Bank of Philippine Islands v.
Spouses Reynaldo and Victoria Royeca
Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision[1]
dated July 12, 2006, and Resolution[2] dated February 13, 2007, which dismissed its complaint
for replevin and damages and granted the respondents counterclaim for damages.
The case stems from the following undisputed facts:
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and
delivered to Toyota Shaw, Inc. a Promissory Note for P577,008.00 payable in 48 equal monthly
installments of P12,021.00, with a maturity date of August 18, 1997. The Promissory Note
provides for a penalty of 3% for every month or fraction of a month that an installment remains
unpaid.
To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage in
favor of Toyota over a certain motor vehicle, more particularly described as follows:
Make and Type 1993 Toyota Corolla 1.3 XL Toyota, with notice to respondents, executed a
Deed of Assignment transferring all its rights, title, and interest in the Chattel Mortgage to Far
East Bank and Trust Company (FEBTC).
Claiming that the respondents failed to pay four (4) monthly amortizations covering the period
from May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March
14, 2000 asking for the payment thereof, plus penalty.The respondents refused to pay on the
ground that they had already paid their obligation to FEBTC.
On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents
with the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with
an alternative prayer for the payment of P48,084.00 plus interest and/or late payment charges at
the rate of 36% per annum from May 18, 1997 until fully paid. The complaint likewise prayed
for the payment of P24,462.73 as attorneys fees, liquidated damages, bonding fees and other
expenses incurred in the seizure of the vehicle. The complaint was later amended to substitute
BPI as plaintiff when it merged with and absorbed FEBTC.
In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling P97,281.78. The
Acknowledgment Receipt, which they attached to the Answer, showed that FEBTC received the
following checks:
The respondents further averred that they did not receive any notice from the drawee banks or
from FEBTC that these checks were dishonored. They explained that, considering this and the
fact that the checks were issued three years ago, they believed in good faith that their obligation
had already been fully paid. They alleged that the complaint is frivolous and plainly vexatious.
They then prayed that they be awarded moral and exemplary damages, attorneys fees and costs
of suit.
During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994
and had assumed the position of Account Analyst since its merger with BPI. He admitted that
they had, in fact, received the eight checks from the respondents. However, two of these checks
(Landbank Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to
P23,692.00 were dishonored. He recalled that the remaining two checks were not deposited
anymore due to the previous dishonor of the two checks. He said that after deducting these
payments, the total outstanding balance of the obligation was P48,084.00, which represented the
last four monthly installments.
On February 23, 2005, the MeTC dismissed the case and granted the respondents counterclaim
for damages, thus:
WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of
action, and on the counterclaim, plaintiff is ordered to indemnify the defendants.
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the
respondents to pay the amount claimed by the petitioner.
1. The sum of P48,084.00 plus interest and/or late payment charges thereon at the rate of
36% per annum from May 18, 1997 until fully paid;
2. The sum of P10,000.00 as attorneys fees; and 

3. The costs of suit 

The RTC denied the respondents motion for reconsideration.
The respondents elevated the case to the Court of Appeals (CA) through a petition for review.
They succeeded in obtaining a favorable judgment when the CA set aside the RTCs Decision
and reinstated the MeTCs Decision on July 12, 2006. On February 13, 2007, the CA denied the
petitioners motion for reconsideration.
ISSUE:
1. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL
PAYMENT OF THEIR OBLIGATION AS ONE OF THEIR AFFIRMATIVE
DEFENSES.
2. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.
The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers
that, under the law and existing jurisprudence, delivery of checks does not constitute payment.
It points out that this principle stands despite the fact that there was no notice of dishonor of the
two checks and the demand to pay was made three years after default.
On the other hand, the respondents postulate that they have established payment of the amount
being claimed by the petitioner and, unless the petitioner proves that the checks have been
dishonored, they should not be made liable to pay the obligation again.
The petition is partly meritorious.
In civil cases, the party having the burden of proof must establish his case by a preponderance
of evidence, or evidence which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto. [18] Thus, the party, whether plaintiff or defendant, who
asserts the affirmative of an issue has the onus to prove his assertion in order to obtain a favorable
judgment. For the plaintiff, the burden to prove its positive assertions never parts. For the
defendant, an affirmative defense is one which is not a denial of an essential ingredient in the
plaintiffs cause of action, but one which, if established, will be a good defense i.e. an avoidance
of the claim.
In Jimenez v. NLRC, cited by both the RTC and the CA, the Court elucidated on who, between
the plaintiff and defendant, has the burden to prove the affirmative defense of payment:

As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff
must allege non-payment, the general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing
with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment devolves upon the debtor who offers
such a defense to the claim of the creditor. Where the debtor introduces some evidence of
payment, the burden of going forward with the evidence - as distinct from the general burden of
proof - shifts to the creditor, who is then under a duty of producing some evidence to show non-
payment.
In applying these principles, the CA and the RTC, however, arrived at different conclusions.
While both agreed that the respondents had the burden of proof to establish payment, the two
courts did not agree on whether the respondents were able to present sufficient evidence of
payment enough to shift the burden of evidence to the petitioner. The RTC found that the
respondents failed to discharge this burden because they did not introduce evidence of payment,
considering that mere delivery of checks does not constitute payment. On the other hand, the CA
concluded that the respondents introduced sufficient evidence of payment, as opposed to the
petitioner, which failed to produce evidence that the checks were in fact dishonored. It noted that
the petitioner could have easily presented the dishonored checks or the advice of dishonor and
required respondents to replace the dishonored checks but none was presented. Further, the CA
remarked that it is absurd for a bank, such as petitioner, to demand payment of a failed
amortization only after three years from the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC,
this is only proof that respondents delivered eight checks in payment of the amount due.
Apparently, this will not suffice to establish actual payment.
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized.
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred that
they believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks.
Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non- payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able
to adduce preponderant evidence to prove its claim.
To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed,
fell upon the respondents who would benefit from such fact. That payment was effected through
the eight checks was the respondents affirmative allegation that they had to establish with legal
certainty. If the petitioner were seeking to enforce liability upon the check, the burden to prove
that a notice of dishonor was properly given would have devolved upon it.[26] The fact is that
the petitioners cause of action was based on the original obligation as evidenced by the
Promissory Note and the Chattel Mortgage, and not on the checks issued in payment thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform
the respondents of the dishonor of the checks. A notice of dishonor is required only to preserve
the right of the payee to recover on the check. It preserves the liability of the drawer and the
indorsers on the check. Otherwise, if the payee fails to give notice to them, they are discharged
from their liability thereon, and the payee is precluded from enforcing payment on the check.
The respondents, therefore, cannot fault the petitioner for not notifying them of the non-payment
of the checks because whatever rights were transgressed by such omission belonged only to the
petitioner.
In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioners
possession of the documents pertaining to the obligation strongly buttresses its claim that the
obligation has not been extinguished. The creditors possession of the evidence of debt is proof
that the debt has not been discharged by payment.[27] A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of payment.[28] In an action for replevin by
a mortgagee, it is prima facie evidence that the promissory note has not been paid.[29] Likewise,
an uncanceled mortgage in the possession of the mortgagee gives rise to the presumption that
the mortgage debt is unpaid.[30]
Finally, the respondents posit that the petitioners claim is barred by laches since it has been three
years since the checks were issued. We do not agree. Laches is a recourse in equity. Equity,
however, is applied only in the absence, never in contravention, of statutory law. Thus, laches
cannot, as a rule, abate a collection suit filed within the prescriptive period mandated by the New
Civil Code.[31] The petitioners action was filed within the ten-year prescriptive period provided
under Article 1144 of the New Civil Code. Hence, there is no room for the application of laches.
Nonetheless, the Court cannot ignore what the respondents have consistently raised that they
were not notified of the non-payment of the checks. Reasonable banking practice and prudence
dictates that, when a check given to a creditor bank in payment of an obligation is dishonored,
the bank should immediately return it to the debtor and demand its replacement or payment lest
it causes any prejudice to the drawer. In light of this and the fact that the obligation has been
partially paid, we deem it just and equitable to reduce the 3% per month penalty charge as
stipulated in the Promissory Note to 12% per annum. Although a court is not at liberty to ignore
the freedom of the parties to agree on such terms and conditions as they see fit, as long as they
contravene no law, morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable, or if
the principal obligation has been partly or irregularly complied with.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of
Appeals Decision dated July 12, 2006, and Resolution dated February 13, 2007, are
REVERSED and SET ASIDE. The Decision of the Regional Trial Court, dated August 11,
2005, is REINSTATED with the MODIFICATION that respondents are ordered to deliver the
possession of the subject vehicle, or in the alternative, pay the petitioner P48,084.00 plus late
penalty charges/interest thereon at the rate of 12% per annum from May 18, 1997 until fully
paid.
SO ORDERED.
PHILIPPINE NATIONAL BANK, petitioner, vs.
 BENITO SEETO, respondent. evidence to show that respondent made oral assurances to refund the value of the check in case
of dishonor.

In support of petitioner's first assignment of error, it is argued that inasmuch as a check need not
On March 13, 1948, respondent Benito Seeto called at the branch of the Philippine National
to be presented for acceptance, unlike a bill of exchange as required by Section 143, Section 144
Bank, petitioner herein, at Surigao, and presented a check, No. A-21096, in the amount of P5,000
of the law is not applicable to the case at bar but Section 84, which provides:
dated at Cebu on March 10, 1948, payable to cash or bearer, and drawn by one Gan Yek Kiao
SEC. 84. Liability of person secondarily liable, when instrument dishonored. — Subject to the
against the Cebu branch of the Philippine National Bank of Communications. After consultation
provisions of this Act, when the nstrument is dishonored by nonpayment, as immediate right of
with the employees of the branch, Seeto made a general and unqualified indorsement of the
recourse to all parties secondarily liable thereon accrues to the holder.
check, and petitioner's agency accepted it and paid respondent the amount of P5,000 therefor.
The check was mailed to petitioner's Cebu branch on March 20, 1948, and was presented to the
It is true that Section 143 and 144 of the law are not applicable, because these are provisions
drawee bank for payment on April 9, 1948, but the check was dishonored for "insufficient funds."
having to do with the presentation of a bill of exchange for acceptance, and are not applicable to
So the check was returned to petitioner's Surigao agency, and upon receipt thereof by it on April
a check, as to which presentment for acceptance is not required.
14, 1948, said branch immediately sent a letter to the respondent herein demanding immediate
It is also true that Section 84 is applicable, but its application is subject to the condition imposed
refund of in the value of the check. A second communication of the same tenor was sent on April
by Section 186, to the effect that the check must be presented for payment within a reasonable
26, 1948, to which respondent answered asking that plaintiff's contemplated suit be deferred
time after its issue.
while he was making inquiries about the reasons for the dishonor of the check. Thereafter,
respondent refused to make the refund demanded, claiming that at the time of the negotiation o
SEC. 186. — Within what time a check must be presented. — A check must be presented for
the check the drawer had sufficient funds in the drawee bank, and that the petitioner's Surigao
payment within a reasonable time after its issue or the drawer will be discharged from liability
agency not delayed to forward the check until the drawer's funds were exhausted, the same would
thereon to the extent of the loss caused by the delay.
have been paid.
Counsel for the petitioner, however, argues that inasmuch as the above section expressly
Thereupon petitioner presented a complaint in the Court of First Instance of Surigao, alleging
provides for the discharge of the drawer from liability to the extent of the loss caused by the
that respondent Benito Seeto gave assurance to petitioner's agency in Surigao that the drawer of
delay, and, on the other hand, it is silent as to the liability of the indorser, the latter may not be
the check had sufficient funds with the drawee bank, and that upon these assurances petitioner's
considered discharged from liability by reason of the delay in the presentment of payment under
agency delivered the P5,000 to the respondent after the latter had made a general and unqualified
the general principle inclusio unius est exclusion alterius. We find no reason nor merit in the
indorsement thereon. Respondent denied having made the alleged assurances. Upon this issue
argument. The silence of Section 186 as to the indorser is due to the fact that his discharge is
petitioner submitted two witnesses at the time of the trial, who testified that it was not the practice
already expressly covered by the provision of Section 84, the indorser being a person secondarily
of petitioner's agency to cash out of town checks, and that the check was cashed because of the
liable on the instrument. The reason for the difference between the liability of the indorser and
assurances given by the respondent that the drawer had sufficient funds, and that he (respondent)
that of the drawer in case of dishonor is that the drawer is not probably or necessarily prejudiced
would refund the amount paid by petitioner's agency in case the check is dishonored. Respondent
thereby, while an indorser is, actually or by legal presumption.
denied having given the assurances. The trial court found notwithstanding respondent's denial to
the contrary, that the respondent made an undertaking to refund the amount of the checks in the
Innumerable decisions have already been rendered in the state courts of the United States to the
event of dishonor. In support of this finding it found that as the drawee bank is not in Cebu, it
effect that although the drawer of a check is discharged only to the extent of loss caused by
was impossible for petitioner's agency to make an independent verification of the drawer's
unreasonable delay in presentment, an indorser is wholly discharged thereby irrespective of any
solvency, and must have taken precautions to protect itself against loss by requiring the
question of loss or injury. ( Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447, cited in
respondent to give assurances that he would return the amount of the check in the case of
Brannan's Negotiable Instruments Law, p. 1134, Nuzum vs. Sheppard, 87 W. Va. 243, 104 S.E.
nonpayment. It also found that there was no unreasonable delay in the presentation of the check,
587, 11 A.L.R. 1024, Ibid.)
and, therefore, rendered judgment sentencing respondent to refund the amount he had received
The proposition maintained in the reported case (Nuzum vs. Sheppard., ante. 1024) that the
for the check.
indorser of a check, unlike the drawer, is relieved of liability thereon by an unreasonable delay
in presenting the same for payment, whether or not he is injured by the delay, is supported by
On appeal to the Court of Appeals, this court held that petitioner was guilty of unreasonably
the great weight of authority, (Cases cited.)
retaining and with-holding the check, and that the delay in the presentment for payment was
inexcusable, so that respondent was thereby discharged from liability. It also held that parol
The Court, in Gough v. Staats (N.Y.) supra, says: "Upon the question of due diligence to charge
evidence is incompetent to show that one signing of a check as indorser is merely a surety or
an indorser, whether he has been prejudiced or not by the delay is perfectly immaterial. It is not
guarantor, rejecting the evidence adduced at the trial court about the respondent's assurance and
inquired into. The law presumes he has been prejudiced." According to the Court in Caroll v.
promise to refund. It, therefore, reversed the judgment of the trial court and dismissed the
Sweet (1891) 128 N.Y. 19, 13 L.R.A. 43, 27 N.E. 763, "presentment to due time as fixed by the
complaint, with costs. Against this judgment an appeal by certiorari has been brought to this
law merchant was a condition upon performance of which the liability of the defendant, as
Court, petitioner Philippine National Bank contending that the Court of Appeals erred in
indorser, depended, and this delay was not excused, although the drawer of the check had no
applying sections 143 and 144 of the Negotiable Instruments Law and declaring respondent
funds, or was insolvent, or because presentment would not been unavailing as a means of
Benito Seeto discharged of his liability as indorser of the check, and in not admitting parol
procuring payment." Only where there is affirmative proof that the indorser knew when he
cashed the check that there would be no funds in the bank to meet it can the rule be avoided.
Otherwise, the failure to present the check in due course of payment will discharge the indorser
even though such presentment would have been unavailing. Start v. Tupper (Vt.) supra. (11
A.L.R. Annotation, pp. 1028-1029.)
We have been unable to find any authority sustaining the proposition that an indorser of a check
is not discharged from liability for an unreasonable delay in presentation for payment. This is
contrary to the essential nature and character of negotiable instruments — their negotiability.
They are supposed to be passed on with promptness in the ordinary course of business
transactions; not to be retained or kept for such time as the holder may want, otherwise the
smooth flow of commercial transactions would be hindered.
There seems to be an intimation in the decision appealed from that inasmuch as the check was
drawn payable elsewhere than at the place of business of the drawer, it must be presented for
acceptance or negotiable within a reasonable time, and upon failure to do so the drawer and all
indorsers thereof are discharged pursuant to Section 144 of the law. Against this insinuation the
petitioner argues that the application of sections 143 and 144 is not proper, and that it may not
be presumed that the check in question was not drawn and executed in Cebu, the residence or
place of business of the drawer. There is no evidence at all as to the place where the check was
drawn. However, we have already pointed out above that neither Section 143 nor Section 144 is
applicable. But our ruling that respondent was discharged upon the dishonor of the check is based
on Sections 84 and 186, the latter expressly requiring that a check must be presented for payment
within a reasonable time after issue.
It is not claimed by the petitioner on this appeal that the conclusion of the Court of Appeals that
there was unreasonable delay in the presentation of the check for payment at the drawee bank is
erroneous. The petitioner concedes the correctness of this conclusion, although for purposes of
argument merely. We find that the conclusion is correct. The fact, admitted by the witnesses for
the petitioner, the checks for the drawer issued subsequent to March 13, 1948, drawn against the
same bank and cashed at the same Surigao agency, were not dishonored positively shows that
the drawer had enough funds when he issued the check in question, and that had it not been for
the unreasonable delay in its presentation for payment, the petitioner herein would have been
able to receive payment therefor. The check is dated March 10, and was cashed by the petitioner's
agency on March 13, 1948. It was not mailed until seven days thereafter, i.e., on March 20, 1948,
or ten days after issue. No excuse was given for this delay. Assuming that it took one week, or
say ten days, or until March 30, for the check to reach Cebu, neither can there be any excuse for
not presenting it for payment at the drawee bank until April 9, 1948, or 10 days after it reached
Cebu. We, therefore, find no reason for disturbing the conclusion of the Court of Appeals that
there was unreasonable delay in the presentation of the check for payment at the drawee bank,
and that is a consequence thereof, the indorser, respondent herein, was thereby discharged.
With respect to the second assignment of error, petitioner argues that the verbal assurances given
by the respondent to the employees of the bank that he was ready to refund the amount if the
check should be dishonored by the drawee bank is a collateral agreement, separate and distinct
from the indorsement, by virtue of which petitioner herein was induced to cash the check, and,
therefore, admissible as an exception that the parol evidence rule. Petitioners contention in this
respect is not entirely unfounded. In the case of Tan Machan vs. De La Trinidad, et al., 4 Phil.,
684, this court held that parol evidence is admissible to show that parties signing as principals
merely did so as sureties. In the case of Robles vs. Lizarraga Hermanos, 50 Phil., 387, it was
also held by this court that parol evidence is admissible to prove "an independent thereof." (Ibid.,
p. 395.) In Philips vs. Preston, 5 How. (U.S.) 278, 12 L. ed, 152, the Supreme Court of the United
States held that any prior or contemporaneous conversation in connection with a note or its
indorsement, may be proved by parol evidence. And Wigmore states that "an extrinsic agreement
between indorser and indorsee which cannot be embodied in the instrument without impairing
its credit is provable by parol." (9 Wigmore 148, section 2445 [3].) If, therefore, the supposed
assurances that the drawer had funds and that the respondent herein would refund the amount of
the check if the drawer had no funds, were the considerations or reasons that induced the branch
agency of the petitioners to go out of its ordinary practice of not cashing out of town checks and
accept the check and to pay its face value, the same would be provable by parol, provided, of
course, that the assurances or inducements offered would not vary, alter, or destroy the
obligations attached by law to the indorsement.
We find, however, that the supposed assurances of refund in case of dishonor of the check are
precisely the ordinary obligations of an indorser, and these obligations are, under the law,
considered discharged by an unreasonable delay in the presentation of the check for payment.
SEC. 66. Liability of general indorser. — And, in addition, he engages that on due presentment,
it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be
dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may be compelled to pay it. (Emphasis
ours.)
There was no express obligation assumed by the respondent herein that the drawer would always
have funds, or that he (the indorser) would refund the amount of the check even if there was
delay in its presentation, so that while the Court of Appeals may have committed an error in
disregarding the evidence submitted by petitioner at the trial of the assurances made by
respondent herein at the time of the negotiation of the check, such error was without prejudice,
because the supposed assurances given were part of his obligations as an indorser, which were
discharged by the unreasonable delay in the presentation of the check for payment.
The judgment appealed from is, therefore, affirmed, with costs against the petitioner.
STATE INVESTMENT HOUSE, INC., petitioner,
 vs.
 COURT OF APPEALS and
NORA B. MOULIC, respondents.
The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for Review of the Decision of respondent
Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in
the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other,
30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment
House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity
of the checks. The checks, however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the
drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested
that it be paid in cash instead, although MOULIC avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and
expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because the
jewelry was never sold and the checks were negotiated without her knowledge and consent. She
also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full
responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint,
and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed
the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the
period prescribed by the Negotiable Instruments Law and that even if STATE did serve such
notice on MOULIC within the reglementary period it would be of no consequence as the checks
should never have been presented for payment. The sale of the jewelry was never effected; the
checks, therefore, ceased to serve their purpose as security for the jewelry.
We are not persuaded.
 The negotiability of the checks is not in dispute. Indubitably, they were
negotiable. After all, at the pre-trial, the
parties agreed to limit the issue to whether or not STATE was a holder of the checks in due
course.1 In this regard, Sec. 52 of the Negotiable Instruments Law provides —
Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder who has
taken the instrument under the following conditions: (a) That it is complete and regular upon its
face; (b) That he became the holder of it before it was overdue, and without notice that it was
previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d)
That at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course.2 Consequently, the burden of proving that STATE is not a
holder in due course lies in the person who disputes the presumption. In this regard, MOULIC
failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due
dates;3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price;
and, (d) petitioner was never informed nor made aware that these checks were merely issued to
payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
from any defect of title of prior parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the checks.4
MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the discharge of
the instrument as against a holder in due course. For the only grounds are those outlined in Sec.
119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By payment
in due course by or on behalf of the principal debtor; (b) By payment in due course by the party
accommodated, where the instrument is made or accepted for his accommodation; (c) By the
intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple
contract for the payment of money; (e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c)
is that cancellation effected by destroying the instrument either by tearing it up,5 burning it,6 or
writing the word "cancelled" on the instrument. The act of destroying the instrument must also
be made by the holder of the instrument intentionally. Since MOULIC failed to get back
possession of the post-dated checks, the intentional cancellation of the said checks is altogether
impossible.
On the other hand, the acts which will discharge a simple contract for the payment of money
under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify
what these acts are, e.g., Art. 1231 of the Civil Code7 which enumerates the modes of
extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant
case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor
while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer
MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal
basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable
Instruments Law:
Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to be
given to the drawer in the following cases: (a) Where the drawer and the drawee are the same
person; (b) When the drawee is a fictitious person or a person not having capacity to contract;
(c) When the drawer is the person to whom the instrument is presented for payment: (d) Where
the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
(e) Where the drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when
she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred
them to another to protect herself. After withdrawing her funds, she could not have expected her
checks to be honored. In other words, she was responsible for the dishonor of her checks, hence,
there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge
of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified
instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that
the party notified is expected to pay it.8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case.9
The drawing and negotiation of a check have certain effects aside from the transfer of title or the
incurring of liability in regard to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of the instrument. There is an
implied representation that funds or credit are available for the payment of the instrument in the
bank upon which it is drawn.10 Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the
instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in
due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with
the drawee bank to meet her obligation on the checks,11 so that Notice of Dishonor would be
futile.
The Court of Appeals also held that allowing recovery on the checks would constitute unjust
enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of
Corazon Victoriano and her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1
million.12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure
of mortgage, the mortgagee is entitled to claim the deficiency from the debtor.13 The step thus
taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a
proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right
to demand payment for the whole debt.14 For, while Act 3135, as amended, does not discuss the
mortgagee's right to recover such deficiency, it does not contain any provision either, expressly
or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose
the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115
of the Civil Code15 does not allow the creditor to recover the deficiency from the sale of the
thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis,
in the event of foreclosure, the vendor "shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the contrary will be void"
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot
be concluded that the creditor loses his right recognized by the Rules of Court to take action for
the recovery of any unpaid balance on the principal obligation simply because he has chosen to
extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given
him by the mortgagor in the contract of mortgage.
The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
course, STATE, without prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-
Party Defendants.
Costs against private respondent. SO ORDERED.
 cases, the MTCC considered the same as an acknowledgement on her part of her obligation with
Emilia Lim v Mindanao Wines and Liquor
Sales Invoice No. 1711[3] dated November 24, 1995, as well as Statement of Accounts No.
076[4] indicate that respondent Mindanao Wines and Liquor Galleria (Mindanao Wines)
delivered several cases of liquors to H & E Commercial owned by Emilia, for which the latter
issued four Philippine National Bank (PNB) postdated checks worth P25,000.00 each. When two
of these checks, particularly PNB Check Nos. 951453[5] and 951454[6] dated October 10, 1996
and October 20, 1996, respectively, bounced for the reasons ACCOUNT CLOSED and DRAWN
AGAINST INSUFFICIENT FUNDS, Mindanao Wines, thru its proprietress Evelyn Valdevieso,
demanded from H & E Commercial the payment of their value through two separate letters both
dated November 18, 1996.[7] When the demands went unheeded, Mindanao Wines filed before
Branch 2 of the Municipal Trial Court in Cities (MTCC) of Davao City Criminal Case Nos.
68,309-B-98 and 68,310-B-98 against Emilia for violations of BP 22.[8]
During trial, the prosecution presented its sole witness, Nieves Veloso (Nieves), accountant and
officer-in-charge of Mindanao Wines. She testified that Emilia has been a customer of Mindanao
Wines who purchased from it assorted liquors. In fact, Sales Invoice No. 1711 covered the orders
made by Emilia from Mindanao Wines and these orders were delivered by the latters salesman
Marcelino Bersaluna[9] (Marcelino) to H & E Commercial in San Francisco, Agusan del Sur.
For the same, Marcelino received the four PNB checks and accordingly endorsed them to
Mindanao Wines. Out of these four PNB checks, two were already paid, i.e., one was collected
while the other redeemed in court.
With regard to the bounced PNB Check Nos. 951453 and 951454, Nieves claimed that upon her
instructions Marcelino went to H & E Commercial more than 10 times to collect their value. But
since his efforts were in vain, two demand letters were thus sent to Emilia which were duly
received by her as the same were signed by the recipient of the letters.
On cross, Nieves admitted that she neither saw Emilia issue the checks nor accompanied
Marcelino in delivering the orders to H & E Commercial or in collecting the unpaid checks.
Asked about the corresponding sales order covering Sales Invoice No. 1711, she acknowledged
that the sales order was unsigned and explained that sales orders of customers are handled by the
Credit and Collection Department of Mindanao Wines.
After the prosecution rested its case, Emilia filed a Demurrer to Evidence[14] claiming
insufficiency of evidence. She asserted that not one of the elements of BP 22 was proven because
the witness merely relied upon the reports of the salesman; that the purchases covered by Sales
Invoice No. 1711 were unauthorized because the corresponding job order was unsigned; and that
it was never established that the bank dishonored the checks or that she was even sent a notice
of dishonor.
the MTCC granted the Demurrer to Evidence. It ruled that while Emilia did issue the checks for
value, the prosecution nevertheless miserably failed to prove one essential element that
consummates the crime of BP 22, i.e., the fact of dishonor of the two subject checks. It noted
that other than the checks, no bank representative testified about presentment and dishonor.
Hence, the MTCC acquitted Emilia of the criminal charges. However, the MTCC still found her
civilly liable because when she redeemed one of the checks during the pendency of the criminal
Mindanao Wines. Pertinent portions of the MTCC Order read:
The elements of B.P. Blg. 22 must concur before one can be convicted of this offense. Since one
element is wanting, it is believed that the guilt of the accused has not been established beyond
reasonable doubt. The Court, however, opines that the accused is civilly liable. There is evidence
on record that an account was contracted. She should, therefore, pay.
WHEREFORE, the demurrer to evidence is granted and these cases are ordered DISMISSED.
Accused, however, is adjudged to pay complainant the total amounts of the 2 checks which is
P50,000.00, with interest at the rate of 12% per annum to be computed from the date of notice
which is November 18, 1996 until the amount is paid in full; to reimburse complainant of the
expenses incurred in filing these cases in the amount of P1,245.00, and to pay attorneys fees of
P10,000.00.
Dissatisfied that her acquittal did not carry with it her exoneration from civil liability, Emilia
appealed to the Regional Trial Court (RTC) of Davao City, Branch 13. Emilia contended that
since the MTCC dismissed the criminal cases on the ground of insufficient evidence, the civil
aspect of the criminal cases should likewise be automatically dismissed. She argued that the
court may only award damages for the civil aspect of BP 22 if the criminal cases have been
dismissed on reasonable doubt upon proof of preponderance of evidence.
The RTC was not persuaded by Emilias contentions. The RTC clarified that the MTCC
dismissed the criminal cases based on reasonable doubt and not on insufficiency of evidence.
And while the prosecution failed to prove criminal liability beyond reasonable doubt, Emilias
indebtedness was nonetheless proven by preponderance of evidence, the quantum of evidence
required to prove the same. Thus, the RTC declared in its January 5, 2001 Order[17] that: The
prosecution however had established that the accused had issued the checks subject of these
cases. The accused had impliedly admitted that she was the maker of the checks subject of [these]
case[s] when she redeemed a third check from the complainant. In fact, the accused had never
categorically denied having issued the checks subject of these cases. When the accused filed the
Demurrer to Evidence, she had hypothetically admitted the evidence presented by the
prosecution to be true, and this includes the allegation of the prosecution that the accused issued
the checks subject of these cases for value. Thus, it dismissed the appeal.
Undeterred, Emilia filed before the CA a Petition for Review[20] still insisting that the MTCCs
dismissal was based on insufficiency of evidence and that same pertains to both the criminal and
civil aspects of BP 22. She reiterated that there was no basis for the civil award made by the
MTCC since the prosecution failed to show evidence of her civil liability and that a court can
only award civil liability in cases of acquittals based on reasonable doubt and not on insufficiency
of evidence. the CA emphasized that even if acquitted, an accused may still be held civilly liable
if a) the acquittal was based on reasonable doubt or b) the court declared that the liability of the
accused is only civil. Just like the RTC, the CA ruled that the dismissal of the criminal cases
against Emilia was expressly based on reasonable doubt, hence, she is not free from civil liability
because the same is not automatically extinguished by acquittal based on said ground. The CA
further declared that even granting that her acquittal was for insufficiency of evidence, the same
is still akin to a dismissal based on reasonable doubt.
Respecting the factual conclusions of the lower courts anent Emilias civil liability, the CA noted
that Emilia had never denied issuing the subject checks for value which, in themselves
constituted evidence of indebtedness. Moreover, she failed to refute the prosecutions evidence
when she filed a Demurrer to Evidence. The CA therefore affirmed the assailed Order of the
RTC except that it deleted the award of attorneys fees: WHEREFORE, premises considered, the
assailed Order of the Regional Trial Court (RTC), Br. 13, Davao City, affirming in toto the Order
of the Municipal Trial Court in Cities (MTCC), Br. 2, Davao City as to the civil liability of
Emilia Lim, is hereby AFFIRMED with the sole modification that the award of attorneys fees in
favor of the Respondent is DELETED.
On Motion for Reconsideration, Emilia asserted that by granting her Demurrer to Evidence based
on insufficiency of evidence, the MTCC acknowledged that there is absolutely no case against
her. She alleged that the preponderance of evidence required in determining civil liability does
not apply to her as she never presented any evidence at all, implying that in such a determination,
both parties should have presented their respective evidence for the purpose of ascertaining as to
which of the evidence presented is superior.
The CA, however, rejected the motion in its Resolution dated November 9, 2006. It held that
insufficiency does not mean the total absence of evidence, but that evidence is lacking of what
is necessary or required to make out her case. The CA explained that the MTCC acquitted Emilia
because the quantum of evidence required for a finding of guilt beyond reasonable doubt was
insufficient to convict her of BP 22. However, the extinction of the civil aspect does not
necessarily follow such acquittal. The CA also disregarded Emilias argument that a
preponderance of evidence should be a comparison of evidence of the opposing parties as such
interpretation would lead to absurdity because by simply refusing to present evidence, a
defendant can then be easily absolved from a civil suit.
Issue: whether the dismissal of Emilias BP 22 cases likewise includes the dismissal of their
civil aspect.
Emilias allegations that she was denied due process and that Mindanao Wines is not the real
party in interest do not merit our attention as these were never raised for resolution before the
courts below.
Emilia claims that she was deprived of due process when the courts below declared her civilly
liable. In support of this, she cites Salazar v. People wherein it was held that a court cannot rule
upon the civil aspect of the case should it grant a demurrer to evidence with leave of court since
the accused is entitled to adduce controverting evidence on the civil liability. Emilia likewise
contends that Mindanao Wines is not a juridical person, it being a single proprietorship only and
thus, not the real party in interest in this case.
We note, however, that Emilia had never invoked before the courts below the ruling in Salazar.
Neither did she specify in her pleadings filed therein whether her demurrer was filed with or
without leave of court. It is only now that Emilia is claiming that the same was filed with leave
of court in an apparent attempt to conform the facts of this case with that in Salazar. The same
goes true with regard to the questioned locus standi of Mindanao Wines. Emilia likewise did not
raise in her pleadings filed with the RTC or the CA that the civil aspect is dismissible for lack of
cause of action because Mindanao Wines is not a juridical person and thus not a real party in
interest. In fact, the courts below all along considered Mindanao Wines as the plaintiff and the
trial proceeded as such.
Obviously, these new issues are mere afterthoughts. They were raised only for the first time in
this petition for review on certiorari. Never were they presented before the RTC and the CA for
resolution. To allow Emilia to wage a legal blitzkrieg and blindside Mindanao Wines is a
violation of the latters due process rights: It is well-settled that no question will be entertained
on appeal unless it has been raised in the proceedings below. Points of law, theories, issues and
arguments not brought to the attention of the lower court, administrative agency or quasi-judicial
body, need not be considered by a reviewing court, as they cannot be raised for the first time at
that late stage. Basic considerations of fairness and due process impel this rule. Any issue raised
for the first time on appeal is barred by estoppel.
For this reason, the said issues do not merit the Courts consideration. Notwithstanding her
acquittal, Emilia is civilly liable.
The extinction of the penal action does not carry with it the extinction of the civil liability where
x x x the acquittal is based on reasonable doubt as only preponderance of evidence is required[27]
in civil cases. On this basis, Emilia insists that the MTCC dismissed the BP 22 cases against her
not on the ground of reasonable doubt but on insufficiency of evidence. Hence, the civil liability
should likewise be extinguished. Emilias Demurrer to Evidence, however, betrays this claim.
Asserting insufficiency of evidence as a ground for granting said demurrer, Emilia herself argued
therein that the prosecution has not proven [her] guilt beyond reasonable doubt.[28] And in
consonance with such assertion, the MTCC in its judgment expressly stated that her guilt was
indeed not established beyond reasonable doubt, hence the acquittal.
In any case, even if the Court treats the subject dismissal as one based on insufficiency of
evidence as Emilia wants to put it, the same is still tantamount to a dismissal based on reasonable
doubt. As may be recalled, the MTCC dismissed the criminal cases because one essential element
of BP 22 was missing, i.e., the fact of the banks dishonor. The evidence was insufficient to prove
said element of the crime as no proof of dishonor of the checks was presented by the prosecution.
This, however, only means that the trial court cannot convict Emilia of the crime since the
prosecution failed to prove her guilt beyond reasonable doubt, the quantum of evidence required
in criminal cases. Conversely, the lack of such proof of dishonor does not mean that Emilia has
no existing debt with Mindanao Wines, a civil aspect which is proven by another quantum of
evidence, a mere preponderance of evidence. Emilia also avers that a courts determination of
preponderance of evidence necessarily entails the presentation of evidence of both parties. She
thus believes that she should have been first required to present evidence to dispute her civil
liability before the lower courts could determine preponderance of evidence. We disagree.
Preponderance of evidence is [defined as] the weight, credit, and value of the aggregate evidence
on either side and is usually considered to be synonymous with the term greater weight of the
evidence or greater weight of the credible evidence. It is evidence which is more convincing to
the court as worthy of belief than that which is offered in opposition thereto.
Contrary to Emilias interpretation, a determination of this quantum of evidence does not need
the presentation of evidence by both parties. As correctly reasoned out by the CA, Emilias
interpretation is absurd as this will only encourage defendants to waive their presentation of
evidence in order for them to be absolved from civil liability for lack of preponderance of
evidence. Besides, Emilia should note that even when a respondent does not present evidence, a
complainant in a civil case is nevertheless burdened to substantiate his or her claims by
preponderance of evidence before a court may rule on the reliefs prayed for by the latter. Settled
is the principle that parties must rely on the strength of their own evidence, not upon the
weakness of the defense offered by their opponent.
Lastly, we see no reason to disturb the ruling of the CA anent Emilias civil liability. As may be
recalled, the CA affirmed the lower courts factual findings on the matter. Factual findings of the
trial court, when affirmed by the CA, will not be disturbed.[32] Also, [i]t is a settled rule that in
a petition for review on certiorari under Rule 45 of the Rules of [Court], only questions of law
may be raised by the parties and passed upon by this Court.[33] Moreover, it is well to remember
that a check may be evidence of indebtedness. A check, the entries of which are in writing, could
prove a loan transaction.[34] While Emilia is acquitted of violations of BP 22, she should
nevertheless pay the debt she owes.
WHEREFORE, the petition for review on certiorari is DENIED. The challenged June 30, 2006
Decision and November 9, 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 64897
are hereby AFFIRMED in toto
G.R. No. L-63419 December 18, 1986
The constitutionality of Batas Pambansa Bilang 22 (BP 22 for short), popularly known as the
Bouncing Check Law, which was approved on April 3, 1979, is the sole issue presented by these
petitions for decision. The question is definitely one of first impression in our jurisdiction.
These petitions arose from cases involving prosecution of offenses under the statute. The
defendants in those cases moved seasonably to quash the informations on the ground that the
acts charged did not constitute an offense, the statute being unconstitutional. The motions were
denied by the respondent trial courts, except in one case, which is the subject of G. R. No. 75789,
wherein the trial court declared the law unconstitutional and dismissed the case. The parties
adversely affected have come to us for relief.
As a threshold issue the former Solicitor General in his comment on the petitions, maintained
the posture that it was premature for the accused to elevate to this Court the orders denying their
motions to quash, these orders being interlocutory. While this is correct as a general rule, we
have in justifiable cases intervened to review the lower court's denial of a motion to quash. 1 In
view of the importance of the issue involved here, there is no doubt in our mind that the instant
petitions should be entertained and the constitutional challenge to BP 22 resolved promptly, one
way or the other, in order to put to rest the doubts and uncertainty that exist in legal and judicial
circles and the general public which have unnecessarily caused a delay in the disposition of cases
involving the enforcement of the statute.
For the purpose of resolving the constitutional issue presented here, we do not find it necessary
to delve into the specifics of the informations involved in the cases which are the subject of the
petitions before us. 2 The language of BP 22 is broad enough to cover all kinds of checks,
whether present dated or postdated, or whether issued in payment of pre-existing obligations or
given in mutual or simultaneous exchange for something of value.
I
BP 22 punishes a person "who makes or draws and issues any check on account or for value,
knowing at the time of issue that he does not have sufficient funds in or credit with the drawee
bank for the payment of said check in full upon presentment, which check is subsequently
dishonored by the drawee bank for insufficiency of funds or credit or would have been
dishonored for the same reason had not the drawer, without any valid reason, ordered the bank
to stop payment." The penalty prescribed for the offense is imprisonment of not less than 30 days
nor more than one year or a fine or not less than the amount of the check nor more than double
said amount, but in no case to exceed P200,000.00, or both such fine and imprisonment at the
discretion of the court. 3
The statute likewise imposes the same penalty on "any person who, having sufficient funds in or
credit with the drawee bank when he makes or draws and issues a check, shall fail to keep
sufficient funds or to maintain a credit to cover the full amount of the check if presented within
a period of ninety (90) days from the date appearing thereon, for which reason it is dishonored
by the drawee bank. 4
An essential element of the offense is "knowledge" on the part of the maker or drawer of the
check of the insufficiency of his funds in or credit with the bank to cover the check upon its
presentment. Since this involves a state of mind difficult to establish, the statute itself creates a
prima facie presumption of such knowledge where payment of the check "is refused by the
drawee because of insufficient funds in or credit with such bank when presented within ninety
(90) days from the date of the check. 5 To mitigate the harshness of the law in its application,
the statute provides that such presumption shall not arise if within five (5) banking days from
receipt of the notice of dishonor, the maker or drawer makes arrangements for payment of the
check by the bank or pays the holder the amount of the check.
Another provision of the statute, also in the nature of a rule of evidence, provides that the
introduction in evidence of the unpaid and dishonored check with the drawee bank's refusal to
pay "stamped or written thereon or attached thereto, giving the reason therefor, "shall constitute
prima facie proof of "the making or issuance of said check, and the due presentment to the
drawee for payment and the dishonor thereof ... for the reason written, stamped or attached by
the drawee on such dishonored check." 6
The presumptions being merely prima facie, it is open to the accused of course to present proof
to the contrary to overcome the said presumptions.
II
BP 22 is aimed at putting a stop to or curbing the practice of issuing checks that are worthless,
i.e. checks that end up being rejected or dishonored for payment. The practice, as discussed later,
is proscribed by the state because of the injury it causes to t public interests.
Before the enactment of BP 22, provisions already existed in our statute books which penalize
the issuance of bouncing or rubber checks. Criminal law has dealth with the problem within the
context of crimes against property punished as "estafa" or crimes involving fraud and deceit. The
focus of these penal provisions is on the damage caused to the property rights of the victim.
The Penal Code of Spain, which was in force in the Philippines from 1887 until it was replaced
by the Revised Penal Code in 1932, contained provisions penalizing, among others, the act of
defrauding another through false pretenses. Art. 335 punished a person who defrauded another
"by falsely pretending to possess any power, influence, qualification, property, credit, agency or
business, or by means of similar deceit." Although no explicit mention was made therein
regarding checks, this provision was deemed to cover within its ambit the issuance of worthless
or bogus checks in exchange for money.
In 1926, an amendment was introduced by the Philippine Legislature, which added a new clause
(paragraph 10) to Article 335 of the old Penal Code, this time referring in explicit terms to the
issuance of worthless checks. The amendment penalized any person who 1) issues a check in
payment of a debt or for other valuable consideration, knowing at the time of its issuance that he
does not have sufficient funds in the bank to cover its amount, or 2) maliciously signs the check
differently from his authentic signature as registered at the bank in order that the latter would
refuse to honor it; or 3) issues a postdated check and, at the date set for its payment, does not
have sufficient deposit to cover the same.
In 1932, as already adverted to, the old Penal Code was superseded by the Revised Penal Code.
9 The above provisions, in amended form, were incorporated in Article 315 of the Revised Penal
Code defining the crime of estafa. The revised text of the provision read as follows:
Art. 315. Swindling (estafa).—Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
xxx xxx xxx
2. By means of any of the following false pretenses or fraudulent acts executed prior to or
simultaneously with the commis sion of the fraud:
(a) By using fictitious name, or falsely pretending to possess power, influence, qualifications,
property, credit, agency, business or imaginary transactions, or by means of other similar deceits;
xxx xxx xxx
(d) By postdating a check, or issuing a check in payment of an obligation the offender knowing
that at the time he had no funds in the bank, or the funds deposited by him were not sufficient to
cover the amount of the cheek without informing the payee of such circumstances.
The scope of paragraph 2 (d), however, was deemed to exclude checks issued in payment of pre-
existing obligations. 10 The rationale of this interpretation is that in estafa, the deceit causing the
defraudation must be prior to or simultaneous with the commission of the fraud. In issuing a
check as payment for a pre-existing debt, the drawer does not derive any material benefit in
return or as consideration for its issuance. On the part of the payee, he had already parted with
his money or property before the check is issued to him hence, he is not defrauded by means of
any "prior" or "simultaneous" deceit perpetrated on him by the drawer of the check.
With the intention of remedying the situation and solving the problem of how to bring checks
issued in payment of pre-existing debts within the ambit of Art. 315, an amendment was
introduced by the Congress of the Philippines in 1967, 11 which was enacted into law as
Republic Act No. 4885, revising the aforesaid proviso to read as follows:
(d) By postdating a check, or issuing a check in payment of an obligation when the offender had
no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of
the check. The failure of the drawer of the check to deposit the amount necessary to cover his
check within three (3) days from receipt of notice from the bank and/or the payee or holder that
said check has been dishonored for lack or insufficiency of funds shall be puma facie evidence
of deceit constituting false pretense or fraudulent act.
However, the adoption of the amendment did not alter the situation materially. A divided Court
held in People vs. Sabio, Jr. 12 that Article 315, as amended by Republic Act 4885, does not
cover checks issued in payment of pre- existing obligations, again relying on the concept
underlying the crime of estafa through false pretenses or deceit— which is, that the deceit or
false pretense must be prior to or simultaneous with the commission of the fraud.
Since statistically it had been shown that the greater bulk of dishonored checks consisted of those
issued in payment of pre-existing debts, 13 the amended provision evidently failed to cope with
the real problem and to deal effectively with the evil that it was intended to eliminate or
minimize.
With the foregoing factual and legal antecedents as a backdrop, the then Interim Batasan
confronted the problem squarely. It opted to take a bold step and decided to enact a law dealing
with the problem of bouncing or worthless checks, without attaching the law's umbilical cord to
the existing penal provisions on estafa. BP 22 addresses the problem directly and frontally and
makes the act of issuing a worthless check malum prohibitum. 14
The question now arises: Is B P 22 a valid law?
Previous efforts to deal with the problem of bouncing checks within the ambit of the law on
estafa did not evoke any constitutional challenge. In contrast, BP 22 was challenged promptly.
Those who question the constitutionality of BP 22 insist that: (1) it offends the constitutional
provision forbidding imprisonment for debt; (2) it impairs freedom of contract; (3) it contravenes
the equal protection clause; (4) it unduly delegates legislative and executive powers; and (5) its
enactment is flawed in that during its passage the Interim Batasan violated the constitutional
provision prohibiting amendments to a bill on Third Reading.
The constitutional challenge to BP 22 posed by petitioners deserves a searching and thorough
scrutiny and the most deliberate consideration by the Court, involving as it does the exercise of
what has been described as "the highest and most delicate function which belongs to the judicial
department of the government."
As we enter upon the task of passing on the validity of an act of a co-equal and coordinate branch
of the government, we need not be reminded of the time-honored principle, deeply ingrained in
our jurisprudence, that a statute is presumed to be valid. Every presumption must be indulged in
favor of its constitutionality. This is not to say that we approach our task with diffidence or
timidity. Where it is clear that the legislature has overstepped the limits of its authority under the
constitution we should not hesitate to wield the axe and let it fall heavily, as fall it must, on the
offending statute.
III
Among the constitutional objections raised against BP 22, the most serious is the alleged conflict
between the statute and the constitutional provision forbidding imprisonment for debt. It is
contended that the statute runs counter to the inhibition in the Bill of Rights which states, "No
person shall be imprisoned for debt or non-payment of a poll tax." 16 Petitioners insist that, since
the offense under BP 22 is consummated only upon the dishonor or nonpayment of the check
when it is presented to the drawee bank, the statute is really a "bad debt law" rather than a "bad
check law." What it punishes is the non-payment of the check, not the act of issuing it. The
statute, it is claimed, is nothing more than a veiled device to coerce payment of a debt under the
threat of penal sanction.
First of all it is essential to grasp the essence and scope of the constitutional inhibition invoked
by petitioners. Viewed in its historical context, the constitutional prohibition against
imprisonment for debt is a safeguard that evolved gradually during the early part of the
nineteenth century in the various states of the American Union as a result of the people's
revulsion at the cruel and inhumane practice, sanctioned by common law, which permitted
creditors to cause the incarceration of debtors who could not pay their debts. At common law,
money judgments arising from actions for the recovery of a debt or for damages from breach of
a contract could be enforced against the person or body of the debtor by writ of capias ad
satisfaciendum. By means of this writ, a debtor could be seized and imprisoned at the instance
of the creditor until he makes the satisfaction awarded. As a consequence of the popular ground
swell against such a barbarous practice, provisions forbidding imprisonment for debt came to be
generally enshrined in the constitutions of various states of the Union.
This humanitarian provision was transported to our shores by the Americans at the turn of t0he
century and embodied in our organic laws. 18 Later, our fundamental law outlawed not only
imprisonment for debt, but also the infamous practice, native to our shore, of throwing people in
jail for non-payment of the cedula or poll tax.
The reach and scope of this constitutional safeguard have been the subject of judicial definition,
both by our Supreme Court 20 and by American State courts.21 Mr. Justice Malcolm speaking
for the Supreme Court in Ganaway vs. Queen, 22 stated: "The 'debt' intended to be covered by
the constitutional guaranty has a well-defined meaning. Organic provisions relieving from
imprisonment for debt, were intended to prevent commitment of debtors to prison for liabilities
arising from actions ex contractu The inhibition was never meant to include damages arising in
actions ex delicto, for the reason that damages recoverable therein do not arise from any contract
entered into between the parties but are imposed upon the defendant for the wrong he has done
and are considered as punishment, nor to fines and penalties imposed by the courts in criminal
proceedings as punishments for crime."
The law involved in Ganaway was not a criminal statute but the Code of Procedure in Civil
Actions (1909) which authorized the arrest of the defendant in a civil case on grounds akin to
those which justify the issuance of a writ of attachment under our present Rules of Court, such
as imminent departure of the defendant from the Philippines with intent to defraud his creditors,
or concealment, removal or disposition of properties in fraud of creditors, etc. The Court, in that
case, declared the detention of the defendant unlawful, being violative of the constitutional
inhibition against imprisonment for debt, and ordered his release. The Court, however, refrained
from declaring the statutory provision in question unconstitutional.
Closer to the case at bar is People v. Vera Reyes,23 wherein a statutory provision which made
illegal and punishable the refusal of an employer to pay, when he can do so, the salaries of his
employees or laborers on the fifteenth or last day of every month or on Saturday every week,
was challenged for being violative of the constitutional prohibition against imprisonment for
debt. The constitutionality of the law in question was upheld by the Court, it being within the
authority of the legislature to enact such a law in the exercise of the police power. It was held
that "one of the purposes of the law is to suppress possible abuses on the part of the employers
who hire laborers or employees without paying them the salaries agreed upon for their services,
thus causing them financial difficulties. "The law was viewed not as a measure to coerce payment
of an obligation, although obviously such could be its effect, but to banish a practice considered
harmful to public welfare.
IV
Has BP 22 transgressed the constitutional inhibition against imprisonment for debt? To answer
the question, it is necessary to examine what the statute prohibits and punishes as an offense. Is
it the failure of the maker of the check to pay a debt? Or is it the making and issuance of a
worthless check in payment of a debt? What is the gravamen of the offense? This question lies
at the heart of the issue before us.
The gravamen of the offense punished by BP 22 is the act of making and issuing a worthless
check or a check that is dishonored upon its presentation for payment. It is not the non-payment
of an obligation which the law punishes. The law is not intended or designed to coerce a debtor
to pay his debt. The thrust of the law is to prohibit, under pain of penal sanctions, the making of
worthless checks and putting them in circulation. Because of its deleterious effects on the public
interest, the practice is proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.
Admittedly, the distinction may seem at first blush to appear elusive and difficult to
conceptualize. But precisely in the failure to perceive the vital distinction lies the error of those
who challenge the validity of BP 22.
It may be constitutionally impermissible for the legislature to penalize a person for non-payment
of a debt ex contractu But certainly it is within the prerogative of the lawmaking body to
proscribe certain acts deemed pernicious and inimical to public welfare. Acts mala in se are not
the only acts which the law can punish. An act may not be considered by society as inherently
wrong, hence, not malum in se but because of the harm that it inflicts on the community, it can
be outlawed and criminally punished as malum prohibitum. The state can do this in the exercise
of its police power.
The police power of the state has been described as "the most essential, insistent and illimitable
of powers" which enables it to prohibit all things hurtful to the comfort, safety and welfare of
society. 24 It is a power not emanating from or conferred by the constitution, but inherent in the
state, plenary, "suitably vague and far from precisely defined, rooted in the conception that man
in organizing the state and imposing upon the government limitations to safeguard constitutional
rights did not intend thereby to enable individual citizens or group of citizens to obstruct
unreasonably the enactment of such salutary measures to ensure communal peace, safety, good
order and welfare."
The enactment of BP 22 is a declaration by the legislature that, as a matter of public policy, the
making and issuance of a worthless check is deemed public nuisance to be abated by the
imposition of penal sanctions.
It is not for us to question the wisdom or impolicy of the statute. It is sufficient that a reasonable
nexus exists between means and end. Considering the factual and legal antecedents that led to
the adoption of the statute, it is not difficult to understand the public concern which prompted its
enactment. It had been reported that the approximate value of bouncing checks per day was close
to 200 million pesos, and thereafter when overdrafts were banned by the Central Bank, it
averaged between 50 minion to 80 million pesos a day. 26
By definition, a check is a bill of exchange drawn on a bank and payable on demand. 27 It is a
written order on a bank, purporting to be drawn against a deposit of funds for the payment of all
events, of a sum of money to a certain person therein named or to his order or to cash and payable
on demand. 28 Unlike a promissory note, a check is not a mere undertaking to pay an amount of
money. It is an order addressed to a bank and partakes of a representation that the drawer has
funds on deposit against which the check is drawn, sufficient to ensure payment upon its
presentation to the bank. There is therefore an element of certainty or assurance that the
instrument wig be paid upon presentation. For this reason, checks have become widely accepted
as a medium of payment in trade and commerce. Although not legal tender, checks have come
to be perceived as convenient substitutes for currency in commercial and financial transactions.
The basis or foundation of such perception is confidence. If such confidence is shakes the
usefulness of checks as currency substitutes would be greatly diminished or may become nit Any
practice therefore tending to destroy that confidence should be deterred for the proliferation of
worthless checks can only create havoc in trade circles and the banking community.
Recent statistics of the Central Bank show that one-third of the entire money supply of the
country, roughly totalling P32.3 billion, consists of peso demand deposits; the remaining two.
These de deposit thirds consists of currency
in circulation. ma deposits in the banks constitute the funds against which among others,
commercial papers like checks, are drawn. The magnitude of the amount involved amply justifies
the legitimate concern of the state in preserving the integrity of the banking system. Flooding
the system with worthless checks is like pouring garbage into the bloodstream of the nation's
economy.
The effects of the issuance of a worthless check transcends the private interests of the parties
directly involved in the transaction and touches the interests of the community at large. The
mischief it creates is not only a wrong to the payee or holder, but also an injury to the public.
The harmful practice of putting valueless commercial papers in circulation, multiplied a
thousand fold, can very wen pollute the channels of trade and commerce, injure the banking
system and eventually hurt the welfare of society and the public interest. As aptly stated — The
'check flasher' does a great deal more than contract a debt; he shakes the pillars of business; and
to my mind, it is a mistaken charity of judgment to place him in the same category with the
honest man who is unable to pay his debts, and for whom the constitutional inhibition against'
imprisonment for debt, except in cases of fraud was intended as a shield and not a sword.
In sum, we find the enactment of BP 22 a valid exercise of the police power and is not repugnant
to the constitutional inhibition against imprisonment for debt.
This Court is not unaware of the conflicting jurisprudence obtaining in the various states of the
United States on the constitutionality of the "worthless check" acts. 31 It is needless to warn that
foreign jurisprudence must be taken with abundant caution. A caveat to be observed is that
substantial differences exist between our statute and the worthless check acts of those states
where the jurisprudence have evolved. One thing to remember is that BP 22 was not lifted bodily
from any existing statute. Furthermore, we have to consider that judicial decisions must be read
in the context of the facts and the law involved and, in a broader sense, of the social economic
and political environment—in short, the milieu—under which they were made. We recognize
the wisdom of the old saying that what is sauce for the goose may not be sauce for the gander.
As stated elsewhere, police power is a dynamic force that enables the state to meet the exigencies
of changing times. There are occasions when the police power of the state may even override a
constitutional guaranty. For example, there have been cases wherein we held that the
constitutional provision on non-impairment of contracts must yield to the police power of the
state. 32 Whether the police power may override the constitutional inhibition against
imprisonment for debt is an issue we do not have to address. This bridge has not been reached,
so there is no occasion to cross it.
We hold that BP 22 does not conflict with the constitutional inhibition against imprisonment for
debt.
V
We need not detain ourselves lengthily in the examination of the other constitutional objections
raised by petitioners, some of which are rather flimsy.
We find no valid ground to sustain the contention that BP 22 impairs freedom of contract. The
freedom of contract which is constitutionally protected is freedom to enter into "lawful"
contracts. Contracts which contravene public policy are not lawful. 33 Besides, we must bear in
mind that checks can not be categorized as mere contracts. It is a commercial instrument which,
in this modem day and age, has become a convenient substitute for money; it forms part of the
banking system and therefore not entirely free from the regulatory power of the state.
Neither do we find substance in the claim that the statute in question denies equal protection of
the laws or is discriminatory, since it penalizes the drawer of the check, but not the payee. It is
contended that the payee is just as responsible for the crime as the drawer of the check, since
without the indispensable participation of the payee by his acceptance of the check there would
be no crime. This argument is tantamount to saying that, to give equal protection, the law should
punish both the swindler and the swindled. The petitioners' posture ignores the well- accepted
meaning of the clause "equal protection of the laws." The clause does not preclude classification
of individuals, who may be accorded different treatment under the law as long as the
classification is no unreasonable or arbitrary.
It is also suggested that BP 22 constitutes undue or improper delegation of legislative powers,
on the theory that the offense is not completed by the sole act of the maker or drawer but is made
to depend on the will of the payee. If the payee does not present the check to the bank for payment
but instead keeps it, there would be no crime. The logic of the argument stretches to absurdity
the meaning of "delegation of legislative power." What cannot be delegated is the power to
legislate, or the power to make laws. 35 which means, as applied to the present case, the power
to define the offense sought to be punished and to prescribe the penalty. By no stretch of logic
or imagination can it be said that the power to define the crime and prescribe the penalty therefor
has been in any manner delegated to the payee. Neither is there any provision in the statute that
can be construed, no matter how remotely, as undue delegation of executive power. The
suggestion that the statute unlawfully delegates its enforcement to the offended party is
farfetched.
Lastly, the objection has been raised that Section 9 (2) of Article VII of the 1973 Constitution
was violated by the legislative body when it enacted BP 22 into law. This constitutional provision
prohibits the introduction of amendments to a bill during the Third Reading. It is claimed that
during its Third Reading, the bill which eventually became BP 22 was amended in that the text
of the second paragraph of Section 1 of the bill as adopted on Second Reading was altered or
changed in the printed text of the bill submitted for approval on Third Reading.
A careful review of the record of the proceedings of the Interim Batasan on this matter shows
that, indeed, there was some confusion among Batasan Members on what was the exact text of
the paragraph in question which the body approved on Second Reading. 36 Part of the confusion
was due apparently to the fact that during the deliberations on Second Reading (the amendment
period), amendments were proposed orally and approved by the body or accepted by the sponsor,
hence, some members might not have gotten the complete text of the provisions of the bill as
amended and approved on Second Reading. However, it is clear from the records that the text of
the second paragraph of Section 1 of BP 22 is the text which was actually approved by the body
on Second Reading on February 7, 1979, as reflected in the approved Minutes for that day. In
any event, before the bin was submitted for final approval on Third Reading, the Interim Batasan
created a Special Committee to investigate the matter, and the Committee in its report, which
was approved by the entire body on March 22, 1979, stated that "the clause in question was ...
an authorized amendment of the bill and the printed copy thereof reflects accurately the provision
in question as approved on Second Reading. 37 We therefore, find no merit in the petitioners'
claim that in the enactment of BP 22 the provisions of Section 9 (2) of Article VIII of the 1973
Constitution were violated.
WHEREFORE, judgment is rendered granting the petition in G.R. No. 75789 and setting aside
the order of the respondent Judge dated August 19, 1986. The petitions in G.R. Nos. 63419,
66839-42, 71654, 74524-25, 75122-49, 75812-13 and 75765-67 are hereby dismissed and the
temporary restraining order issued in G.R. Nos. 74524-25 is lifted. With costs against private
petitioners.
SO ORDERED.
MICHAEL A. OSMEA, petitioner, vs. CITIBANK, N.A., ASSOCIATED
BANK and FRANK TAN, respondents.
On February 22, 1991, the petitioner filed with the Regional Trial Court of Makati an action for
damages against the respondents Citibank, N.A. and Associated Bank.[3] The case was docketed
as Civil Case No. 91-538. The complaint materially alleged that, on or about August 25, 1989,
the petitioner purchased from the Citibank Managers Check No. 20-015301 (the check for
brevity) in the amount of P1,545,000 payable to respondent Frank Tan; the petitioner later
received information that the aforesaid managers check was deposited with the respondent
Associated Bank, Rosario Branch, to the account of a certain Julius Dizon under Savings
Account No. 19877; the clearing and/or payment by the respondents of the check to an improper
party and the absence of any indorsement by the payee thereof, respondent Frank Tan, is a clear
violation of the respondents obligations under the Negotiable Instruments Law and standard
banking practice; considering that the petitioners intended payee for the check, the respondent
Frank Tan, did not receive the value thereof, the petitioner demanded from the respondents
Citibank and the Associated Bank the payment or reimbursement of the value of the check; the
respondents, however, obstinately refused to heed his repeated demands for payment and/or
reimbursement of the amount of the check; hence, the petitioner was compelled to file this
complaint praying for the restitution of the amount of the check, and for moral damages and
attorneys fees.
On June 17, 1991, the petitioner, with leave of court, filed an Amended Complaint impleading
Frank Tan as an additional defendant. The petitioner averred therein that the check was
purchased by him as a demand loan to respondent Frank Tan. Since apparently respondent Frank
Tan did not receive the proceeds of the check, the petitioner might have no right to collect from
respondent Frank Tan and is consequently left with no recourse but to seek payment or
reimbursement from either or both respondents Citibank and/or Associated Bank.
In its answer to the amended complaint, the respondent Associated Bank alleged that the
petitioner was not the real party-in-interest but respondent Frank Tan who was the payee of the
check. The respondent also maintained that the check was deposited to the account of respondent
Frank Tan, a.k.a. Julius Dizon, through its Ayala Head Office and was credited to the savings
account of Julius Dizon; the Ayala office confirmed with the Rosario Branch that the account of
Julius Dizon is also in reality that of respondent Frank Tan; it never committed any violation of
its duties and responsibilities as the proceeds of the check went and was credited to respondent
Frank Tan, a.k.a. Julius Dizon; the petitioners affirmative allegation of non-payment to the payee
is self-serving; as such, the petitioners claim for damages is baseless, unfounded and without
legal basis.
On the other hand, the respondent Citibank, in answer to the amended complaint,[6] alleged that
the payment of the check was made by it in due course and in the exercise of its regular banking
function. Since a managers check is normally purchased in favor of a third party, the identity of
whom in most cases is unknown to the issuing bank, its only responsibility when paying the
check was to examine the genuineness of the check. It had no way of ascertaining the
genuineness of the signature of the payee respondent Frank Tan who was a total stranger to it. If
at all, the petitioner had a cause of action only against the respondent Associated Bank which,
as depository or collecting bank, was obliged to make sure that the check in question was
properly endorsed by the payee. It is not expected of the respondent Citibank to ascertain the
genuineness of the indorsement of the payee or even the lack of indorsement by him, most
especially when the check was presented for payment with the respondent Associated Banks
guaranteeing all prior indorsements or lack thereof.
On March 16, 1992, the trial court declared Frank Tan in default for failure to file his answer.[7]
On June 10, 1992, the pre-trial conference was concluded without the parties reaching an
amicable settlement.[8] Hence, trial on the merits ensued.
After evaluating the evidence adduced by the parties, the trial court resolved that the
preponderance of evidence supports the claim of the petitioner as against respondent Frank Tan
only but not against respondents Banks. Hence, on February 21, 1995, the trial court rendered
judgment in favor of the petitioner and against respondent Frank Tan. The complaints against
the respondents Banks were dismissed. The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered as follows :
1. Ordering defendant Frank Tan to pay plaintiff Michael Osmea the amount of One Million Five
Hundred Forty-Five Thousand (P1,545,000.00) Pesos, Philippine Currency, with interest thereon
at 12% per annum from January 1990, date of extra-judicial demand until the full amount is paid;
2. Dismissing the complaint against defendants Citibank and Associated Bank;
3. Dismissing the counter-claims and the cross-claim of Citibank against Associated Bank for
lack of merit.
With costs against defendant Frank Tan.[9]
The petitioner appealed the decision,[10] while respondent Frank Tan did not. On November 26,
1999, the appellate court rendered judgment affirming in toto the decision of the trial court.
Aggrieved, the petitioner assailed the decision in his petition at bar.
The petitioner contends that:
I. RESPONDENT COURT ERRED IN NOT HOLDING CITIBANK AND ASSOCIATED
BANK LIABLE TO PETITIONER FOR THE ENCASHMENT OF CITIBANK MANAGERS
CHECK NO. 20015301 BY JULIUS DIZON.
II. RESPONDENT COURT ERRED IN HOLDING THAT FRANK TAN AND JULIUS
DIZON ARE ONE AND THE SAME PERSON. III. THE IDENTITY OF FRANK TAN AS
JULIUS DIZON WAS KNOWN ONLY TO ASSOCIATED BANK AND WAS NOT
BINDING ON PETITIONER.[11]
The petition is denied.
The petitioner asserts that the check was payable to the order of respondent Tan. However, the
respondent Associated Bank ordered the check to be deposited to the account of one Julius
Dizon, although the check was not endorsed by respondent Tan. As Julius Dizon was not a holder
of the check in due course, he could not validly negotiate the check. The latter was not even a
transferee in due course because respondent Tan, the payee, did not endorse the said check. The
position of the respondent Bank is akin to that of a bank accepting a check for deposit wherein
the signature of the payee or endorsee has been forged.
The contention of the petitioner does not hold water.
The fact of the matter is that the check was endorsed by Julius Dizon and was deposited and
credited to Savings Account No. 19877 with the respondent Associated Bank. But the evidence
on record shows that the said account was in the name of Frank Tan Guan Leng, which is the
Chinese name of the respondent Frank Tan, who also uses the alias Julius Dizon. As correctly
ruled by the Court of Appeals:
On the other hand, Associated satisfactorily proved that Tan is using and is also known by his
alias of Julius Dizon. He signed the Agreement On Bills Purchased (Exh. 1) and Continuing
Suretyship Agreement (Exh. 2) both acknowledged on January 16, 1989, where his full name is
stated to be FRANK Tan Guan Leng (aka JULIUS DIZON). Exh. 1 also refers to his Account
No. SA#19877, the very same account to which the P1,545,000.00 from the managers check was
deposited. Osmea countered that such use of an alias is illegal. That is but an irrelevant casuistry
that does not detract from the fact that the payee Tan as Julius Dizon has encashed and deposited
the P1,545,000.00.
The respondent Associated Bank presented preponderant evidence to support its assertion that
respondent Tan, the payee of the check, did receive the proceeds of the check. It adduced
evidence that Julius Dizon and Frank Tan are one and the same person. Respondent Tan was a
regular and trusted client or depositor of the respondent Associated Bank in its branch at Rosario,
Binondo, Manila. As such, respondent Tan was allowed to maintain two (2) savings accounts
therein.[13] The first is Savings Account No. 20161-3 under his name Frank Tan.[14] The other
is Savings Account No. 19877 under his assumed Filipino name Julius Dizon,[15] to which
account the check was deposited in the instant case. Both witnesses for the respondent
Associated Bank, Oscar Luna (signature verifier) and Luz Lagrimas (new accounts clerk),
testified that respondent Tan was using the alias Julius Dizon, and that both names referred to
one and the same person, as Frank Tan himself regularly transacted business at the bank under
both names.[16] This is also evidenced by the Agreement on Bills Purchased[17] and the
Continuing Suretyship Agreement[18] executed between Frank Tan and the respondent
Associated Bank on January 16, 1989. Frank Tans name appears in said document as FRANK
TAN GUAN LENG (a.k.a. JULIUS DIZON).[19] The same documentary evidence also made
reference to Savings Account No. 19877,[20] the very same account to which the check was
deposited and the entire P1,545,000 was credited. Additionally, Citibank Check No. 075713[21]
which was presented by the petitioner to prove one of the loans previously extended to
respondent Tan showed that the endorsement of respondent Tan at the dorsal side thereof[22] is
strikingly similar to the signatures of Frank Tan appearing in said agreements.
By seeking to recover the loan from respondent Tan, the petitioner admitted that respondent Tan
received the amount of the check. This apprehension was not without any basis at all, for after
the petitioner attempted to communicate with respondent Tan on January or February 1990,
demanding payment for the loan, respondent Tan became elusive of the petitioner.[23] As a
matter of fact, respondent Tan did not file his answer to the amended complaint and was never
seen or heard of by the petitioner.[24] Besides, if it were really a fact that respondent Tan did
not receive the proceeds of the check, he could himself have initiated the instant complaint
against respondents Banks, or in the remotest possibility, joined the petitioner in pursuing the
instant claim.
The petitioner initially sought to recover from the respondents Banks the amount of P1,545,000
corresponding to the loan obtained by respondent Tan from him, obviously because respondent
Tan had no intent to pay the amount. The petitioner alleges that the respondents Banks were
negligent in paying the amount to a certain Julius Dizon, in relation to the pertinent provisions
of the Negotiable Instruments Law, without the proper indorsement of the payee, Frank Tan. The
petitioner cites the ruling of the Court in Associated Bank v. Court of Appeals,[25] in which we
outlined the respective responsibilities and liabilities of a drawee bank, such as the respondent
Citibank, and a collecting bank, such as the defendant Associated Bank, in the event that payment
of a check to a person not designated as the payee, or who is not a holder in due course, had been
made. However, the ruling of the Court therein does not apply to the present case for, as has been
amply demonstrated, the petitioner failed to establish that the proceeds of the check was indeed
wrongfully paid by the respondents Banks to a person other than the intended payee. In addition,
the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single
case.
Moreover, the chain of events following the purported delivery of the check to respondent Tan
renders even more dubious the petitioners claim that respondent Tan had not received the
proceeds of the check. Thus, the petitioner never bothered to find out from the said respondent
whether the latter received the check from his messenger. And if it were to be supposed that
respondent Tan did not receive the check, given that his need for the money was urgent, it strains
credulity that respondent Tan never even made an effort to get in touch with the petitioner to
inform the latter that he did not receive the check as agreed upon, and to inquire why the check
had not been delivered to him. The petitioner and respondent Tan saw each other during social
gatherings but they never took the chance to discuss details on the loan or the check.[27] Their
actuations are not those to be usually expected of friends of 15 years who, as the petitioner would
want to impress upon this Court, were transacting business on the basis of confidence.[28] In
fact, the first time that the petitioner attempted to communicate with respondent Tan was on
January or February 1990, almost five or six months after the expected delivery of the check, for
the purpose of demanding payment for the loan. And it was only on that occasion that respondent
Tan, as the petitioner insinuates, informed him that he (Frank Tan) had not received the proceeds
of the check and refused to pay his loan.[29] All told, the petitioners allegation that respondent
Tan did not receive the proceeds of the check[30] is belied by the evidence on record and
attendant circumstances.
Conversely, the records would disclose that even the petitioner himself had misgivings about the
truthfulness of his allegation that respondent Tan did not receive the amount of the check. This
is made implicit by respondent Tans being made a party-defendant to the case when the petitioner
filed his amended complaint. In his memorandum in the case below, the petitioner averred inter
alia that:
The amount of P1,545,000.00 is sought to be recovered from:
1. Frank Tan for his failure to pay the loan extended by plaintiff; and
2. Associated Bank and Citibank for having accepted for deposit and/or paid the Citibank
managers check despite the absence of any signature/endorsement by the named payee, Frank
Tan.
The claim of the petitioner that respondent Tans use of an alias is illegal does not detract a whit
from the fact that respondent Tan had been credited by the respondent Associated Bank for the
amount of the check. Respondent Tan did not appeal the decision of the RTC.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision dated
November 26, 1999 of the Court of Appeals in CA-G.R. CV No. 49529 is hereby AFFIRMED.
Costs against the petitioner.
SO ORDERED.
G.R. No. L-22578 January 31, 1973
NATIONAL MARKETING CORPORATION, plaintiff-appellee,
 vs.
 FEDERATION
OF UNITED NAMARCO DISTRIBUTORS, INC., defendant-appellan
Appeal by defendant, Federation of United Namarco Distributors, Inc., from a decision of the
Court of First Instance of Manila in Civil Case No. 46124, ordering said defendant to pay the
plaintiff, National Marketing Corporation the sum of P609,014.73, representing the cost of
merchandise delivered to, and not paid for by, the defendant, with interest thereon at the legal
rate from the date of delivery of the merchandise, until the whole obligation is paid; and the sum
of P5,000.00, for and as attorney's fees and other expenses of litigation, plus costs.
The facts of this case, which are not disputed by the parties, are correctly set forth in the appealed
decision from which we reproduce hereunder, as follows:
The plaintiff, hereinafter to be called the NAMARCO, is a government owned and controlled
corporation duly organized and existing under and by virtue of Republic Act No. 1345, as
amended; and the defendant, hereinafter to be called the FEDERATION, is a non-stock
corporation duly organized and existing under and by virtue of the laws of the Philippines.
On November 16, 1959, the NAMARCO and the FEDERATION entered into a Contract of Sale
which contains the following stipulations, terms and conditions:
"That, WHEREAS, by virtue of NAMARCO Board Resolution dated November 3, 1959, the
Management of NAMARCO was authorized to import the following items with the
corresponding dollar value totalling Two Million One Thousand Thirty One Dollars
($2,001.031.00), to wit:
xxx xxx xxx
xxx xxx xxx
"That, WHEREAS, for and in consideration of the sum of Two Hundred Thousand Pesos
(P200,000.00) as part payment of the items and/or merchandise above-mentioned, and deposited
by the FEDERATION with the NAMARCO upon signing of the items and/or merchandise above
enumerated items and/or merchandise shall be paid on cash basis upon delivery of the duly
indorsed negotiable shipping document covering the same, the NAMARCO agrees to sell the
said items and/or merchandise subject to the following terms and conditions:
"1. That the FEDERATION shall pay the NAMARCO the value of the goods equivalent to the
procurement costs plus 5% mark-up, provided, however, that should there be any adjustment in
the procurement costs the same shall be refunded to the FEDERATION.
"2. That all handling and storage charges of the goods sold shall be for the account of the
FEDERATION.
"3. That the FEDERATION waives its right to claim for any loss or damage that may be suffered
due to force majeure such as war, riots, strikes, etc., except when such incident is directly or
indirectly due to the negligence of the NAMARCO or its representative;
"4. That the items and/or merchandise sold by NAMARCO to the FEDERATION shall be
distributed among its members and retailers in accordance with NAMARCO's existing rules and
regulation,, governing the distribution of NAMARCO goods and at the wholesale and retail
prices to be determined by NAMARCO.
xxx xxx xxx
 (Annex "A" to the Complaint or Exh. "A").
Among the goods covered by the Contract of Sale were 2,000 cartons of PK Chewing Gums,
1,000 cartons of Juicy Fruit Chewing Gums, 500 cartons of Adams Chicklets, 168 cartons of
Blue Denims, and 138 bales of Khaki Twill.
To insure the payment of those goods by the FEDERATION, the NAMARCO accepted three
domestic letters of credit, to wit: PNB Domestic L/C No. 600570, dated January 27, 1960, in
favor of the NAMARCO for the account of the FEDERATION, available by draft up to the
aggregate amount of P277,357.91, covering the full invoice value of the 2,000 cartons PK-5
Chewing Gums, 1,000 cartons of Juicy Fruit Chewing Gums, and 500 cartons of Adams
Chicklets; PNB Domestic L/C No. 600606, dated January 28, 1960, in favor of the NAMARCO
for the account of the FEDERATION, available by draft up to the aggregate amount of
P135,891.82, covering the full invoice value of the 168 cartons of Blue Denims; and PNB
Domestic L/C No. 600586, dated January 28, 1960, in favor of the NAMARCO for the account
of the FEDERATION, available by draft up to the aggregate amount of P197,804.12, covering
the full invoice value of the 183 bales of Khaki Twill, each to be accompanied by statement of
account of buyer issued by the NAMARCO, accepted draft and duly executed trust receipt
approved by the Philippine National Bank.
Upon arrival of the goods in Manila in January, 1960, the NAMARCO submitted to the
FEDERATION Statement of Account for P277,357.91, covering shipment of the 2,000 cartons
of PK Chewing Gums, 1,000 cartons of Juicy Fruit Chewing Gums, and 500 cartons of Adams
Chicklets; Statement of Account of P135,891.32, covering shipment of the 168 cartons of Blue
Denims; and Statement of Account of P197,824.12, covering shipment of the 183 bales of Khaki
Twill or a total of P611,053.35, for the FEDERATION to pay.
On January 29, 1960, the FEDERATION received from the NAMARCO the 2,000 cartons of
PK Chewing Gums, 1,000 cartons of Juicy Fruit Chewing Gums, and 500 cartons of Adams
Chicklets, all with a total value of P277,357.91, under the condition that the cost thereof would
be paid in cash through PNB Domestic L/C No. 600570; and on February 20, 1960, the
FEDERATION received from the NAMARCO the 168 cartons of Blue Denims and 183 bales
of Khaki Twill, with a total value of P135,891.82 and P197,804.12, respectively, under the
condition that the cost thereof would be paid in cash through PNB Domestic L/C Nos. 600606
and 600586, respectively.
On March 2, 1960, the FEDERATION and some of its members filed a complaint against the
NAMARCO, which became Civil Case No. 42684 of this Court for specific performance and
damages, alleging that after the NAMARCO had delivered a great portion of the goods listed in
the Contract of Sale, it refused to deliver the other goods mentioned in the said contract. The
pertinent allegations of the complaint in that case is, as follows:
"17. That now the defendant has refused and declined to accept the cash payments by the
FEDERATION, in accordance with the terms and conditions stipulated in said contract, Annex
"A" hereof, against deliveries to it of the commodities listed in paragraph 16 hereof, and has
refused and declined to make deliveries thereof to the FEDERATION, in accordance with such
terms and conditions; and that the plaintiffs have always been, and still are willing to take
deliveries of the same commodities and to pay for them, through the FEDERATION, in
accordance with the terms and conditions of said contract." (Exh. "1")
On March 10, 1960, the NAMARCO presented to the Philippine National Bank, Manila, for
payment Sight Draft, dated March 10, 1960, for P277,357.91, to cover the full payment of the
2,000 cartons of PK Chewing Gums, 1,000 cartons of Juicy Fruit Chewing Gums, and 500
cartons of Adams Chicklets, duly accompanied with supporting papers; Sight Draft, dated March
10, 1960, for P135,891.82, to cover the full payment of the 168 cartons of Blue Denims, duly
accompanied with supporting papers; and Sight Draft, dated March 10, 1960, for P197,804.12,
to cover the full payment of 183 bales of Khaki Twill, duly accompanied with supporting papers.
On March 19, 1960, the NAMARCO filed in Civil Case No. 42684 its answer to the complaint,
alleging that the Contract of Sale was not validly entered into by the NAMARCO and, therefore,
it is not bound by the provisions thereof, without setting up any counterclaim for the value of the
goods which it had already delivered but which had not yet been paid for by the FEDERATION.
"On May 19, 1960, the Philippine National Bank informed the NAMARCO that could not
negotiate and effect payment on the sight drafts drawn under PNB Domestic L/C Nos. 600570,
600606 and 606586, in the amounts of P277,357.91, P135,891.82 and P197,804.12, respectively,
as the requirements of the covering letters of credit had not been complied with. The common
condition of the three letters of credit is that the sight drafts drawn on them must be duly accepted
by the FEDERATION before they will be honored by the Philippine National Bank. But the said
drafts were not presented to the FEDERATION for acceptance.
On June 7, 1960, the NAMARCO demanded from the FEDERATION the payment of the total
amount of P611,053.35, but the latter failed and refused to pay the said amount, or any portion
thereof, to the NAMARCO.
In the readjustment made on the basis of actual expenditures, the total cost of the goods was
reduced from P611,053.35 to P609.014.73.
On October 15, 1960, the Court of First Instance of Manila promulgated its decision in Civil
Case No. 42684, ordering the NAMARCO to specifically perform its obligation in the Contract
of Sale, by delivering to the FEDERATION the undelivered goods.
On November 11, 1960, the NAMARCO appealed from the decision. On March 31, 1962, the
Supreme Court 1 rendered a decision on NAMARCO's appeal in Civil Case No. 42684, holding
that the Contract of Sale was valid." (Record on Appeal, pp. 63-71, Civil Case No. 46124.)
On January 25, 1961, NAMARCO instituted the present action (Civil Case No. 46124) alleging,
among others, that the FEDERATION'S act or omission in refusing to satisfy the former's valid,
just and demandable claim has compelled it to file the instant action; and praying that the
FEDERATION be ordered to pay the NAMARCO the sum of P611,053.35, representing the cost
of merchandise mentioned in the preceding paragraph, with interest thereon at the legal rate from
the date of delivery of the merchandise in question, until the whole obligation is paid; P20,000.00
as attorney's fees and other expenses of litigation, plus costs.
On February 7, 1961, the FEDERATION moved to dismiss the complaint on the ground that the
cause of action alleged therein is barred forever, pursuant to Section 6 of Rule 10 of the Rules
of Court. In support thereof, the FEDERATION alleged that on March 2, 1960, the
FEDERATION and some of its members instituted Civil Case No. 42684 against NAMARCO
for specific performance to enforce compliance with the contract of sale; that said contract, basis
of Civil Case No. 42684, is also the basis of NAMARCO's present complaint in Civil Case No.
46124; that when NAMARCO filed, on March 19, 1960, its answer to the complaint in Civil
Case No. 42684, it did not set up any counterclaim therein; that on October 15, 1960, the Court
of First Instance of Manila promulgated the decision in said Civil Case No. 42684, ordering,
among others, the NAMARCO to specifically perform its obligation under the contract of sale
by delivering to the FEDERATION the goods subject-matter of the contract as are involved in
the complaint; that the claim of NAMARCO against the FEDERATION matured either on May
19, 1960 when the Philippine National Bank, Manila, informed the NAMARCO that it could not
effect payment on the sight drafts, or on June 7, 1969 when NAMARCO demanded payment of
the sum of P611,053,35; that the FEDERATION refused to pay said amount; that NAMARCO's
claim in the present case, Civil Case No. 46124, against the FEDERATION alone, being a
compulsory counterclaim against the latter, in that it arose out of or is necessarily connected with
the transaction or occurrence that is the subject-matter of the action of the FEDERATION in
Civil Case No. 42684 against the NAMARCO and therefore it must have been set up in said
Civil Case No. 42684 in the manner prescribed by section 4, Rule 10 of the Rules of Court, and
within the time between March 19, 1960, the date of filing, in Civil Case No. 42684, of the
answer of NAMARCO, and October 15, 1960, the date of the decision in that case; and that the
failure of NAMARCO to set up, in said Civil Case No. 42684, such a counterclaim, precludes
NAMARCO from raising it as an independent action, pursuant to Section 6 of Rule 10 of the
Rules of Court.
On February 11, 1961, NAMARCO interposed its opposition to said motion to dismiss
contending that its claim for the recovery of the cost of merchandise delivered to the
FEDERATION on January 29 and February 20, 1960 is not necessarily connected with the suit
in Civil Case No. 42684 for specific performance and, therefore, does not fall under the category
of compulsory counterclaim; that NAMARCO's failure to set it up as a counterclaim in its answer
in Civil Case No. 42684 does not constitute res judicata; that the deliveries of the merchandise
were effected through the fault or negligence of one of its personnel, Juan T. Arive, who was
administratively charged therefor, found guilty and accordingly dismissed; that the issue in Civil
Case No. 42684, was the genuineness and due execution of said contract as the same was entered
into by the General Manager of the NAMARCO without the knowledge, consent and approval
of the Board of Directors and that the same was not approved by the Auditor General
conformably with Administrative Order No. 290 dated February 3, 1959 of the President of the
Philippines and therefore it would have been inconsistent for NAMARCO to avail itself of the
contract the validity of which it was impugning, to enforce its claim; and that the present claim
is not necessarily connected with the transaction or occurrence that is the subject matter of Civil
Case No. 42684, as the same evidence would not support or refute both.
On February 18, 1961, the FEDERATION filed a rejoinder reiterating that the requirements on
the rule of compulsory counterclaim are present; that the first requirement — that the
counterclaim arises out of or is necessarily connected with the contract of sale subject-matter of
NAMARCO's cause of action — is evident from the face of the complaint itself.
On June 3, 1961, the lower court issued an order holding "in abeyance" action on the motion to
dismiss till after the trial on the merits.
On June 14, 1961, the FEDERATION filed its answer to the NAMARCO's complaint admitting
some material averments of the complaint, specifically denying other allegations and
consistently with its position averred as affirmative defense that NAMARCO's failure to assert
its claim against the FEDERATION before judgment in Civil Case No. 42684 on October 15,
1960 constituted a bar to the institution of the present action. By way of counterclaim, the
FEDERATION sought P50,000.00 as attorney's fees and other expenses of litigation, as well as
P17,000.00 as damages for improper issuance of a writ of attachment which writ, evidently had
been issued earlier by the court.
On June 21, 1961, NAMARCO filed an answer to the FEDERATION'S counterclaim
specifically denying the material averments thereof and maintaining that the present action is not
barred by Civil Case No. 42684.
On January 13, 1964, after due hearing, the lower court rendered its aforementioned decision.
Hence, the present appeal.
In this appeal, the FEDERATION contends that: I
II
III
The lower court erred in failing to hold that the complaint does not state a cause of action against
the defendant-appellant;
The lower court erred in holding that the plaintiff-appellee's claim is not a compulsory
counterclaim as defined and governed by section 6, Rule 10 of the old Rules of Court (Section
4, Rule 9 of the new);
The lower court erred in entering judgment in favor of the plaintiff-appellee and ordering
defendant- appellant to pay the former the sum of P609,014.73 with interest thereon at the legal
rate from the date of delivery of the merchandise, and the sum of P5,000.00 for and as attorney's
fees and other expenses of litigation, with costs.
We shall first proceed because of its decisive significance, with the issue posed by appellant in
its second assignment of error ... whether or not this action of NAMARCO for the collection of
the payment of the merchandise delivered to, but not yet paid by, the FEDERATION, is already
barred as a consequence of the failure of NAMARCO to set it up as a counterclaim in the
previous case, (Civil Case No. 42684).
In ruling that the present claim of NAMARCO is not compulsory counterclaim, that should have
been asserted in the previous case the lower court had the following to say:
As to the meaning of the terms "transactions" and "occurrence" used in Section 6, Rule 10, Rules
of Court, Francisco in his annotations and commentaries on the Rules of Court, Vol, I, p. 577,
cites the following:
"The terms "transaction" and "occurrence" used in the section now under consideration include
the facts and circumstances out of which a claim may arise, and whether two claims arise out of
the same transaction or occurrence depends in part on whether the same evidence would support
or refute both. (Williams v. Robinson, 3 Federal Rules Service, 174). These terms are broader
than the term "contract", and authorize matters to be counter-claimed which could not be counter-
claimed as arising out of the contract sued upon by the plaintiff. This is obvious, for while a
contract is a transaction, a transaction is not necessarily a contract. One of the definitions of the
term "transaction" is, "a matter or affair either completed or in course of completion." (Story,
etc., Commercial Co. v. Story, 100 Cal. 35, 34 Pac. 671).
"Mr. Pomeroy defines the term as "that combination of acts and events, circumstances and
defaults which viewed in one aspect results in the plaintiff's right of action, and viewed in another
aspect results in the defendant's right of action. ... As these two opposing rights cannot be the
same, it follows that there may be, and generally must be, acts, facts, events, and defaults in the
transaction as a whole which do not enter into each cause of action." Every transaction is more
or less complex, consisting of various facts and acts done by the respective parties and it
frequently happens that one or more of these acts, if viewed by itself, may be such a violation of
duty as to give to the other a right of action; but the obligation thus created may be so counter-
balanced by other matters growing out of the same transaction that no compensation ought to be
made therefor. Insuch a case, simple equity requires that the respective causes of action in behalf
of each be adjusted in a single suit." (Story, etc., Commercial Co. v. Story, 100 Cal. 35, 34 Pac.
671).
What is the "transaction or occurrence that is the subject-matter of the opposing party's
(FEDERATION'S) claim' in Civil Case No. 42684? It must consist in "the facts and
circumstances out of which a claim may arise", or it must be "that combination of acts and events,
circumstances and defaults which viewed in one aspect results in the plaintiff's right of action,
and viewed in another aspect results in defendant's right of action.
The complaint of the FEDERATION against the NAMARCO in Civil Case No. 42684 was
predicated on the refusal of the latter to perform its obligation under the Contract of Sale. The
refusal of the NAMARCO to perform its obligation under the Contract of Sale is the act or the
event, the circumstance or default, which constitutes the transaction or the occurrence.
The FEDERATION contends that NAMARCO's claim arose out of that transaction or
occurrence, or was necessarily connected with that transaction or occurrence, because the cause
of action of the FEDERATION in Civil Case No. 42684 and the cause of action of the
NAMARCO in this case are based on the same Contract of Sale.
But it will be noted that one of the requisites for the application of the rule on compulsory
counterclaim is that the counterclaim should at least be connected with or must arise out of the
transaction or occurrence which gave rise to the opposing party's claim.
To illustrate the meaning of that requisite, the following cases are cited:
"1. In a former suit, B claimed realty under a will of her deceased husband and L claimed the
same as a forced heir. After judgment dividing the property and requiring B to turn over a part
of the same to L, this suit was brought by B to recover the value of the improvements made on
the property during the time she had possession of the same. Defendant pleaded res adjudicata
alleging that B should have made a counterclaim in the first action. Held: That the former suit
was a petition for the inheritance and the present one being a claim for improvement is in no
wise connected with the principal object of the former litigation and that a counterclaim could
not properly have been presented in the first action (Bautista v. Jimenez, 24 Phil. 111).
"2. Mariano executed an instrument purporting to be a deed of conveyance of two parcels of land
in favor of Maclan. About a year later, Mariano instituted an action (Civil Case No. 106) against
Maclan for the annulment of the said instrument on the ground of fraud and the recovery of the
property. Judgment was rendered in favor of Mariano. About two years later, Maclan filed a
complaint against Garcia who acquired the property by inheritance from Mariano, for the
purpose of recovering the sum of P5,200.00 as necessary expenses allegedly incurred in the
preservation of said property prior to the commencement of case No. 106, Held: It is clear that
the claim for repairs or necessary expenses allegedly made by Maclan in the property in dispute
in case No. 106, is necessarily connected with the action of the plaintiff therein to recover said
property from Maclan. Said connection is substantially identical with that which exists between
an action for recovery of a land and the claim for improvements therein made by the defendant
in said case. It is well settled that such claim for improvements is barred unless set up by recovery
of the land (Bautista v. Jimenez, 24 Phil. 111; Berses v. Villanueva, 25 Phil. 473; Lopez v. Gloria,
40 Phil. 76; Beltran v. Valbuena, 53 Phil. 697; Calit v. Giness and Hernandez, 62 Phil. 451).
The right of the NAMARCO to the cost of the goods existed upon delivery of the said goods to
the FEDERATION which, under the Contract of Sale, had to pay for them. Therefore, the claim
of the NAMARCO for the cost of the goods delivered arose out of the failure of the FEDERATION
to pay for the said goods, and not out of the refusal of the NAMARCO to deliver the other goods
to the FEDERATION. The action of the FEDERATION in Civil Case No. 42684, based on the
refusal of the NAMARCO to deliver the other goods, had nothing to do with the latter's claim
for the cost of the goods delivered and, hence, such claim was not necessarily connected
therewith. ...
The claim of the NAMARCO in this case could have been a permissive counterclaim, but is not
a compulsory counterclaim, in Civil Case No. 42684. .
While the Contract of Sale created reciprocal obligations between the FEDERATION and the
NAMARCO, the refusal of the latter to deliver the other goods was not due to the failure of the
FEDERATION to pay for the goods delivered, but rather to the fact that it believed, as alleged
in its answer in Civil Case No. 42684, that the Contract of Sale was not validly entered into by
it. Such being the case, the failure of the FEDERATION to pay for the goods delivered could
not have been properly raised by the NAMARCO as a defense or pleaded as a compulsory
counterclaim in Civil Case No. 42684. However, had the NAMARCO alleged its present claim
in Civil Case No. 42684, the Court would have permitted it. A permissive counterclaim is one
which does not arise out of, or is not necessarily connected with, the transaction or occurrence
that is the subject-matter of the opposing party's claim.
Since the cause of action of the FEDERATION in Civil Case No. 42684 is such that the claim
of the NAMARCO in this case could not properly be pleaded as a compulsory counter-claim in
that case, the NAMARCO is not precluded from bringing this present action. Section 6, Rule 10,
Rules of Court, is not applicable.2 (Emphasis supplied.)
This ruling of the court a quo is now assigned as error by the FEDERATION for it is its position
that the previous action which it filed against NAMARCO, for specific performance to compel
NAMARCO to deliver the goods, was predicated upon the contract of sale of November 16,
1959 executed by the FEDERATION and NAMARCO who are the same parties, both in the
previous case as well as in the present case, (Civil Case No. 46124) and therefore this action
must be considered as having arisen out of or is necessarily connected with the transaction or
occurrence that was the subject matter of the previous case. It is the theory of the FEDERATION
that the applicable guiding principle is "that there be a logical relationship between" plaintiff's
claim and defendant's counterclaim. It insists that "logical relationship" exists between the
previous action for specific performance (Civil Case No. 42684) and NAMARCO's present
action for the payment of the goods delivered as (a) both actions are derived from the same
contract of sale; and (b) the two actions are but the consequences of the reciprocal obligation
imposed by law3 upon the parties by virtue of the aforesaid contract. The alleged failure of the
FEDERATION to pay for goods delivered should therefore have been raised by NAMARCO as
a defense or counterclaim in the previous case notwithstanding the fact that said claim only
accrued after NAMARCO's answer was filed in said Civil Case No. 42684 because NAMARCO
could have set it up as a counterclaim in a supplemental pleading pursuant to section 4 of Rule
1 of the old Rules of Court.4
On the other hand, NAMARCO insists that the same evidence or substantial identity in the
evidence criterion should be applied in determining whether or not its claim is compulsory, ...
and on the basis of such test its claim could not be considered compulsory, because: (a) the
evidence presented to support the genuineness and due execution of the contract of sale as ground
for specific performance in Civil Case No. 42684, is not the same as the evidence presented to
support NAMARCO's claim for recovery of the cost of the merchandise received by the
FEDERATION, subject of the instant appeal; (b) for NAMARCO in Civil Case No. 42684 to
interpose its claim for the payment of the goods delivered pursuant to the contract of sale, and
thus seek in effect the enforcement of said contract, would have been inconsistent with its
defense that the same contract was a nullity and (c) in any event, such claim could neither have
been asserted as a counterclaim by NAMARCO in its answer, filed on March 19, 1960, to the
complaint in Civil Case No. 42684, for it had no cause of action as yet against the FEDERATION
as, under the rule, a claim to be available as a counterclaim to an action must be due and owing
at the time of the commencement of the action, nor could NAMARCO file it as a counterclaim
based on a contingent demand for the same cannot be allowed.
I
1. The rule on compulsory counterclaim contained the section 6 of Rule 10 of the old Rules of
Court,5 is taken from section 97 of Act No. 190.6 This rule is substantially the same as Rule 13
(a) of the Federal Rules of Civil Procedure.7 This rule is "mandatory" because the failure of the
corresponding party to set it up will bar his right to interpose it in a subsequent litigation.8 Under
this Rule, counterclaim not set up shall be barred if the following circumstances are present: (1)
that it arises out of, or is necessarily connected with, the transaction or occurrence that is the
subject matter of the opposing party's claim (2) that it does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction; and (3) that the court has
jurisdiction to entertain the claim.9 Conversely, a counterclaim is merely permissive and hence
is not barred if not set up, where it has logical relation with the transaction or occurrence that is
the subject matter of the opposing party's claim, or even where there is such connection, the court
has no jurisdiction to entertain the claim or it requires for its adjudication the presence of third
persons of whom the court cannot acquire jurisdiction. 10
The first requisite that the claim should arise out of or is necessarily connected with the
transaction or occurrence that is the subject matter of the opposing party's claim, may give rise
to the critical question: What constitutes a "transaction" or "occurrence"? On this point the lower
court has conveniently embodied in its decision, quoted elsewhere herein, the meaning of the
terms "transaction" or "occurrence", as defined in Williams v. Robinson, 11and in Pomeroy's
Treatise on Remedies and Remedial Rights. 12 The formulation in Williams v. Robinson shows
the futility of attempting to reduce the term "transaction" or "occurrence" within the context of
an all-embracing definition. Such formulation does not adequately answer every question
whether a particular claim is compulsory in character. As a matter of fact most courts, rather than
attempting to define the key terms of the rule on compulsory counterclaim, 13 have preferred to
suggest certain criteria or tests by which the compulsory or permissive nature of specific
counterclaims can be determined. Wright & Miller in their Federal Practice and Procedure 14
summarize them as follows:
1. Are the issues of fact and law raised by the claim and counterclaim largely the same?
2. Would res judicata bar a subsequent suit on defendant's claim absent the compulsory
counterclaim rule?
3. Will substantially the same evidence support or refute plaintiff's claim as well as defendant's
counter- claim?
4. Is there any logical relation between the claim and the counter-claim?
 An affirmative answer
to each of the foregoing questions suggests that the counterclaim is compulsory. These tests or
standards have been the object of extensive analysis and criticisms, as
follows:
The first test ... identity of issues, 15 had been considered of doubtful utility for it assumes that,
in order to protect himself from inadvertently losing the right to present his claim in a later action,
defendant will be both motivated and able to determine before answering whether his claim must
be asserted as a compulsory counterclaim. ... Yet, no one can be certain what the issues are until
after the pleadings are closed and discovery is underway, and in many instances the issues are
not really formulated until the pre-trial conference.
The second test ... that the counterclaim is compulsory if it would be barred by res judicata, 16
has been judicially recognized by some courts as "the acid test" for distinguishing compulsory
from permissive counterclaim. As aptly stated by Judge Frank in a dissenting opinion: ...
Everyone agrees, too, that, if a counterclaim is not "compulsory"' it is "permissive" and that the
following is the acid test in distinguishing the two: If a defendant fails to set up a "compulsory"
counterclaim, he cannot in a later suit assert it against the plaintiff, since it is barred by res
judicata; but if it is "permissive", then it is not thus barred. To put it differently, if a counterclaim
is the kind not thus barred, it is "permissive." We can have recently employed that test; see Claim
v. Kastar, 2 Cir., 138 F. 2d 828, 830; See also Moore, Federal Practice, 682; Clark, Code
Pleading, 447; Big Cola Corp. v. World Bottling Co., 6 Cir., 134 F. 2d 718. 17
This criterion has however been found inadequate as an overall standard.
The third test ... same evidence or substantial identity in the evidence relating to the claim and
counterclaim 18 has been considered satisfactory if used with caution. A test based on similarity
of evidence appears reasonable considering that the very purpose of making certain types of
counterclaims compulsory is to prevent the relitigation of the same set of fact. However, it has
been shown that some counterclaims may be compulsory even if they do not meet this test. For
instance in an action to void an insurance policy on the ground of fraud, in which there is a
counterclaim for the amount of the loss covered by the policy, the evidence of fraud is apt to be
entirely different from the evidence as to the loss suffered by the insured (Mercury Ins. Co. v.
Verea Ruegg, D.C.N.Y. 1949, 12 F.R. Serv. 13a.11 case 2) or an action for earned freight with
counterclaims for damages to cargo, demurrage and expenses due to the unseaworthiness of the
vessel (Eastern Transp. Co. v. U.S., C.A. 2d. 1947, 159 F. 2d. 349).
The fourth test ... the logical relationship between the claim and counterclaim has been called
"the one compelling test of compulsoriness" 19 It was enunciated in the leading case of Moore
v. New York Cotton Exchange. 20 Under this test, any claim a party has against an opposing
party that is logically related to the claim being asserted by the opposing party and that is not
within the exceptions to the rule, is a compulsory counterclaim. Its outstanding quality is its
flexibility. On the other hand this flexibility necessarily entails some uncertainty in its
application because of its looseness and potentially over broad scope. This difficulty
notwithstanding, of the four judicially formulated criteria it has by far attained the widest
acceptance among the courts.
An examination of the cases on compulsory counterclaims may help clarify and illuminate the
judicial application of the "logical relation test". In the leading case of Moore v. New York
Cotton Exchange (1926, 46 S.Ct 367, 371, 270 U.S. 593, 70 L.Ed 750, 45 A.L.R. 1370) the
logical relation or connection between the defendant's counterclaim and the plaintiff's claim has
been explained thus:
The bill sets forth the contract with the Western Union and the refusal of the New York Exchange
to allow appellant to receive the continuous cotton quotations, and asks a mandatory injunction
to compel appellees to furnish them. The answer admits the refusal and justifies it. The
counterclaim sets up that, nevertheless, appellant is purloining or otherwise illegally obtaining
them, and asks that this practice be enjoined. "Transaction" is a word of flexible meaning. It may
comprehend a series of many occurrences, depending not so much upon the immediateness of
their connection as upon their logical relationship. The refusal to furnish the quotations is one
of the links in the chain which constitutes the transaction upon which appellant here bases its
cause of action. It is an important part of the transaction constituting the subject-matter of the
counterclaim. It is the one circumstance without which neither party would have found it
necessary to seek relief. Essential facts alleged by appellant enter into and constitute in part the
cause of action set forth in the counterclaim. That they are not precisely identical, or that the
counterclaim embraces additional allegations, as for example, that appellant is unlawfully getting
the quotations, does not matter. To hold otherwise would be to rob this branch of the rule of all
serviceable meaning, since the facts relied upon by the plaintiff rarely, if ever, are, in all
particulars, the same as those constituting the defendant's counterclaim. Compare Xenia Branch
Bank v. Lee, 7 Abb. Pr. 372, 390-394. And see generally, Cleveland Engineering Co. v. Galion
Dynamic Motor Truck Co. supra, p. 408 [243 Fed.] Champion Spark Plug Co. v. Champion
Ignition Co. (D.C.) 247 Fed. 200, 203-205.
So close is the connection between the case sought to be stated in the bill and that set up in the
counterclaim, that it only needs the failure of the former to establish a foundation for the latter;
but the relief afforded by the dismissal of the bill is not complete without an injunction
restraining appellant from continuing to obtain by stealthy appropriation what the court had said
it could not have by judicial compulsion. 21
It must be observed that in Moore, the important link which established that "logical relation"
between plaintiff Moore's claim and defendant New York Cotton Exchange's counterclaim, is
the refusal of the latter to furnish to the former cotton price quotations because of its belief that
Moore was purloining or otherwise illegally obtaining its cotton price quotations and distributing
them to bucketshops. As the Court pointed out "It is an important part of the transaction
constituting the subject matter of the counterclaim. It is the one circumstance without which
neither party could have found it necessary to seek relief. ... So close is the connection between
the case sought to be stated in the bill and that set up in the counterclaim, that it only needs the
failure of the former to establish a foundation for the latter; but the relief afforded by the
dismissal of the bill is not complete without an injunction restraining appellant from continuing
to obtain by stealthy appropriation what the court held it could not have by judicial compulsion."
A review of decided cases in this jurisdiction on compulsory counterclaims likewise
demonstrates the nexus between plaintiff's claim and defendant's counterclaim showing the
"logical relation" between the two. Thus in actions for ejectment, 22 or for the recovery of
possession of real property, 23 it is well settled that the defendant's claims for value of the
improvements on the property or necessary expenses for its preservation are required to be
interposed in the same action as compulsory counterclaims. In such cases it is the refusal of the
defendant to vacate or surrender possession of the premises that serves as the vital link in the
chain of facts and events, that constitutes the transaction upon which the plaintiff bases his cause
of action. It is likewise an "important part of the transaction constituting the subject matter of the
counterclaim" of defendant for the value of the improvements or the necessary expenses incurred
for the preservation of the property. For they are off-shoots of the same basic controversy
between the parties which is the right of either to the possession of the property.
While the refusal of NAMARCO to deliver the remainder of the goods contracted for in its
"trade assistance agreement" with FEDERATION, is the important link in the chain of facts and
events that constituted the transaction upon which Federation's cause of action was based in Civil
Case No. 42684, it is not even a part of the transaction constituting the subject matter of
NAMARCO's present suit. For the action of FEDERATION on March 2, 1960, to compel
NAMARCO to recognize the validity of their agreement and deliver the remainder of the goods
to be paid "on cash basis" in no way involved the payment of the merchandise worth
P609,014.73, already delivered and paid for in cash by means of the domestic letters of credit.
When the domestic letters of credit were subsequently dishonored by the Philippine National
Bank on May 19, 1960 compelling NAMARCO to send on June 7, 1960 a letter of demand for
payment to FEDERATION which the latter received on July 5, 1960, but which it apparently
ignored and because of such inaction NAMARCO therefore sued FEDERATION for payment
on January 25, 1961, such non-payment by FEDERATION was a matter which was distinct and
separate from and had no logical relationship with the subject matter of FEDERATION's own
suit. These two claims are separate and distinct, as they involve totally different factual and legal
issues and do not represent the same "basic controversy".
II
A counterclaim has been held to be compulsory if there is a logical relationship between it and
the main claim. Thus, in Great Lakes Rubber Corporation v. Herbert Cooper Co., 286 F. 2d 631
(1961), Judge Biggs speaking for the Third Circuit Court said this:
"We have indicated that a counterclaim is compulsory if it bears a "logical relationship" to an
opposing party's claim. Zion v. Sentry Safety Control Corp., 3 Cir., 1959. 258 F. 2d 31. See also
United Artists Corp. v. Masterpiece Productions, Inc. 2 Cir., 1955, 221 F. 2d 213, 216. The
phrase "logical relationship" is given meaning by the purpose of the rule which it was designed
to implement. Thus, a counterclaim is logically related to the opposing party's claim where
separate trials of each of their respective claims would involve a substantial duplication of effort
and time by the parties and the courts. Where multiple claims involve many of the same factual
issues, or the same factual and legal issues, or where they are off-shoots of the same basic
controversy between the parties, fairness and considerations of convenience and of economy
require that the counterclaimant be permitted to maintain his cause of
action. ...
But even assuming for the nonce that NAMARCO's present claim is logically related to the claim
of the FEDERATION in the previous case, NAMARCO's claim having accrued or matured after
the service of its answer in the earlier case is in the nature of an after-acquired counterclaim
which under the rules is not barred even if it is not set up in the previous case as a counterclaim.
An after-acquired counterclaim, is one of the recognized exceptions to the general rule that a
counterclaim is compulsory and must be asserted if it arises out of the same transaction as the
opposing party's claim.
Although the claim arises out of the transaction or occurrence three exceptions are made to the
compulsory requirement that it be pleaded. They are:
(1) Time of Filing. The claim which is the basis of the counterclaim must be in existence at the
time of "counter-claimant" files his pleading. Thus if P sues A and A does not have a claim
arising out of the transaction or occurrence of P's suit at the time A files his answer A is not
obliged to plead such a claim, although one arises subsequent to the filing of his answer. 25
Wright & Miller, Federal Practice and Procedure, 26 explain this exception to the compulsory
counterclaim requirement thus:
The first exception is that the party need not assert a counterclaim that has not matured at the
time he serves his pleading. This is derived from the language in the rule limiting its application
to claims the pleader has "at the time of serving the pleading." A counterclaim acquired by
defendant after he has answered will not be considered compulsory, even if it arises out of the
same transaction as does plaintiff's claim. Similarly, a counterclaim acquired by plaintiff after
he has replied to a counterclaim by defendant is not compulsory under Rule 13(a). However, if
a party should acquire a matured counterclaim after he has pleaded, Rule 13(e) provides that he
may obtain the court's permission to include it in a supplemental pleading under Rule 15(d). 27
A counterclaim may be asserted under Rule 13(e) only by leave of court, which usually will be
granted in order to enable the parties to litigate all the claims that they have against each other
at one time thereby avoiding multiple actions. However, Rule 13(e) is permissive in character.
An after-acquired counterclaim, even if it arises out of the transaction or occurrence that is the
subject matter of the opposing party's claim, need not be pleaded supplementally; the after-
acquired claim is not considered a compulsory counterclaim under Rule 13(a) and a failure to
interpose it will not bar its assertion in a later suit.
The decision to grant or deny a motion to serve a supplemental counterclaim is totally within the
trial court's discretion. 28
The provisions of Rule 13 of the Federal Rules of Civil Procedure, adverted to in the preceding
commentaries and decisions of the federal courts, have been engrafted into our procedural rules.
Thus section 3 of Rule 10 29 of the former Rules of Court was taken from Rule 13 (a) and (g) of
the Federal Rules of Civil Procedure, while sections 4 and 6 of same Rule 10, 30 were taken,
respectively, from Rule 13(e) and (a) of the said Federal Rules. 31
It is a rational rule of statutory construction that a statute adopted from another state or country
will be presumed to have been adopted with the construction placed upon it by the courts of that
state or country before its adoption. Such construction is regarded as of great weight, or at least
persuasive and will generally be followed if sound and reasonable, and in harmony with justice
and public policy, and with other laws of the adopting jurisdiction on the subject. 32 And while
the construction of a statute by courts of the original state after its adoption by another, may have
no controlling effect on the adopting state, it may be strongly persuasive and will be followed
when it is considered to give true force and effect to the statute." 33
We find no cogent reason why such uniform and settled construction of Rule 13 of the Federal
Rules should not be applied in the interpretation of the aforesaid sections of Rule 10 of the old
Rules of Court. Thus while Section 6 of Rule 10 of the old Rules defines a compulsory
counterclaim as a claim that "arises out of or is necessarily connected with, the transaction or
occurrence that is the subject-matter of the opposing party's claim," Section 3 of the same rule,
requires that such counterclaim must be in existence "at the time" the counter-claimant files his
answer.
The counterclaim must be existing at the time of filing the answer, though not at the
commencement of the action for under Section 3 of the former Rule 10, the counterclaim or
cross-claim which a party may aver in his answer must be one which he may have "at the time"
against the opposing party. That phrase can only have reference to the time of the answer. 34
Certainly a premature counterclaim cannot be set up in the answer. This construction is not only
explicit from the language of the aforecited provisions but also serves to harmonize the aforecited
sections of Rule 10, with section 4 of the same rule which provides that "a counterclaim ... which
either matured or was acquired by a party after serving his pleading may, with the permission of
the court, be presented as a counterclaim ... by supplemental pleading before judgment."
Thus a party who fails to interpose a counterclaim although arising out of or is necessarily
connected with the transaction or occurrence of the plaintiff's suit but which did not exist or
mature at the time said party files his answer is not thereby barred from interposing such claim
in a future litigation. However such claim may with the court's permission be included in the
same case by way of supplemental pleading before judgment under Section 4 of the former Rule
10 of the Rules (now Sec. 9 of Rule 6). And the same may be allowed unless the case has
progressed so far that it may be inconvenient or confusing to allow the additional claim to be
pleaded. 35
We therefore rule that NAMARCO's present action, is not barred by its failure to assert it as a
counterclaim in the previous case.
III
The FEDERATION also contends that it has incurred no liability, as NAMARCO has neither
alleged nor proved that it has complied with the conditions contained in the three domestic letters
of credit, that the sight drafts drawn upon them be presented to FEDERATION for acceptance
before they can be honored by the Bank. It is the theory of the FEDERATION in its brief that
the failure of NAMARCO to present the sight drafts to the former for acceptance, pursuant to
the requirements of the letters of credit deprives NAMARCO of a cause of action against
FEDERATION. It must be noted however that such purported discharge from its obligation to
NAMARCO due to the failure of the latter to comply with the requirements of the domestic
letters of credit, was never invoked by FEDERATION as a basis for its "Motion to Dismiss" of
February 7, 1961 36 or as an affirmative defense in its "answer" to the complaint on June 14,
1961 in Civil Case No. 46124. 37 There is no showing that this question was raised as an issue
during the trial. As a matter of fact such matter was neither discussed nor mentioned in the
appealed judgment since the entire theory of the FEDERATION in its defense is that the claim
of NAMARCO being a "compulsory counterclaim", is now barred, NAMARCO having failed
to set it up on a counterclaim in the previous case. Well settled is the rule that questions which
were not raised in the lower court cannot be raised for the first time on appeal. 38 Defendant-
appellant therefore is now precluded from raising that question.
In any event NAMARCO's action is not based on the domestic letters of credit, but on its legal
right to the cost of the goods delivered to the FEDERATION the correlative obligation of the
latter to pay for the same, and its default or refusal to make such payments.
Furthermore the mere delivery by the FEDERATION of the domestic letters of credit to
NAMARCO did not operate to discharge the debt of the FEDERATION. As shown by the
appealed judgment NAMARCO accepted the three letters of credit "to insure the payment of
those goods by the FEDERATION ... ." It was given therefore as a mere guarantee for the
payment of the merchandise. The delivery of promissory notes payable to order, or bills of
exchange or drafts or other mercantile document shall produce the effect of payment only when
realized, or when by the fault of the creditor, the privileges inherent in their negotiable character
have been impaired. (Art. 1249 New Civil Code.) The clause of Article 1249 relative to the
impairment of the negotiable character of the commercial paper by the fault of the creditor, is
applicable only to instruments executed by third persons and delivered by the debtor to the
creditor, and does not apply to instruments executed by the debtor himself and delivered to the
creditor. 39 In the case at bar it is not even pretended that the negotiable character of the sight
drafts was impaired as a result of the fault of NAMARCO. The fact that NAMARCO attempted
to collect from the Philippine National Bank on the sight drafts on March 10, 1960, is of no
material significance. As heretofore stated they were never taken, in the first instance as payment.
There was no agreement that they should be accepted as payment. The mere fact that
NAMARCO proceeded in good faith to try to collect payments thereon, did not amount to an
appropriation by it of the amounts mentioned in the sight drafts so as to release its claims against
the FEDERATION. A mere attempt to collect or enforce a bill or note from which no payment
results is not such an appropriation of it as to discharge the debt. 40
We note however, that the lower court erred in imposing interest at the legal rate on the amount
due, "from the date of delivery of the merchandise", and not from the date of the extra-judicial
demand. In the absence of any stipulations on the matter, the rule is that the obligor is considered
in default only from the time the obligee judicially or extrajudicially demands fulfillment of the
obligation and interest is recoverable only from the time such demand is made. 41 There being
no stipulation as to when the aforesaid payments were to be made, the FEDERATION is
therefore liable to pay interest at the legal rate only from June 7, 1960, the date when
NAMARCO made the extra- judicial demand upon said party. We likewise fail to find any
factual or legal basis for the award of attorney's fees.
ACCORDINGLY, with the modifications above indicated, the appealed judgment is hereby
affirmed, with costs against defendant-appellant.
CALTEX (PHILIPPINES), INC., petitioner,
 vs.
 COURT OF APPEALS and
SECURITY BANK AND TRUST COMPANY, respondents.
On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with
herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation
of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
 Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701
 to 74740 40


4 Mar. 82 90127
 160,000 to 89986 22 88,000
5 Mar. 82 74797
 to 90146 20 80,000
5 Mar. 82 89965
 to 94800 4 16,000
5 Mar. 82 70147
 to 90150 4 16,000
8 Mar. 82 90001
 to 90020 20 80,000
9 Mar. 82 90023
 to 90050 28 112,000
9 Mar. 82 89991
 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ———— Total 280 P1,120,000 ===== ========
Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).
Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said
depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated
time deposits from and after date" of the assignment and further authorizes said bank to pre-
terminate, set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987,
pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the
former "a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which
plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment
of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell
due and on August 5, 1983, the latter set-off and applied the time deposits in question
to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of
the complaint, hence this petition wherein petitioner faults respondent court in ruling
(1) that the subject certificates of deposit are non- negotiable despite being clearly
negotiable instruments; (2) that petitioner did not become a holder in due course of the
said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code
of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
 AND TRUST COMPANY
 6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
 SUCAT OFFICEP 4,000.00 CERTIFICATE OF
DEPOSIT
 Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS
Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon
presentation and surrender of this certificate, with interest at the rate of 16% per cent
per annum.
(Sgd. Illegible) (Sgd. Illegible) —————————— ———————————
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments,
nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the words "has deposited" a
certain amount follows. The document further provides that the amount deposited
shall be "repayable to said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated therein,
the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz
as the person who made the deposit and further engages itself to pay said depositor
the amount indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in
question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
 (b) Must contain an
unconditional promise or order to pay a sum certain in money; (c) Must be payable on
demand, or at a fixed or determinable future time;
 (d) Must be payable to order or to
bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability.
The parties' bone of contention is with regard to requisite (d) set forth above. It is noted
that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982,
testified in open court that the depositor reffered to in the CTDs is no other than Mr.
Angel de la Cruz.
witness:
xxx xxx xxx
 q In other words Mr. Witness, you are saying that per books of the bank,
the depositor
Atty. Calida:
 referred (sic) in these certificates states that it was Angel dela Cruz?
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one
who cause (sic) the amount.
Atty. Calida:
 q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7 Atty. Calida:
xxx xxx xxx
witness:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit
insofar as the bank is concerned?
a Angel dela Cruz is the depositor. 8
 xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument itself. 9
In the construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be determined by
what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the "bearer." The documents do
not say that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to the bearer of
the documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical terms in
the documents, instead of having the word "BEARER" stamped on the space provided
for the name of the depositor in each CTD. On the wordings of the documents, therefore,
the amounts deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar
as the bank is concerned," but obviously other parties not privy to the transaction between them
would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable
Instruments Law and calls for the application of the elementary rule that the interpretation of
obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer
is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to
petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner,
although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to
whether the CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own authorized and responsible
representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon. 14 A party may not go back
on his own acts and representations to the prejudice of the other party who relied upon them. 15
In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted
to falsify it.
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill
of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing
that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness
to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could
have proved, if such truly was the fact, that the CTDs were delivered as payment and not as
security. Having opposed the motion, petitioner now labors under the presumption that evidence
willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of the property as collateral security.
It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face
to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence
and is not discharged by the transfer, and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will not be given that effect in such a transaction
if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or
other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
22 In the present case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of
the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not
disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must
be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the
Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether
as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the
extent of its lien nor the execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has
definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or
not private respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, on the ground that petitioner
failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of issues
submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this
case are:
1. Whether or not the CTDs as worded are negotiable instruments.
 2. Whether or not defendant
could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the
assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the
CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities,
the foregoing enumeration does not include the issue of negligence on the part of respondent
bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed
by the parties and, consequently, issues not raised in the trial court cannot be raised for the first
time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose
at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except
such as may involve privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs
would be tantamount to saying that petitioner could raise on appeal any issue. We agree with
private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the
questioned certificates can be premised on a multitude of other legal reasons and causes of action,
of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if
accepted, would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code
of Commerce laying down the rules to be followed in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs
in the case at bar, are merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on
the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for
the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word
shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility.
36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a mandatory precedent
requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.
SO ORDERED.
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES, Petitioner, vs.
 COMMISSIONER OF INTERNAL
REVENUE, Respondent;
These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004
and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well
as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the
Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly
reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514
and 6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai
Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on
the other hand, denied the respective motions for reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and
individual, resident or non-resident of the Philippines, with respect to their passive investments
in the Philippines, particularly investments in shares of stocks in domestic corporations. As a
custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other
income derived from its investor-clients’ passive investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are
managed by HSBC through instructions given through electronic messages. The said instructions
are standard forms known in the banking industry as SWIFT, or "Society for Worldwide
Interbank Financial Telecommunication." In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad instructing HSBC to
debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt
of the securities.7
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
Documentary Stamp Tax (DST) from September to December 1997 and also from January to
December 1998 amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down
as follows:
September to December 1997 : ₱19,572,992.10 January to December 1998
₱₱32,904,437.30
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner,
Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from
abroad on the management of funds located in the Philippines which do not involve transfer of
funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO GONZAGA & ASSOCIATES
 G/F AFC Building, Alfaro
St.
 Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo Tax Counsel
Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK
& STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic
instructions involving the following transactions of residents and non-residents of the Philippines
with respect to their local or foreign currency accounts are subject to documentary stamp tax
under Section 181 of the 1997 Tax Code, viz:
A. Investment purchase transactions:
 An overseas client sends instruction to its bank in the
Philippines to either:
(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a
named recipient in the Philippines."
The foregoing transactions are carried out under instruction from abroad and [do] not involve
actual fund transfer since the funds are already in the Philippine accounts. The instructions are
in the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both
cases, the payment is against the delivery of investments purchased. The purchase of investments
and the payment comprise one single transaction. DST has already been paid under Section 176
for the investment purchase.
B. Other transactions:
 An overseas client sends an instruction to its bank in the Philippines to
either:
(i) debit its local or foreign currency account and to pay a named recipient, who may be another
bank, a corporate entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a
named recipient, who may be another bank, a corporate entity or an individual in the
Philippines."
The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202)
or tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency accounts with a
bank in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain
conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides
that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippines, there shall be collected a documentary stamp
tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of
the face value of any such bill of exchange, or order, or Philippine equivalent of such value, if
expressed in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for payment
purporting to be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e.,
a bill of exchange or order for the payment of money, which purports to draw money from a
foreign country but payable in the Philippines. In the instant case, however, while the payor is
residing outside the Philippines, he maintains a local and foreign currency account in the
Philippines from where he will draw the money intended to pay a named recipient. The
instruction or order to pay shall be made through an electronic message, i.e., SWIFT MT 100 or
MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made, signed or
issued by the payee. In the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the same do not involve any transfer
of funds from abroad or from the place where the instruction originates. Insofar as the local bank
is concerned, such instruction could be considered only as a memorandum and shall be entered
as such in its books of accounts. The actual debiting of the payor’s account, local or foreign
currency account in the Philippines, is the actual transaction that should be properly entered as
such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit,
local or foreign currency account, is not subject to DST, unless the account so maintained is a
current or checking account, in which case, the issuance of the check or bank drafts is subject to
the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case,
and subject to the physical impossibility on the part of the payor to be present and prepare and
sign an instrument purporting to pay a certain obligation, the withdrawal and payment shall be
made in cash. In this light, the withdrawal shall not be subject to documentary stamp tax. The
case is parallel to an automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s
account and thereafter upon instruction of the non-resident depositor-payor, through an
electronic message, the depository bank to debit his account and pay a named recipient shall not
be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of its regular banking
transaction which is not subject to documentary stamp tax. Neither does the receipt of funds
makes the recipient subject to the documentary stamp tax. The funds are deemed to be part of
the deposits of the client once credited to his account, and which, thereafter can be disposed in
the manner he wants. The payor-client’s further instruction to debit his account and pay a named
recipient in the Philippines does not involve transfer of funds from abroad. Likewise, as stated
earlier, such debit of local or foreign currency account in the Philippines is not subject to the
documentary stamp tax under the aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made through an
electronic message by non-resident payor-client to debit his local or foreign currency account
maintained in the Philippines and to pay a certain named recipient also residing in the Philippines
is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the
case, such electronic instruction purporting to draw funds from a local account intended to be
paid to a named recipient in the Philippines is not subject to documentary stamp tax imposed
under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, this ruling shall be considered null
and void.
Very truly yours,
 (Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim
for the refund of the amount of ₱19,572,992.10 allegedly representing erroneously paid DST to
the BIR for the period covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of
the amount of ₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the
period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter
to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of
the two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in
CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered
to refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of
₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing
erroneously paid DST that have been sufficiently substantiated with documentary evidence. The
CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of
the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident investor-client, which is
to debit his local or foreign currency account in the Philippines and pay a certain named recipient
also residing in the Philippines is not the transaction contemplated in Section 181 of the Code.
In this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic
bank transfer of local funds from a savings account to a checking account maintained by a
depositor in one bank. The act of debiting the account is not subject to the documentary stamp
tax under Section 181. Neither is the transaction subject to the documentary stamp tax under
Section 180 of the same Code. These electronic message instructions cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the ability to be
transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such in the books of
account of the local bank, and the actual debiting of the payor’s local or foreign currency account
in the Philippines is the actual transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009
and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT
CERTIFICATE in favor of Petitioner the amount of ₱30,360,570.75 representing erroneous
payment of documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted.
Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of ₱16,436,395.83
representing erroneously paid documentary stamp tax for the months of September 1997 to
December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their
passive investments in the Philippines mainly involving shares of stocks in domestic
corporations. These investor-clients maintain Philippine peso and/or foreign currency accounts
with [HSBC]. Should they desire to purchase shares of stock and other investments securities in
the Philippines, the investor-clients send their instructions and advises via electronic messages
from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter
to debit their local or foreign currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1- 2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC,
[HSBC] was thus required to pay [DST] based on its acceptance of these electronic messages –
which, as [HSBC] readily admits in its petition filed before the [CTA], were essentially orders
to pay the purchases of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC]
considering that the said tax was levied against the acceptances and payments by [HSBC] of the
subject electronic messages/orders for payment. The issue of whether such electronic messages
may be equated as a written document and thus be subject to tax is beside the point. As We have
already stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of
exchange or order for payment of money but on the acceptance or payment of the said bill or
order. The acceptance of a bill or order is the signification by the drawee of its assent to the order
of the drawer to pay a given sum of money while payment implies not only the assent to the said
order of the drawer and a recognition of the drawer’s obligation to pay such aforesaid sum, but
also a compliance with such obligation (Philippine National Bank vs. Court of Appeals, 25
SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]).
What is vital to the valid imposition of the [DST] under Section 181 is the existence of the
requirement of acceptance or payment by the drawee (in this case, [HSBC]) of the order for
payment of money from its investor-clients and that the said order was drawn from a foreign
country and payable in the Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being imposed in the case at
bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]),
the Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal relationships through
the execution of specific instruments, independently of the legal status of the transactions giving
rise thereto. In the same case, the High Court also declared – citing Du Pont vs. United States
(300 U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. It is an excise upon the facilities
used in the transaction of the business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC]
pursuant to the order made by its client-investors as embodied in the cited electronic messages,
through which the herein parties’ privilege and opportunity to transact business respectively as
drawee and drawers was exercised, separate and apart from the circumstances and conditions
related to such acceptance and subsequent payment of the sum of money authorized by the
concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its
privilege under its drawee-drawer relationship with its client-investor through the execution of a
specific instrument which, in the case at bar, is the acceptance of the order for payment of money.
The acceptance of a bill or order for payment may be done in writing by the drawee in the bill
or order itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court,
supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably ‘done
in writing in a separate instrument’ each time it debited the local or foreign currency accounts of
its client-investors pursuant to the latter’s instructions and advises sent by electronic messages
to [HSBC]. The [DST] therefore must be paid upon the execution of the specified instruments
or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment
of money sent by the client-investors through electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual
and legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident
exercise of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the review of tax cases.
HSBC further argues that the Commissioner of Internal Revenue had already settled the issue on
the taxability of electronic messages involved in these cases in BIR Ruling No. 132-99 and
reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997
Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for the
payment of money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s
exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent
with prevailing law and long standing administrative practice, respondent is not barred from
questioning his own revenue ruling. Tax refunds like tax exemptions are strictly construed
against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines" and that "a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money
to order or to bearer." A bill of exchange is one of two general forms of negotiable instruments
under the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel to
an automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank." The Court favorably adopts the finding of the CTA that
the electronic messages "cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred" and that the said electronic messages are
"mere memoranda" of the transaction consisting of the "actual debiting of the [investor-client-
payor’s] local or foreign currency account in the Philippines" and "entered as such in the books
of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic messages that are subjected to
DST in these cases are not negotiable instruments as they do not comply with the requisites of
negotiability under Section 1 of the Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the
payment is supposed to come from a specific fund or account of the investor-clients; and, they
are not payable to order or bearer but to a specifically designated third party. Thus, the electronic
messages are not bills of exchange. As there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines, there could have been no acceptance or
payment that will trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year
1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippines, there shall be collected a documentary stamp
tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of
the face value of any such bill of exchange, or order, or the Philippine equivalent of such value,
if expressed in foreign currency. (Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for
DST paid during the period September to December 1997 and subject of G.R. No. 166018, is
worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided:
SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of
any sum of money drawn or purporting to be drawn in any foreign country but payable in the
Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp in
payment of the tax upon such document in the same manner as is required in this Act for the
stamping of inland bills of exchange or promissory notes, and no bill of exchange shall be paid
nor negotiated until such stamp shall have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers,
and upon acceptances, assignments, sales, and transfers of the obligation, right, or property
incident thereto documentary taxes for and in respect of the transaction so had or accomplished
shall be paid as hereinafter prescribed, by the persons making, signing, issuing, accepting, or
transferring the same, and at the time such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the Philippine
Islands, on each two hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency,
two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20
as amended:
 SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other
kinds of orders for the payment of
money, payable at sight or on demand, or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money
drawn in a foreign country but payable in this country whether at sight or on demand or after a
specified period after sight or from a stated date, is presented for acceptance or payment, there
must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each ₱200
or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippines, there shall be collected a documentary stamp
tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of
any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos.
1457 and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax
Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance
or payment of any bill of exchange or order for the payment of money purporting to be drawn in
a foreign country but payable in the Philippines, there shall be collected a documentary stamp
tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of
any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in
foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained substantially the same
for the past one hundred years.1âwphi1 The identical text and common history of Section 230
of the 1977 Tax Code, as amended, and the 1997 Tax Code, as amended, show that the law
imposes DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or
properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily
liable for the payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting,
or (5) transferring the taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges conferred by law for
the creation, revision, or termination of specific legal relationships through the execution of
specific instruments. Examples of such privileges, the exercise of which, as effected through the
issuance of particular documents, are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997
Tax Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of
exchange or order for the payment of money that was drawn abroad but payable in the
Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee to accept
or pay a bill of exchange or order for the payment of money, which has been drawn abroad but
payable in the Philippines, and on the corresponding privilege of the drawer to have acceptance
of or payment for the bill of exchange or order for the payment of money which it has drawn
abroad but payable in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very
definite meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law
provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is
the signification by the drawee of his assent to the order of the drawer. The acceptance must be
in writing and signed by the drawee. It must not express that the drawee will perform his promise
by any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of
exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money
and the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests
his consent to comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an
acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his
acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment.32 Presentment for acceptance is the production or exhibition of the bill of exchange
to the drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law requires it.34 In the
instances where presentment for acceptance is not necessary, the holder of the bill of exchange
can proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily liable for
the purpose of demanding and obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for
payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or
orders for the payment of money that have been drawn abroad but payable in the Philippines)
that is subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for
acceptance or presentment for payment, respectively. In other words, the acceptance or payment
of the subject bill of exchange or order for the payment of money is done when there is
presentment either for acceptance or for payment of the bill of exchange or order for the payment
of money.
Applying the above concepts to the matter subjected to DST in these cases, the electronic
messages received by HSBC from its investor-clients abroad instructing the former to debit the
latter's local and foreign currency accounts and to pay the purchase price of shares of stock or
investment in securities do not properly qualify as either presentment for acceptance or
presentment for payment. There being neither presentment for acceptance nor presentment for
payment, then there was no acceptance or payment that could have been subjected to DST to
speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the payment of money
on the part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn
abroad and made payable here in the Philippines. Thus, there was no acceptance as the electronic
messages did not constitute the written and signed manifestation of HSBC to a drawer's order to
pay money. As HSBC could not have been an acceptor, then it could not have made any payment
of a bill of exchange or order for the payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable for DST under Section 230
of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person
making, signing, issuing, accepting, or, transferring" the taxable instruments under the said
provision. Thus, HSBC erroneously paid DST on the said electronic messages for which it is
entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax
Appeals are REINSTATED.
SO ORDERED.
Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ,
petitioner-appellee, vs.
 DR. JOSE BUCOY, administrator-appellant.
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively,
Pacifica Jimenez presented for payment four promissory notes signed by Pacita for different
amounts totalling twenty-one thousand pesos (P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency then
prevailing, the administrator manifested willingness to pay provided adjustment of the sums be
made in line with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that
the notes should be paid in the currency prevailing after the war, and that consequently plaintiff
was entitled to recover P21,000 plus attorneys fees for the sum of P2,000.
Hence this appeal.
 Executed in the month of August 1944, the first promissory note read as
follows:
Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos payable
six months after the war, without interest.
The other three notes were couched in the same terms, except as to amounts and dates.
There can be no serious question that the notes were promises to pay "six months after the war,"
the amounts mentioned.
But the important question, which obviously compelled the administrator to appeal, is whether
the amounts should be paid, peso for peso, or whether a reduction should be made in accordance
with the well-known Ballantyne schedule.
This matter of payment of loans contracted during the Japanese occupation has received our
attention in many litigations after the liberation. The gist of our adjudications, in so far as
material here, is that if the loan should be paid during the Japanese occupation, the Ballantyne
schedule should apply with corresponding reduction of the amount.1 However, if the loan was
expressly agreed to be payable only after the war or after liberation, or became payable after
those dates, no reduction could be effected, and peso-for-peso payment shall be ordered in
Philippine currency.2
The Ballantyne Conversion Table does not apply where the monetary obligation, under the
contract, was not payable during the Japanese occupation but until after one year counted for the
date of ratification of the Treaty of Peace concluding the Greater East Asia War. (Arellano vs.
De Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the Japanese occupation, to be discharged after
the war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102
Phil., 173.)
Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso
for peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the loan therein given could
have been repaid during the Japanese occupation. Dated December 26, 1944, it was payable
within one year. Payment could therefore have been made during January 1945. The notes here
in question were payable only after the war.
The appellant administrator calls attention to the fact that the notes contained no express promise
to pay a specified amount. We declare the point to be without merit. In accordance with doctrines
on the matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousand
pesos six months after the war, without interest." And so of the other notes.
"An acknowledgment may become a promise by the addition of words by which a promise of
payment is naturally implied, such as, "payable," "payable" on a given day, "payable on
demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, to a promise to pay. In other words, if over and above the mere
acknowledgment of the debt there may be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles,
Bills, 10, 11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge
myself to be indebted to A in $109, to be paid on demand, for value received," or, "I O. U. $85
to be paid on May 5th," are held to be promissory notes, significance being given to words of
payment as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs.
Hallack, (Colo.) 13 Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign these notes, his
estate is not liable for the same. This defense, however, was not interposed in the lower court.
There the only issue related to the amount to be amount, considering that the money had been
received in Japanese money. It is now unfair to put up this new defense, because had it been
raised in the court below, appellees could have proved, what they now alleged that Pacita
contracted the obligation to support and maintain herself, her son and her husband (then
concentrated at Santo Tomas University) during the hard days of the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
In order that a question may be raised on appeal, it is essential that it be within the issues made
by the parties in their pleadings. Consequently, when a party deliberately adopts a certain theory,
and the case is tried and decided upon that theory in the court below, he will not be permitted to
change his theory on appeal because, to permit him to do so, would be unfair to the adverse party.
(Rules of Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424;
American Express Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475,
480; Toribio vs. Dacasa, 55 Phil., 461.)
Appellant's last assignment of error concerns attorneys fees. He says there was no reason for
making this and exception to the general rule that attorney's fees are not recoverable in the
absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case
if defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid,
just and demandable claim" or "where the court deems it just and equitable that attorney's fees
be recovered" (Article 2208 Civil Code). These are — if applicable — some of the exceptions
to the general rule that in the absence of stipulation no attorney's fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is
desirable that the decision should state the reason why such award is made bearing in mind that
it must necessarily rest on an exceptional situation. Unless of course the text of the decision
plainly shows the case to fall into one of the exceptions, for instance "in actions for legal
support," when exemplary damages are awarded," etc. In the case at bar, defendant could not
obviously be held to have acted in gross and evident bad faith." He did not deny the debt, and
merely pleaded for adjustment, invoking decisions he thought to be controlling. If the trial judge
considered it "just and equitable" to require payment of attorney's fees because the defense —
adjustment under Ballantyne schedule — proved to be untenable in view of this Court's
applicable rulings, it would be error to uphold his view. Otherwise, every time a defendant loses,
attorney's fees would follow as a matter of course. Under the article above cited, even a clearly
untenable defense would be no ground for awarding attorney's fees unless it amounted to "gross
and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept
her offer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is
tenable, defendant's attitude being merely a consequence of his line of defense, which though
erroneous does not amount to "gross and evident bad faith." For one thing, there is a point raised
by defendant, which so far as we are informed, has not been directly passed upon in this
jurisdiction: the notes contained no express promise to pay a definite amount.
There being no circumstance making it reasonable and just to require defendant to pay attorney's
fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as
to the attorney's fees which are hereby disapproved. So ordered.
METROPOLITAN BANK & TRUST COMPANY, petitioner,
 vs.
 COURT OF
APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA CASTILLO, respondents.
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-
essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these events
happened, operating in Calapan, Mindoro, with the other private respondents as its principal
officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37.
They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its
General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez
while the others appeared to have been indorsed by their respective payees, followed by Gomez
as second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account
No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the
branch office to the principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing.2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times
to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over
Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner
says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on
July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed
a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986,
the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
 1. Dismissing the complaint with costs
against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum
of P1,754,089.00 and to reinstate and credit to such account such amount existing before the
debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and
Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association,
Inc. to withdraw the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual
terms and conditions on the deposit slips allowing Metrobank to charge back any amount
erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case
are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been cleared
and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his
account with it. Without such assurance, Golden Savings would not have allowed the
withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed,
Golden Savings might even have incurred liability for its refusal to return the money that to all
appearances belonged to the depositor, who could therefore withdraw it any time and for any
reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited
them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied
on Metrobank to determine the validity of the warrants through its own services. The proceeds
of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to
withdraw them from its own deposit.7 It was only when Metrobank gave the go- signal that
Gomez was finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking
the personal circumstances of Gomez before accepting his deposit does not hold water. It was
Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and
moreover, the treasury warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his
signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under
the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot
be faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling — more than one and a half million pesos (and this was 1979). There was no reason why
it should not have waited until the treasury warrants had been cleared; it would not have lost a
single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it
had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly
stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice — from the
uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants
had been cleared simply because of "the lapse of one week."8 For a bank with its long experience,
this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this bank, the right is reserved
to charge back to the depositor's account any amount previously credited, whether or not such
item is returned. This also applies to checks drawn on local banks and bankers and their branches
as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting
agent for Golden Savings and give it the right to "charge back to the depositor's account any
amount previously credited, whether or not such item is returned. This also applies to checks ".
. . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other
reason." It is claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed,
it could be argued that the depositor, in signing the deposit slip, does so only to identify himself
and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We
do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit
slip were considered a contract, the petitioner could still not validly disclaim responsibility
thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems
to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true.
On the contrary, Article 1909 of the Civil Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be
judged 'with more or less rigor by the courts, according to whether the agency was or was not
for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was
the clearance given by it that assured Golden Savings it was already safe to allow Gomez to
withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden
Savings. There may have been no express clearance, as Metrobank insists (although this is
refuted by Golden Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice but three times. The
total withdrawal was in excess of its original balance before the treasury warrants were
deposited, which only added to its belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for
any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would
have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance.
There would have been no need for it to wait until the warrants had been cleared before paying
the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests,
is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar
when it is considered that the supposed dishonor of the warrants was not communicated to
Golden Savings before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings.
But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to disturb. And as
we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established
by clear, positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are
not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a particular
fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-
negotiable. There should be no question that the exception on Section 3 of the Negotiable
Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument
and is entitled to the rights and privileges of a holder in due course, free from defenses. But this
treasury warrant is not within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration,
is actually an Order for payment out of "a particular fund," and is not unconditional and does not
fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and
section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed
that they were "genuine and in all respects what they purport to be," in accordance with Section
66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the
purpose of guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on
the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed,
Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,12 but
we feel this case is inapplicable to the present controversy.1âwphi1 That case involved checks
whereas this case involves treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing them for clearance. Also, the
fact of forgery was proved in that case but not in the case before us. Finally, the Court found the
Jai Alai Corporation negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not
appear that he was authorized to indorse it. No similar negligence can be imputed to Golden
Savings.
We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury
checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez
was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor.
The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which
must bear the consequences of its own negligence. But the balance of P586,589.00 should be
debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared.
To also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank,
let alone the fact that it has already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3
of the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing
defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding
thereon, if any, after the debit.
SO ORDERED.
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
 vs.
 COURT OF
APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs
Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently,
another deed of mortgage, dated April 14, 1958, in connection with two loans granted by the
latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by
Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City, co-owned by
said mortgagor spouses, was given as security under the aforesaid two deeds. 2 They also
executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and SOLIDARILY,
promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . . (P
11,500.00) Philippine Currency, with interest at the rate of six (6%) per centum compounded
monthly payable in . . . (120)equal monthly installments of . . . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled.
5 Lagasca and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages, P
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a
complaint against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their
property and all other documents executed in relation thereto in favor of the Government Service
Insurance System" be declared null and void. It was further prayed that they be allowed to
recover said property, and/or the GSIS be ordered to pay them the value thereof, and/or they be
allowed to repurchase the land. Additionally, they asked for actual and moral damages and
attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts
not as sureties or guarantors for the Lagasca spouses but they merely gave their common property
to the said co-owners who were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic) in that the
GSIS required their consent to the mortgage of the entire parcel of land which was covered with
only one certificate of title, with full knowledge that the loans secured thereby were solely for
the benefit of the appellant (sic) spouses who alone applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for having foreclosed
the mortgage without having given sufficient notice to them as required either as to their
delinquency in the payment of amortization or as to the subsequent foreclosure of the mortgage
by reason of any default in such payment. The notice published in the newspaper, 'Daily Record
(Exh. 12) and posted pursuant to Sec 3 of Act 3135 is not the notice to which the mortgagor is
entitled upon the application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed that In view of all the
foregoing, the judgment appealed from is hereby reversed, and another one entered (1) declaring
the foreclosure of the mortgage void insofar as it affects the share of the appellants; (2) directing
the GSIS to reconvey to appellants their share of the mortgaged property, or the value thereof if
already sold to third party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano
5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act
No. 2031, otherwise known as the Negotiable Instruments Law, which provide that an
accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser
without receiving value therefor, but is held liable on the instrument to a holder for value
although the latter knew him to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are
clearly not negotiable instruments. These documents do not comply with the fourth requisite to
be considered as such under Section 1 of Act No. 2031 because they are neither payable to order
nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite,
the provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the
provisions of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed
the documents "only to give their consent to the mortgage as required by GSIS", with the latter
having full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would
be unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from
the salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the
salary of Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact,
as already stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage"
promising to exclude private respondents and their share of the mortgaged property from liability
to the mortgagee. There is no intimation that the former executed such instrument for a
consideration, thus confirming that they did so pursuant to their original agreement.
The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that
there was no objection in the court below regarding the admissibility of the testimony and
documents that were presented to prove that the private respondents signed the mortgage papers
just to accommodate their co-owners, the Lagasca spouses. Besides, the introduction of such
evidence falls under the exception to said rule, there being allegations in the complaint of private
respondents in the court below regarding the failure of the mortgage contracts to express the true
agreement of the parties. 14
However, contrary to the holding of the respondent court, it cannot be said that private
respondents are without liability under the aforesaid mortgage contracts. The factual context of
this case is precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code
to the effect that third persons who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the
Lagasca spouses would not invalidate the mortgage with respect to private respondents' share in
the property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond
for the performance of the principal obligation. The parties to the mortgage could not have
intended that the same would apply only to the aliquot portion of the Lagasca spouses in the
property, otherwise the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof.
The facts further show that the private respondents expressly bound themselves as solidary
debtors in the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling
of respondent court that lack of notice to the private respondents of the extrajudicial foreclosure
sale impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court
ruled that Act No. 3135, as amended, does not require personal notice on the mortgagor, quoting
the requirement on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty days in at least
three public places of the municipality where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share
of private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the
mortgage and the extrajudicial foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court
of Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.

PHILIPPINE NATIONAL BANK, Petitioner,
 vs.
 ERLANDO T. RODRIGUEZ and
NORMA RODRIGUEZ, Respondents.
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine
National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and
demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T.
Rodriguez).
The spouses were engaged in the informal lending business. In line with their business, they had
a discounting3 arrangement with the Philnabank Employees Savings and Loan Association
(PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of
PNB Amelia Avenue Branch. The association maintained current and savings accounts with
petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
postdated checks issued to members whenever the association was short of funds. As was
customary, the spouses would replace the postdated checks with their own checks issued in the
name of the members.
It was PEMSLA’s policy not to approve applications for loans of members with outstanding
debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional
loans despite their outstanding loan accounts. They took out loans in the names of unknowing
members, without the knowledge or consent of the latter. The PEMSLA checks issued for these
loans were then given to the spouses for rediscounting. The officers carried this out by forging
the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the
members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other
hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account
without any indorsement from the named payees. This was an irregular procedure made possible
through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the
PNB Branch. It appears that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in
the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees
who were all members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme,
PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the
spouses were returned or dishonored for the reason "Account Closed." The corresponding
Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The
amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses from the rediscounting
transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for
damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and
petitioner PNB. They sought to recover the value of their checks that were deposited to the
PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because
PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear
the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that
the claim for damages should come from the payees of the checks, and not from spouses
Rodriguez. Since there was no demand from the said payees, the obligation should be considered
as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account
without any indorsement from the payees. The bank contended that spouses Rodriguez, the
makers, actually did not intend for the named payees to receive the proceeds of the checks.
Consequently, the payees were considered as "fictitious payees" as defined under the Negotiable
Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments,
the checks were negotiable by mere delivery. PNB’s Answer included its cross-claim against its
co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against
the bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that
PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims
were dismissed. The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate
or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account
No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint
until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount
of damages suffered by them taking into consideration the standing of the plaintiffs being
sugarcane planters, realtors, residential subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their
having incurred great dificulty (sic) especially in the residential subdivision business, which was
not pushed through and the contractor even threatened to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00; (c) Exemplary damages in the amount of
P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not involve very
complicated issues; and for the
(e) Costs of suit.
 3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground that the disputed
checks should be considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA.
The court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their
cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when
it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we
are more convinced by the strong and credible evidence for the defendant- appellant with regard
to the plaintiffs-appellees’ and PEMSLA’s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s account for
payment of the loans it has approved in exchange for PEMSLA’s checks with the full value of
the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69)
checks were in the possession of PEMSLA’s errand boy for presentment to the defendant-
appellant that led to this present controversy. It also appears that the teller who accepted the said
checks was PEMSLA’s officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks
were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of
contract on the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-
dated checks to its qualified members who had applied for loans. However, because of
PEMSLA’s insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to
issue rediscounted checks in favor of said applicant members. Based on the investigation of the
defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a
profit by issuing rediscounted checks, while the officers of PEMSLA and other members would
be able to claim their loans, despite the fact that they were disqualified for one reason or another.
They were able to achieve this conspiracy by using other members who had loaned lesser
amounts of money or had not applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish
this money-making scheme. The payees in the checks were "fictitious payees" because they were
not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on
their faces were unquestionably payable to order; and that PNB committed a breach of contract
when it paid the value of the checks to PEMSLA without indorsement from the payees. They
also argued that their cause of action is not only against PEMSLA but also against PNB to
recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and
fallo of which read:
 In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-
appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May
1999 until fully paid; 2. Moral damages in the amount of P200,000;
 3. Attorney’s fees in the
amount of P100,000; and
 4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us
AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-
10892, as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE
Our original decision promulgated in this case on 22 July 2004.
The CA ruled that the checks were payable to order. According to the appellate court, PNB failed
to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended
the checks to be received by the specified payees. Thus, PNB is liable for the value of the checks
which it paid to PEMSLA without indorsements from the named payees. The award for damages
was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their relationship, which constrained
respondents to seek legal action.
Hence, the present recourse under Rule 45.
Issues
 The issues may be compressed to whether the subject checks are payable to order or to
bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not
intend for the named payees to receive the proceeds. Thus, they are bearer instruments that could
be validly negotiated by mere delivery. Further, testimonial and documentary evidence presented
during trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with
each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining
finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it
becomes final may, motu proprio or upon motion of the parties, correct its judgment with the
singular objective of achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order.
The Court does not sanction careless disposition of cases by courts of justice. The highest degree
of diligence must go into the study of every controversy submitted for decision by litigants.
Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable
laws judiciously studied, before the promulgation of every judgment by the court. Only in this
manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the
check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank
payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL
states:
SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable
to the order of a specified person or to him or his order. It may be drawn payable to the order of
–
(a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or
 (c) The
drawee; or
 (d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
 Where the instrument is payable to order, the
payee must be named or otherwise indicated therein with reasonable certainty. SEC. 9. When
payable to bearer. – The instrument is payable to bearer –
(a) When it is expressed to be so payable; or
 (b) When it is payable to a person named therein
or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known
to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of negotiation. Under
Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the other hand, does not require an
indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred from
one person to another in such manner as to constitute the transferee the holder thereof. If payable
to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of
the holder completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under Section 9(c)
of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non- existing person, and such fact is
known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si
Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer
instruments because the named payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for
this reason that We look elsewhere for guidance. Court rulings in the United States are a logical
starting point since our law on negotiable instruments was directly lifted from the Uniform
Negotiable Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living payee may also be
"fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds
of the check. This usually occurs when the maker places a name of an existing payee on the
check for convenience or to cover up an illegal activity.14 Thus, a check made expressly payable
to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not
the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee
and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears
the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument
that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious
payee to negotiate the check by placing his indorsement thereon. And since the maker knew this
limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in
case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise,
it will be most convenient for the maker who desires to escape payment of the check to always
deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely
named without any intention that the payee should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In
the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its
authorized signatories. Martin drew seven checks payable to the German Savings Fund Company
Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation
without authority from the latter. Martin was also an officer of the GSFCBA but did not have
signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA
and signed his own name as indorsement. He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the corporation filed an action against the
bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the check so payable did
not intend for the specified payee to have any part in the transactions, the payee is considered as
a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated
by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless of whether prior indorsements
were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company,
Inc.18 upheld the fictitious- payee rule. The rule protects the depositary bank and assigns the
loss to the drawer of the check who was in a better position to prevent the loss in the first place.
Due care is not even required from the drawee or depositary bank in accepting and paying the
checks. The effect is that a showing of negligence on the part of the depositary bank will not
defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss.
Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to
the fraudulent scheme. Said the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances
which might have well induced a prudent banker to investigate and other permutations of
negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a
"commercial bad faith" exception to UCC 3-405, applicable when the transferee "acts
dishonestly – where it has actual knowledge of facts and circumstances that amount to bad faith,
thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support in the
text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on
all parties an obligation to act with "honesty in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank
transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted
that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees
were actual, existing, and living persons who were members of PEMSLA that had a
rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were "fictitious" in its
broader context.
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not
intend for the named payees to be part of the transaction involving the checks. At most, the
bank’s thesis shows that the payees did not have knowledge of the existence of the checks. This
lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention
on the part of respondents-spouses that the payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not the individual
payees, it is understandable that they relied on the information given by the officers of PEMSLA
that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as found by both
lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-
spouses that the named payees were the intended recipients of the checks’ proceeds. The bank
failed to satisfy a requisite condition of a fictitious-payee situation – that the maker of the check
intended for the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-
payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently,
the drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from
the named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed
by the payee is apparently grossly negligent in its operations.21 This Court has recognized the
unique public interest possessed by the banking industry and the need for the people to have full
trust and confidence in their banks.22 For this reason, banks are minded to treat their customer’s
accounts with utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature
of the drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to
the named payee in the check. It should charge to the drawer’s accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn
against respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to
ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks
before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict
accordance with the instructions of the drawers. Petitioner miserably failed to discharge this
burden.
The checks were presented to PNB for deposit by a representative of PEMSLA absent any type
of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks
in strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid
the values of the checks not to the named payees or their order, but to PEMSLA, a third party to
the transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking
industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of
their employees. In Bank of the Philippine Islands v. Court of Appeals,25 this Court cautioned
thus:
Banks handle daily transactions involving millions of pesos. By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected
to exercise the highest degree of diligence in the selection and supervision of their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid
deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank
employees that caused the loss, the bank should be held liable.27
PNB’s argument that there is no loss to compensate since no demand for payment has been made
by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason "Account Closed." These PEMSLA checks
were the corresponding payments to the Rodriguez checks. Since they could not encash the
PEMSLA checks, respondents-spouses were unable to collect payments for the amounts they
had advanced.
A bank that has been remiss in its duty must suffer the consequences of its negligence. Being
issued to named payees, PNB was duty-bound by law and by banking rules and procedure to
require that the checks be properly indorsed before accepting them for deposit and payment. In
fine, PNB should be held liable for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-
defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two
defendants in answer to the complaint of respondents-spouses and cross-claim of PNB. The
Rules expressly provide that failure to file an answer is a ground for a declaration that defendant
is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file
responsive pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis. Thus, this
judgment shall be without prejudice to whatever action the bank might take against its co-
defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction not of its own volition but
due to the actions of some of its employees. Considering that moral damages must be understood
to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award
of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that
the award for moral damages is reduced to P50,000.00, and that this is without prejudice to
whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and
the employees involved.