written into the DCR (i.e.,
"should this [DCR] remain outstanding in your favor thirty [30] days
after its maturity") was not a defense against petitioner's demand
for physical surrender of the Note on at least three grounds: firstly,
such term was never brought to the attention of petitioner Sesbreño
at the time the money market placement with Philfinance was
made; secondly, such term runs counter to the very purpose of the
custodianship or depositary agreement as an integral part of a
money market transaction; and thirdly, it is inconsistent with the
provisions of Article 1988 of the Civil Code noted above. Indeed, in
principle, petitioner became entitled to demand physical delivery of
the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from
Philfinance.
We conclude, therefore, that private respondent Pilipinas must
respond to petitioner for damages sustained by arising out of its
breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and
unlawfully deprived petitioner of the Note deposited with it.
Whether or not Pilipinas itself benefitted from such conversion or
unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes. Prima facie, the damages suffered by petitioner
consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the
Note by compensation, plus legal interest of six percent (6%) per
annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to

such right of reimbursement as Pilipinas may have vis-a-vis
Philfinance.

III.

The third principal contention of petitioner — that Philfinance and

private respondents Delta and Pilipinas should be treated as one
corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of

Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents

Delta and Pilipinas have been organized as separate corporate
entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common
Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors
of all three (3) companies. Petitioner has neither alleged nor proved
that one or another of the three (3) concededly related companies
used the other two (2) as mere alter egos or that the corporate
affairs of the other two (2) were administered and managed for the
benefit of one. There is simply not enough evidence of record to
justify disregarding the separate corporate personalities of delta and
Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of

the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989
and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE,
to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent
Pilipinas bank is hereby ORDERED to indemnify petitioner for
damages in the amount of P304,533.33, plus legal interest thereon
at the rate of six percent (6%) per annum counted from 2 April 1981.
As so modified, the Decision and Resolution of the Court of Appeals
are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court
which assails on questions of law a decision of the Intermediate
Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well
as its resolution dated October 17, 1985, denying the motion for
reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It
had for its program of logging activities for the year 1978 the
opening of additional roads, and simultaneous logging operations
along the route of said roads, in its logging concession area at
Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic
Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing (the "seller-assignor"),
a corporation dealing in tractors and other heavy equipment
business, offered to sell to petitioner-corporation two (2) "Used"
Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-
16-B.
In order to ascertain the extent of work to which the tractors were
to be exposed, (t.s.n., May 28, 1980, p. 44) and to determine the
capability of the "Used" tractors being offered, petitioner-
corporation requested the seller-assignor to inspect the job site.
After conducting said inspection, the seller-assignor assured
petitioner-corporation that the "Used" Allis Crawler Tractors which
were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-
assignor's skill and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2) units of
"Used" Allis Crawler Tractors. It also paid the down payment of Two
Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the
two 2) units of tractors (Exh. "3-A"). At the same time, the deed of
sale with chattel mortgage with promissory note was executed (Exh.
"2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a
deed of assignment (E exh. " 1 "), assigned its rights and interest in
the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2)
units of "Used" tractors to the petitioner-corporation's job site and
as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one
of the tractors broke down and after another nine (9) days, the
other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and
requested for the seller-assignor's usual prompt attention under the
warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara,
Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-
1," "6-D," and "6-E"), but the tractors did not come out to be what
they should be after the repairs were undertaken because the units
were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were
delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its
obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and
have them reconditioned, and thereafter to offer them for sale. The
proceeds were to be given to the respondent and the excess, if any,
to be divided between the seller-assignor and petitioner-corporation
which offered to bear one-half (1/2) of the reconditioning cost (E
exh. " 7 ").
No response to this letter, Exhibit "7," was received by the
petitioner-corporation and despite several follow-up calls, the seller-
assignor did nothing with regard to the request, until the complaint
in this case was filed by the respondent against the petitioners, the
corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners
for the recovery of the principal sum of One Million Ninety Three
Thousand Seven Hundred Eighty Nine Pesos & 71/100
(P1,093,789.71), accrued interest of One Hundred Fifty One
Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of
August 15, 1979, accruing interest thereafter at the rate of twelve
(12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs
of suit.
The petitioners filed their amended answer praying for the dismissal
of the complaint and asking the trial court to order the respondent
to pay the petitioners damages in an amount at the sound discretion
of the court, Twenty Thousand Pesos (P20,000.00) as and for
attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses
of litigation. The petitioners likewise prayed for such other and
further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the
following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official
and personal capacities the principal sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86)
as of August 15, 1979 and accruing interest thereafter at the rate of
12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the costs
of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion
for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court
and assigned therein the following errors:
I considering the following. it is in writing and signed by the maker; it
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE
AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the
challenged decision affirming in toto the decision of the trial court.
The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from the fact
that no provision of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a contract of sale
unless a contrary intention appears, there is an implied warranty,
the defense of breach of warranty, if there is any, as in this case,
does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of
the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries,
Inc. The plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the questioned
units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to
appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the issue as to
whether the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a
financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring
commercial papers or accounts receivable duly authorized pursuant
to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
contains an unconditional promise to pay a certain sum of money
payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was
transferred and delivered by IPM to the appellee and duly endorsed
to the latter (Sec. 30, NIL); it was taken in the conditions that the
note was complete and regular upon its face before the same was
overdue and without notice, that it had been previously dishonored
and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing
and Acceptance Corporation held the instrument free from any
defect of title of prior parties and free from defenses available to
prior parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee
IPM and its capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and conclusively
enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to law
and evidence, We find the appeal without merit and thus affirm the
decision in toto. With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July
17, 1985 was denied by the Intermediate Appellate Court in its
resolution dated October 17, 1985, a copy of which was received by
the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS
NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS
A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST
THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY
UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE
SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY
STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October
17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to
the petition filed on February 20, 1986, contended that the petition
was filed out of time; that the promissory note is a negotiable
instrument and respondent a holder in due course; that respondent
is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in
question is a negotiable instrument so as to bar completely all the
available defenses of the petitioner against the respondent-
assignee.
Preliminarily, it must be established at the outset that we consider
the instant petition to have been filed on time because the
petitioners' motion for reconsideration actually raised new issues. It
cannot, therefore, be considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its
express 90-day warranty because the findings of the trial court,
adopted by the respondent appellate court, that "14 days after
delivery, the first tractor broke down and 9 days, thereafter, the
second tractor became inoperable" are sustained by the records.
The petitioner was clearly a victim of a warranty not honored by the
maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it
unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to
the seller the particular purpose for which the goods are acquired,
and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there
is an implied warranty that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated, and
the vendor was not aware of the hidden faults or defects in the thing
sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule,
extends to the corporation to whom it assigned its rights and
interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in
which case the latter's rights are based on the negotiable instrument
and assuming further that the petitioner's defenses may not prevail
against it.
Secondly, it likewise cannot be denied that as soon as the tractors
broke down, the petitioner-corporation notified the seller-assignor's
sister company, AG & P, about the breakdown based on the seller-
assignor's express 90-day warranty, with which the latter complied
by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which
they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded
its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566,
the vendee may elect between withdrawing from the contract and
demanding a proportionate reduction of the price, with damages in
either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its
contract with the seller-assignor, necessarily can no longer sue the
seller-assignor except by way of counterclaim if the seller-assignor
sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35
SCRA 102) we held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency
of the suit until the final judgment of rescission is rendered when
the law itself requires that he should exercise due diligence to
minimize its own damages (Civil Code, Article 2203). (Emphasis
supplied)
Going back to the core issue, we rule that the promissory note in
question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to
the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS &
71/100 only (P 1,093,789.71), Philippine Currency, the said principal
sum, to be payable in 24 monthly installments starting July 15, 1978
and every 15th of the month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be payable
to order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to
order where it is drawn payable to the order of a specified person or
to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named in
the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of
a negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes
and Selected Cases on Negotiable Instruments Law, Third Edition,
page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the
seller-assignor when it was sued by the respondent-assignee
because the petitioner's defenses apply to both or either of either of
them. Actually, the records show that even the respondent itself
admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is
the Deed of Sale with Chattel Mortgage with the promissory note
which is as testified to by the witness was indorsed? (Counsel for
Plaintiff nodding his head.) Then we have no further questions on
cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage
were assigned; . . . you want to make a distinction, one is an
assignment of mortgage right and the other one is indorsement of
the promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?
xxx xxx xxx

ATTY. ILAGAN:
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder
in due course is a holder who has taken the instrument under the
following conditions:
We stipulate it is one single transaction. (pp. 27-29, TSN., February
13, 1980).

xxx xxx xxx

Secondly, even conceding for purposes of discussion that the

promissory note in question is a negotiable instrument, the
respondent cannot be a holder in due course for a more significant xxx xxx xxx
reason.

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

The evidence presented in the instant case shows that prior to the
sale on installment of the tractors, there was an arrangement
between the seller-assignor, Industrial Products Marketing, and the (d) That the time it was negotiated by him he had no notice of any
respondent whereby the latter would pay the seller-assignor the infirmity in the instrument of deffect in the title of the person
entire purchase price and the seller-assignor, in turn, would assign negotiating it
its rights to the respondent which acquired the right to collect the
price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.
xxx xxx xxx

A mere perusal of the Deed of Sale with Chattel Mortgage with

Promissory Note, the Deed of Assignment and the Disclosure of SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute
Loan/Credit Transaction shows that said documents evidencing the notice of an infirmity in the instrument or defect in the title of the
sale on installment of the tractors were all executed on the same person negotiating the same, the person to whom it is negotiated
day by and among the buyer, which is herein petitioner must have had actual knowledge of the infirmity or defect, or
Consolidated Plywood Industries, Inc.; the seller-assignor which is knowledge of such facts that his action in taking the instrument
the Industrial Products Marketing; and the assignee-financing amounts to bad faith. (Emphasis supplied)
company, which is the respondent. Therefore, the respondent had
actual knowledge of the fact that the seller-assignor's right to collect
the purchase price was not unconditional, and that it was subject to We subscribe to the view of Campos and Campos that a financing
the condition that the tractors -sold were not defective. The company is not a holder in good faith as to the buyer, to wit:
respondent knew that when the tractors turned out to be defective,
it would be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners. Even
In installment sales, the buyer usually issues a note payable to the
assuming for the sake of argument that the promissory note is
seller to cover the purchase price. Many times, in pursuance of a
negotiable, the respondent, which took the same with actual
previous arrangement with the seller, a finance company pays the
knowledge of the foregoing facts so that its action in taking the
full price and the note is indorsed to it, subrogating it to the right to
instrument amounted to bad faith, is not a holder in due course. As
collect the price from the buyer, with interest. With the increasing
such, the respondent is subject to all defenses which the petitioners
frequency of installment buying in this country, it is most probable
may raise against the seller-assignor. Any other interpretation would
that the tendency of the courts in the United States to protect the
be most inequitous to the unfortunate buyer who is not only
buyer against the finance company will , the finance company will be
saddled with two useless tractors but must also face a lawsuit from
subject to the defense of failure of consideration and cannot recover
the assignee for the entire purchase price and all its incidents
the purchase price from the buyer. As against the argument that
without being able to raise valid defenses available as against the
such a rule would seriously affect "a certain mode of transacting
assignor.
business adopted throughout the State," a court in one case stated:

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

had no knowledge of any fact, which would justify its act of taking
the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
It may be that our holding here will require some changes in
business methods and will impose a greater burden on the finance
companies. We think the buyer-Mr. & Mrs. General Public-should
have some protection somewhere along the line. We believe the
finance company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to protect his
interests against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a
potent argument in favor of a rule which win afford public
protection to the general buying public against unscrupulous dealers
in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d
649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country

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

In like manner, therefore, even assuming that the subject

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

Prescinding from the foregoing and setting aside other peripheral

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

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

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

SO ORDERED.
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his
personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and
RAUL H. SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant
City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr.,
before the Regional Trial Court of Cebu City. After trial judgment was
rendered ordering the defendants to pay P11,000.00 to the plaintiff,
private respondent herein. The decision having become final and
executory, on motion of the latter, the trial court ordered its
execution. This order was questioned by the defendants before the
Court of Appeals. However, on 15 January 1992 a writ of execution
was issued.
On 4 February 1992 a notice of garnishment was served on
petitioner Loreto D. de la Victoria as City Fiscal of Mandaue City
where defendant Mabanto, Jr., was then detailed. The notice
directed petitioner not to disburse, transfer, release or convey to
any other person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or belonging to
Mabanto, Jr., under penalty of law. 1 On 10 March 1992 private
respondent filed a motion before the trial court for examination of
the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals
was dismissed. Thus the trial court, finding no more legal obstacle to
act on the motion for examination of the garnishees, directed
petitioner on 4 November 1992 to submit his report showing the
amount of the garnished salaries of Mabanto, Jr., within fifteen (15)
days from receipt 2 taking into consideration the provisions of Sec.
12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require
petitioner to explain why he should not be cited in contempt of
court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash
the notice of garnishment claiming that he was not in possession of
any money, funds, credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but that said checks
were not yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds which
could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered
petitioner to immediately comply with its order of 4 November
1992. 3 It opined that the checks of Mabanto, Jr., had already been
released through petitioner by the Department of Justice duly
signed by the officer concerned. Upon service of the writ of
garnishment, petitioner as custodian of the checks was under
obligation to hold them for the judgment creditor. Petitioner
became a virtual party to, or a forced intervenor in, the case and the
trial court thereby acquired jurisdiction to bind him to its orders and
processes with a view to the complete satisfaction of the judgment.
Additionally, there was no sufficient reason for petitioner to hold
the checks because they were no longer government funds and
presumably delivered to the payee, conformably with the last
sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered
from procedural infirmities nevertheless he took pains in
enlightening the court by sending a written explanation dated 22
July 1992 requesting for the lifting of the notice of garnishment on
the ground that the notice should have been sent to the Finance
Officer of the Department of Justice. Petitioner insists that he had
no authority to segregate a portion of the salary of Mabanto, Jr. The
explanation however was not submitted to the trial court for action
since the stenographic reporter failed to attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The
trial court explained that it was not the duty of the garnishee to
inquire or judge for himself whether the issuance of the order of
execution, writ of execution and notice of garnishment was justified.
His only duty was to turn over the garnished checks to the trial court
which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check
still in the hands of the maker or its duly authorized representative is
owned by the payee before physical delivery to the latter: and, (2)
whether the salary check of a government official or employee
funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not
owned by Mabanto, Jr., because they were not yet delivered to him,
and that petitioner as garnishee has no legal obligation to hold and
deliver them to the trial court to be applied to Mabanto, Jr.'s
judgment debt. The thesis of petitioner is that the salary checks still
formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching
credits belonging to the judgment debtor owing to him from a
stranger to the litigation. 6 Emphasis is laid on the phrase "belonging
to the judgment debtor" since it is the focal point in resolving the
issues raised.
 have also established therein the compelling reasons, as exceptions
thereto, which were not taken into account by the trial court, e.g., a
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is defect on the face of the writ or actual knowledge by the garnishee
public funds. He receives his compensation in the form of checks of lack of entitlement on the part of the garnisher. It is worth to note
from the Department of Justice through petitioner as City Fiscal of that the ruling referred to the validity of advance execution of
Mandaue City and head of office. Under Sec. 16 of the Negotiable judgments, but a careful scrutiny of that case and similar cases
Instruments Law, every contract on a negotiable instrument is reveals that it was applicable to a notice of garnishment as well. In
incomplete and revocable until delivery of the instrument for the the case at bench, it was incumbent upon petitioner to inquire into
purpose of giving effect thereto. As ordinarily understood, delivery the validity of the notice of garnishment as he had actual knowledge
means the transfer of the possession of the instrument by the maker of the non-entitlement of private respondent to the checks in
or drawer with intent to transfer title to the payee and recognize question. Consequently, we find no difficulty concluding that the
him as the holder thereof.7 trial court exceeded its jurisdiction in issuing the notice of
garnishment concerning the salary checks of Mabanto, Jr., in the
possession of petitioner.
According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer
concerned through petitioner and upon service of the writ of WHEREFORE, the petition is GRANTED. The orders of 9 March 1993
garnishment by the sheriff petitioner was under obligation to hold and 20 April 1993 of the Regional Trial Court of Cebu City, Br. 17,
them for the judgment creditor. It recognized the role of petitioner subject of the petition are SET ASIDE. The notice of garnishment
as custodian of the checks. At the same time however it considered served on petitioner dated 3 February 1992 is ordered DISCHARGED.
the checks as no longer government funds and presumed delivered
to the payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: "And where the instrument is no
longer in the possession of a party whose signature appears SO ORDERED.
thereon, a valid and intentional delivery by him is presumed." Yet,
the presumption is not conclusive because the last portion of the
provision says "until the contrary is proved." However this phrase
was deleted by the trial court for no apparent reason. Proof to the
contrary is its own finding that the checks were in the custody of
petitioner. Inasmuch as said checks had not yet been delivered to
Mabanto, Jr., they did not belong to him and still had the character
of public funds. In Tiro v. Hontanosas 8 we ruled that —

The salary check of a government officer or employee such as a

teacher does not belong to him before it is physically delivered to
him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the payee
has no power over it; he cannot assign it without the consent of the
Government.

As a necessary consequence of being public fund, the checks may

not be garnished to satisfy the judgment. 9 The rationale behind this
doctrine is obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways v. San Diego
10 that —

The functions and public services rendered by the State cannot be

allowed to be paralyzed or disrupted by the diversion of public funds
from their legitimate and specific objects, as appropriated by law.

In denying petitioner's motion for reconsideration, the trial court

expressed the additional ratiocination that it was not the duty of the
garnishee to inquire or judge for himself whether the issuance of the
order of execution, the writ of execution, and the notice of
garnishment was justified, citing our ruling in Philippine Commercial
Industrial Bank v. Court of Appeals. 11 Our precise ruling in that case
was that "[I]t is not incumbent upon the garnishee to inquire or to
judge for itself whether or not the order for the advance execution
of a judgment is valid." But that is invoking only the general rule. We

G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG,
ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK
OF THE PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial
Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
brevity) filed a complaint for a sum of money against respondents
Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a
promissory note executed by respondent Sima Wei on June 9, 1983;
and
(2) To enforce payment of two checks executed by Sima Wei,
payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no
cause of action. The trial court granted the defendants' Motions to
Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals:1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST
DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13,
RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE
DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-
RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to
respondent Sima Wei, the latter executed and delivered to the
former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with
interest at 32% per annum. Sima Wei made partial payments on the
note, leaving a balance of P1,032,450.02. On November 18, 1983,
Sima Wei issued two crossed checks payable to petitioner Bank
drawn against China Banking Corporation, bearing respectively the
serial numbers 384934, for the amount of P550,000.00 and 384935,
for the amount of P500,000.00. The said checks were allegedly
issued in full settlement of the drawer's account evidenced by the
promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For
reasons not shown, these checks came into the possession of
respondent Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise) to the account
of respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of
the Balintawak branch of Producers Bank, relying on the assurance
of respondent Samson Tung, President of Plastic Corporation, that
the transaction was legal and regular, instructed the cashier of
Producers Bank to accept the checks for deposit and to credit them
to the account of said Plastic Corporation, inspite of the fact that the
checks were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential
elements are: (1) legal right of the plaintiff; (2) correlative obligation
of the defendant; and (3) an act or omission of the defendant in
violation of said legal right.2
The normal parties to a check are the drawer, the payee and the
drawee bank. Courts have long recognized the business custom of
using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to issue
a check is to properly fill up the blanks and sign it. However, the
mere fact that he has done these does not give rise to any liability
on his part, until and unless the check is delivered to the payee or
his representative. A negotiable instrument, of which a check is, is petitioner Bank has a right of action against her for the balance due
not only a written evidence of a contract right but is also a species of thereon.
property. Just as a deed to a piece of land must be delivered in order
to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding
However, insofar as the other respondents are concerned, petitioner
contract. Section 16 of the Negotiable Instruments Law, which
Bank has no privity with them. Since petitioner Bank never received
governs checks, provides in part:
the checks on which it based its action against said respondents, it
never owned them (the checks) nor did it acquire any interest
therein. Thus, anything which the respondents may have done with
Every contract on a negotiable instrument is incomplete and respect to said checks could not have prejudiced petitioner Bank. It
revocable until delivery of the instrument for the purpose of giving had no right or interest in the checks which could have been violated
effect thereto. . . . by said respondents. Petitioner Bank has therefore no cause of
action against said respondents, in the alternative or otherwise. If at
all, it is Sima Wei, the drawer, who would have a cause of action
against her
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him.3 Delivery of an instrument co-respondents, if the allegations in the complaint are found to be
means transfer of possession, actual or constructive, from one true.
person to another.4 Without the initial delivery of the instrument
from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect
to the instrument. With respect to the second assignment of error raised by petitioner
Bank regarding the applicability of Section 13, Rule 3 of the Rules of
Court, We find it unnecessary to discuss the same in view of Our
finding that the petitioner Bank did not acquire any right or interest
The allegations of the petitioner in the original complaint show that in the checks due to lack of delivery. It therefore has no cause of
the two (2) China Bank checks, numbered 384934 and 384935, were action against the respondents, in the alternative or otherwise.
not delivered to the payee, the petitioner herein. Without the
delivery of said checks to petitioner-payee, the former did not
acquire any right or interest therein and cannot therefore assert any
cause of action, founded on said checks, whether against the drawer In the light of the foregoing, the judgment of the Court of Appeals
Sima Wei or against the Producers Bank or any of the other dismissing the petitioner's complaint is AFFIRMED insofar as the
respondents. second cause of action is concerned. On the first cause of action, the
case is REMANDED to the trial court for a trial on the merits,
consistent with this decision, in order to determine whether
respondent Sima Wei is liable to the Development Bank of Rizal for
In the original complaint, petitioner Bank, as plaintiff, sued any amount under the promissory note allegedly signed by her.
respondent Sima Wei on the promissory note, and the alternative
defendants, including Sima Wei, on the two checks. On appeal from
the orders of dismissal of the Regional Trial Court, petitioner Bank
alleged that its cause of action was not based on collecting the sum SO ORDERED.
of money evidenced by the negotiable instruments stated but on
quasi-delict — a claim for damages on the ground of fraudulent acts
and evident bad faith of the alternative respondents. This was
clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-
settled that a party cannot change his theory on appeal, as this
would in effect deprive the other party of his day in court.5

Notwithstanding the above, it does not necessarily follow that the

drawer Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two
checks payable to petitioner Bank has no merit for, as We have
earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery
to petitioner Bank, the delivery of checks in payment of an
obligation does not constitute payment unless they are cashed or
their value is impaired through the fault of the creditor.6 None of
these exceptions were alleged by respondent Sima Wei.

Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,

G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION,
plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO.,
LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16,
1974 certified this case to this Court the issue issued therein being
one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in
favor of Ng Sambok Sons Motors Co., Ltd., in the amount of
P15,939.00 payable in twelve (12) equal monthly installments,
beginning May 18, 1969, with interest at the rate of one percent per
month. It is further provided that in case on non-payment of any of
the installments, the total principal sum then remaining unpaid shall
become due and payable with an additional interest equal to
twenty-five percent of the total amount due.
On the same date, Sambok Motors Company (hereinafter referred
to as Sambok), a sister company of Ng Sambok Sons Motors Co.,
Ltd., and under the same management as the former, negotiated
and indorsed the note in favor of plaintiff Metropol Financing &
Investment Corporation with the following indorsement:
Pay to the order of Metropol Bacolod Financing & Investment
Corporation with recourse. Notice of Demand; Dishonor; Protest;
and Presentment are hereby waived.
SAMBOK MOTORS CO. (BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments
when they became due, so on October 30, 1969 plaintiff formally
presented the promissory note for payment to the maker. Dr.
Villaruel failed to pay the promissory note as demanded, hence
plaintiff notified Sambok as indorsee of said note of the fact that the
same has been dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a
complaint for collection of a sum of money before the Court of First
Instance of Iloilo, Branch I. Sambok did not deny its liability but
contended that it could not be obliged to pay until after its co-
defendant Dr. Villaruel has been declared insolvent.
During the pendency of the case in the trial court, defendant Dr.
Villaruel died, hence, on October 24, 1972 the lower court, on
motion, dismissed the case against Dr. Villaruel pursuant to Section
21, Rule 3 of the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered
its decision dated September 12, 1973, the dispositive portion of
which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the
sum of P15,939.00 plus the legal rate of interest from October 30,
1969;
(b) Ordering same defendant to pay to plaintiff the sum equivalent
to 25% of P15,939.00 plus interest thereon until fully paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted,
appellant Sambok raising a lone assignment of error as follows:
The trial court erred in not dismissing the complaint by finding
defendant appellant Sambok Motors Company as assignor and a
qualified indorsee of the subject promissory note and in not holding
it as only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse"
in the indorsement of the note, it becomes a qualified indorser that
being a qualified indorser, it does not warrant that if said note is
dishonored by the maker on presentment, it will pay the amount to
the holder; that it only warrants the following pursuant to Section
65 of the Negotiable Instruments Law: (a) that the instrument is
genuine and in all respects what it purports to be; (b) that he has a
good title to it; (c) that all prior parties had capacity to contract; (d)
that he has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.

The appeal is without merit.

A qualified indorsement constitutes the indorser a mere assignor of

the title to the instrument. It may be made by adding to the
indorser's signature the words "without recourse" or any words of
similar import. 2 Such an indorsement relieves the indorser of the
general obligation to pay if the instrument is dishonored but not of
the liability arising from warranties on the instrument as provided in
Section 65 of the Negotiable Instruments Law already mentioned
herein. However, appellant Sambok indorsed the note "with
recourse" and even waived the notice of demand, dishonor, protest
and presentment.

"Recourse" means resort to a person who is secondarily liable after

the default of the person who is primarily liable. 3 Appellant, by
indorsing the note "with recourse" does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by
such indorsement, it agreed that if Dr. Villaruel fails to pay the note,
plaintiff-appellee can go after said appellant. The effect of such
indorsement is that the note was indorsed without qualification. A
person who indorses without qualification engages that on due
presentment, the note shall be accepted or paid, or both as the case
may be, and that if it be dishonored, he will pay the amount thereof
to the holder. 4 Appellant Sambok's intention of indorsing the note
without qualification is made even more apparent by the fact that
the notice of demand, dishonor, protest and presentment were an
waived. The words added by said appellant do not limit his liability,
but rather confirm his obligation as a general indorser.

Lastly, the lower court did not err in not declaring appellant as only
secondarily liable because after an instrument is dishonored by non-
payment, the person secondarily liable thereon ceases to be such
and becomes a principal debtor. 5 His liabiliy becomes the same as
that of the original obligor. 6 Consequently, the holder need not
even proceed against the maker before suing the indorser.

WHEREFORE, the decision of the lower court is hereby affirmed. No

costs.

SO ORDERED.

G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No.
16447), petitioner, Natividad Gempesaw, appealed to this Court in a
Petition for Review, on the issue of the right of the drawer to
recover from the drawee bank who pays a check with a forged
indorsement of the payee, debiting the same against the drawer's
account.
The records show that on January 23, 1985, petitioner filed a
Complaint against the private respondent Philippine Bank of
Communications (respondent drawee Bank) for recovery of the
money value of eighty-two (82) checks charged against the
petitioner's account with the respondent drawee Bank on the
ground that the payees' indorsements were forgeries. The Regional
Trial Court, Branch CXXVIII of Caloocan City, which tried the case,
rendered a decision on November 17, 1987 dismissing the complaint
as well as the respondent drawee Bank's counterclaim. On appeal,
the Court of Appeals in a decision rendered on February 22, 1990,
affirmed the decision of the RTC on two grounds, namely (1) that the
plaintiff's (petitioner herein) gross negligence in issuing the checks
was the proximate cause of the loss and (2) assuming that the bank
was also negligent, the loss must nevertheless be borne by the party
whose negligence was the proximate cause of the loss. On March 5,
1990, the petitioner filed this petition under Rule 45 of the Rules of
Court setting forth the following as the alleged errors of the
respondent Court:1
I period of two years, petitioner issued, following her usual practice
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING
AND RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE
AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES
AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS,
OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS,
IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO
PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE
CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS
IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates
four grocery stores located at Rizal Avenue Extension and at Second
Avenue, Caloocan City. Among these groceries are D.G. Shopper's
Mart and D.G. Whole Sale Mart. Petitioner maintains a checking
account numbered 13-00038-1 with the Caloocan City Branch of the
respondent drawee Bank. To facilitate payment of debts to her
suppliers, petitioner draws checks against her checking account with
the respondent bank as drawee. Her customary practice of issuing
checks in payment of her suppliers was as follows: the checks were
prepared and filled up as to all material particulars by her trusted
bookkeeper, Alicia Galang, an employee for more than eight (8)
years. After the bookkeeper prepared the checks, the completed
checks were submitted to the petitioner for her signature, together
with the corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner signed each
and every check without bothering to verify the accuracy of the
checks against the corresponding invoices because she reposed full
and implicit trust and confidence on her bookkeeper. The issuance
and delivery of the checks to the payees named therein were left to
the bookkeeper. Petitioner admitted that she did not make any
verification as to whether or not the checks were delivered to their
respective payees. Although the respondent drawee Bank notified
her of all checks presented to and paid by the bank, petitioner did
not verify he correctness of the returned checks, much less check if
the payees actually received the checks in payment for the supplies
she received. In the course of her business operations covering a
stated above, a total of eighty-two (82) checks in favor of several
suppliers. These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent drawee Bank.
Respondent drawee Bank correspondingly debited the amounts
thereof against petitioner's checking account numbered 30-00038-1.
Most of the aforementioned checks were for amounts in excess of
her actual obligations to the various payees as shown in their
corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check
No. 652282 issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47
in favor of Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in
favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated
August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66),
her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No.
589019 dated March 17, 1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her obligation was only P648.00
(Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73),
the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No.
62033 dated May 23, 1984 in the amount of P11,504.00 in favor of
Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00
(Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent
drawee bank were crossed checks.3 Aside from the daily notice
given to the petitioner by the respondent drawee Bank, the latter
also furnished her with a monthly statement of her transactions,
attaching thereto all the cancelled checks she had issued and which
were debited against her current account. It was only after the lapse
of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees
were brought to Ernest L. Boon, Chief Accountant of respondent
drawee Bank at the Buendia branch, who, without authority
therefor, accepted them all for deposit at the Buendia branch to the
credit and/or in the accounts of Alfredo Y. Romero and Benito Lam.
Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-
three (63) out of the eighty-two (82) checks were deposited in
Savings Account No. 00844-5 of Alfredo Y. Romero at the
respondent drawee Bank's Buendia branch, and four (4) checks in
his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the
checks were deposited in Account No. 0443-4, under the name of
Benito Lam at the Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically
written on the checks testified that they did not receive nor even
see the subject checks and that the indorsements appearing at the
back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee
Bank which conducted periodic inspection of the branches'
operations failed to discover, check or stop the unauthorized acts of
Ernest L. Boon. Under the rules of the respondent drawee Bank, only
a Branch Manager and no other official of the respondent drawee
bank, may accept a second indorsement on a check for deposit. In
the case at bar, all the deposit slips of the eighty-two (82) checks in
question were initialed and/or approved for deposit by Ernest L.
Boon. The Branch Managers of the Ongpin and Elcaño branches
accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective
branches.
On November 7, 1984, petitioner made a written demand on
respondent drawee Bank to credit her account with the money
value of the eighty-two (82) checks totalling P1,208.606.89 for
having been wrongfully charged against her account. Respondent
drawee Bank refused to grant petitioner's demand. On January 23,
1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check
drawn against the drawee bank. The payees are not parties to the
case. Rather, it is the drawer, whose signature is genuine, who
instituted this action to recover from the drawee bank the money
value of eighty-two (82) checks paid out by the drawee bank to
holders of those checks where the indorsements of the payees were
forged. How and by whom the forgeries were committed are not
established on the record, but the respective payees admitted that
they did not receive those checks and therefore never indorsed the
same. The applicable law is the Negotiable Instruments Law4
(heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against
whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense
by the party whose signature is forged. A party whose signature to
an instrument was forged was never a party and never gave his
consent to the contract which gave rise to the instrument. Since his
signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus,
if a person's signature is forged as a maker of a promissory note, he
cannot be made to pay because he never made the promise to pay.
Or where a person's signature as a drawer of a check is forged, the
drawee bank cannot charge the amount thereof against the
drawer's account because he never gave the bank the order to pay.
And said section does not refer only to the forged signature of the
maker of a promissory note and of the drawer of a check. It covers
also a forged indorsement, i.e., the forged signature of the payee or
indorsee of a note or check. Since under said provision a forged
signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an indorsement
prevents any subsequent party from acquiring any right as against
any party whose name appears prior to the forgery. Although rights
may exist between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against parties
prior to the forgery. Such forged indorsement cuts off the rights of
all subsequent parties as against parties prior to the forgery.
However, the law makes an exception to these rules where a party is
precluded from setting up forgery as a defense.

As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of
cases: (1) where forgery was accomplished by a person not
associated with the drawer — for example a mail robbery; and (2)
where the indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements. While there is no
duty resting on the depositor to look for forged indorsements on his
cancelled checks in contrast to a duty imposed upon him to look for
forgeries of his own name, a depositor is under a duty to set up an
accounting system and a business procedure as are reasonably
calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer
(depositor) learns that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty promptly to report
such fact to the drawee bank.5 For his negligence or failure either to
discover or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee who has
debited his account under a forged indorsement.6 In other words,
he is precluded from using forgery as a basis for his claim for re-
crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up
and completed by her trusted employee, Alicia Galang, and were
given to her for her signature. Her signing the checks made the
negotiable instrument complete. Prior to signing the checks, there
was no valid contract yet.
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the
purpose of giving effect thereto.7 The first delivery of the
instrument, complete in form, to the payee who takes it as a holder,
is called issuance of the instrument.8 Without the initial delivery of
the instrument from the drawer of the check to the payee, there can
be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and
thereafter authorized her employee Alicia Galang to deliver the
eighty-two (82) checks to their respective payees. Instead of issuing
the checks to the payees as named in the checks, Alicia Galang
delivered them to the Chief Accountant of the Buendia branch of the
respondent drawee Bank, a certain Ernest L. Boon. It was
established that the signatures of the payees as first indorsers were
forged. The record fails to show the identity of the party who made
the forged signatures. The checks were then indorsed for the second
time with the names of Alfredo Y. Romero and Benito Lam, and were
deposited in the latter's accounts as earlier noted. The second
indorsements were all genuine signatures of the alleged holders. All
the eighty-two (82) checks bearing the forged indorsements of the
payees and the genuine second indorsements of Alfredo Y. Romero
and Benito Lam were accepted for deposit at the Buendia branch of
respondent drawee Bank to the credit of their respective savings
accounts in the Buendia, Ongpin and Elcaño branches of the same
bank. The total amount of P1,208,606.89, represented by eighty-two
(82) checks, were credited and paid out by respondent drawee Bank
to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an
indorsement has been forged cannot charge the drawer's account
for the amount of said check. An exception to this rule is where the
drawer is guilty of such negligence which causes the bank to honor
such a check or checks. If a check is stolen from the payee, it is quite
obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This
accounts for the rule that although a depositor owes a duty to his
drawee bank to examine his cancelled checks for forgery of his own
signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an
agent or employee deal with the payee's indorsement. The drawer
and the payee often time shave business relations of long standing.
The continued occurrence of business transactions of the same
nature provides the opportunity for the agent/employee to commit
the fraud after having developed familiarity with the signatures of
the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud
is discovered. This is specially true when the agent perpetrates a
series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as
a prudent businessman would under the circumstances. In the case
at bar, the petitioner relied implicitly upon the honesty and loyalty
of her bookkeeper, and did not even verify the accuracy of amounts
of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements,
she apparently did not carefully examine the same nor the check
stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent forgeries
would not have been accomplished. It was not until two years after
the bookkeeper commenced her fraudulent scheme that petitioner
discovered that eighty-two (82) checks were wrongfully charged to
her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of
Petitioner's suppliers complained of non-payment. Assuming that
even one single complaint had been made, petitioner would have
been duty-bound, as far as the respondent drawee Bank was
concerned, to make an adequate investigation on the matter. Had
this been done, the discrepancies would have been discovered,
sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring of the
subsequent checks with forged indorsements. On the other hand,
since the record mentions nothing about such a complaint, the
possibility exists that the checks in question covered inexistent sales.
But even in such a case, considering the length of a period of two (2)
years, it is hard to believe that petitioner did not know or realize
that she was paying more than she should for the supplies she was
actually getting. A depositor may not sit idly by, after knowledge has
come to her that her funds seem to be disappearing or that there
may be a leak in her business, and refrain from taking the steps that
a careful and prudent businessman would take in such
circumstances and if taken, would result in stopping the continuance
of the fraudulent scheme. If she fails to take steps, the facts may
establish her negligence, and in that event, she would be estopped
from recovering from the bank.9

One thing is clear from the records — that the petitioner failed to
examine her records with reasonable diligence whether before she
signed the checks or after receiving her bank statements. Had the
petitioner examined her records more carefully, particularly the
invoice receipts, cancelled checks, check book stubs, and had she
compared the sums written as amounts payable in the eighty-two
(82) checks with the pertinent sales invoices, she would have easily
discovered that in some checks, the amounts did not tally with those
appearing in the sales invoices. Had she noticed these discrepancies,
she should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular entries.
Likewise had petitioner been more vigilant in going over her current
account by taking careful note of the daily reports made by
respondent drawee Bank in her issued checks, or at least made
random scrutiny of cancelled checks returned by respondent drawee
Bank at the close of each month, she could have easily discovered
the fraud being perpetrated by Alicia Galang, and could have
reported the matter to the respondent drawee Bank. The
respondent drawee Bank then could have taken immediate steps to
prevent further commission of such fraud. Thus, petitioner's
negligence was the proximate cause of her loss. And since it was her
negligence which caused the respondent drawee Bank to honor the
forged checks or prevented it from recovering the amount it had
already paid on the checks, petitioner cannot now complain should
the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from
using the forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs.
Hongkong & Shanghai Bank 11 is not applicable to the case at bar
because in said case, the check was fraudulently taken and the
signature of the payee was forged not by an agent or employee of
the drawer. The drawer was not found to be negligent in the
handling of its business affairs and the theft of the check by a total
stranger was not attributable to negligence of the drawer; neither
was the forging of the payee's indorsement due to the drawer's
negligence. Since the drawer was not negligent, the drawee was
duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have
honored the checks because they were crossed checks. Issuing a
crossed check imposes no legal obligation on the drawee not to
honor such a check. It is more of a warning to the holder that the
check cannot be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's bank
which in turn must present it for payment against the drawee bank
in the course of normal banking transactions between banks. The
crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee
bank from having checks with more than one indorsement. The
banking rule banning acceptance of checks for deposit or cash
payment with more than one indorsement unless cleared by some
bank officials does not invalidate the instrument; neither does it
invalidate the negotiation or transfer of the said check. In effect, this
rule destroys the negotiability of bills/checks by limiting their
negotiation by indorsement of only the payee. Under the NIL, the
only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the
instrument, so that any subsequent party may be forewarned that
ceases to be negotiable. However, the restrictive indorsee acquires
the right to receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as such indorsee
where the form of the indorsement does not authorize him to do so.
12
Although the holder of a check cannot compel a drawee bank to
honor it because there is no privity between them, as far as the
drawer-depositor is concerned, such bank may not legally refuse to
honor a negotiable bill of exchange or a check drawn against it with
more than one indorsement if there is nothing irregular with the bill
or check and the drawer has sufficient funds. The drawee cannot be
compelled to accept or pay the check by the drawer or any holder
because as a drawee, he incurs no liability on the check unless he
accepts it. But the drawee will make itself liable to a suit for
damages at the instance of the drawer for wrongful dishonor of the
bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from
raising the defense of forgery by reason of her gross negligence. But
under Section 196 of the NIL, any case not provided for in the Act
shall be governed by the provisions of existing legislation. Under the
laws of quasi-delict, she cannot point to the negligence of the
respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the
proximate cause thereof and under Article 2179 of the Civil Code,
she may not be awarded damages. However, under Article 1170 of
the same Code the respondent drawee Bank may be held liable for
damages. The article provides —
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between
petitioner as depositor (obligee) and the respondent drawee bank as
the obligor. In the performance of its obligation, the drawee bank is
bound by its internal banking rules and regulations which form part
of any contract it enters into with any of its depositors. When it
violated its internal rules that second endorsements are not to be
accepted without the approval of its branch managers and it did
accept the same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at the very
least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not
discover the irregularity with respect to the acceptance of checks
with second indorsement for deposit even without the approval of
the branch manager despite periodic inspection conducted by a
team of auditors from the main office constitutes negligence on the
part of the bank in carrying out its obligations to its depositors.
Article 1173 provides —
PREMISES CONSIDERED, the case is hereby ordered REMANDED to
the trial court for the reception of evidence to determine the exact
amount of loss suffered by the petitioner, considering that she
partly benefited from the issuance of the questioned checks since
the obligation for which she issued them were apparently
extinguished, such that only the excess amount over and above the
total of these actual obligations must be considered as loss of which
one half must be paid by respondent drawee bank to herein
petitioner.
SO ORDERED.

The fault or negligence of the obligor consists in the omission of that

diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and
of the place. . . .

We hold that banking business is so impressed with public interest

where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence. Surely, respondent drawee Bank cannot claim it exercised
such a degree of diligence that is required of it. There is no way We
can allow it now to escape liability for such negligence. Its liability as
obligor is not merely vicarious but primary wherein the defense of
exercise of due diligence in the selection and supervision of its
employees is of no moment.

Premises considered, respondent drawee Bank is adjudged liable to

share the loss with the petitioner on a fifty-fifty ratio in accordance
with Article 172 which provides:

Responsibility arising from negligence in the performance of every

kind of obligation is also demandable, but such liability may be
regulated by the courts according to the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it
is being made clear that the decision to hold the drawee bank liable
is based on law and substantial justice and not on mere equity. And
although the case was brought before the court not on breach of
contractual obligations, the courts are not precluded from applying
to the circumstances of the case the laws pertinent thereto. Thus,
the fact that petitioner's negligence was found to be the proximate
cause of her loss does not preclude her from recovering damages.
The reason why the decision dealt on a discussion on proximate
cause is due to the error pointed out by petitioner as allegedly
committed by the respondent court. And in breaches of contract
under Article 1173, due diligence on the part of the defendant is not
a defense.