Republic of the PhilippinesSUPREME COURTManila

EN BANCG.R. No. L-22405        June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,vs.MAURICIO A. SORIANO, ET AL., defendant-appellees.

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all postmasters, and the following day notice was likewise served upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts. The following day it deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter had been found to have been irregularly issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a)     To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's clearing account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify the plaintiff in the same amount with interest at 8-½% per annum from September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft account;

(b)     To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the amount of P1,000.00 or in such amount as will be proved and/or determined by this Honorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of America on September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal money order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-½% per annum from September 27, 1961 until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the

other and will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post Office, and that money orders, once issued, create a contractual relationship of debtor and creditor, respectively, between the government, on the one hand, and the remitters payees or endorses, on the other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money order system, the government is not engaging in commercial transactions but merely exercises a governmental power for the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors. Among others, the condition is imposed that "in cases of adverse claim, the money order or money orders involved will be returned to you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not apply to the letter in question because it does not provide for a department regulation but merely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ., concur.

Castro and Makasiar, JJ., took no part.

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISIONG.R. No. 97753  August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,vs.COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:

1.      On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD     CTDDates   Serial Nos.     Quantity        Amount

22 Feb. 82      90101 to 90120  20      P80,000

26 Feb. 82      74602 to 74691  90      360,0002 Mar. 82       74701 to 74740  40      160,0004 Mar. 82       90127 to 90146  20      80,0005 Mar. 82       74797 to 94800  4       16,0005 Mar. 82       89965 to 89986  22      88,0005 Mar. 82       70147 to 90150  4       16,0008 Mar. 82       90001 to 90020  20      80,0009 Mar. 82       90023 to 90050  28      112,0009 Mar. 82       89991 to 90000  10      40,0009 Mar. 82       90251 to 90272  22      88,000———     ————Total   280     P1,120,000=====   ========

2.      Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208).

3.      Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).

4.      On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).

5.      On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6.      Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

7.      On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-

terminate the same.

8.      On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9.      No copy of the requested documents was furnished herein defendant.

10.     Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11.     In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12.     In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse.

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP   4,000.00CERTIFICATE OF DEPOSITRate 16%

Date of Maturity FEB. 23, 1984  FEB 22, 1982,   19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible)        (Sgd. Illegible)

——————————      ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:

(a)     It must be in writing and signed by the maker or drawer;

(b)     Must contain an unconditional promise or order to pay a sum certain in money;

(c)     Must be payable on demand, or at a fixed or determinable future time;

(d)     Must be payable to order or to bearer; and

(e)     Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx      xxx     xxx

Atty. Calida:

q       In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz?

witness:

a       Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount.

Atty. Calida:

q       And no other person or entity or company, Mr. Witness?

witness:

a       None, your Honor. 7

xxx      xxx     xxx

Atty. Calida:

q       Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned?

witness:

a       Angel dela Cruz is the depositor. 8

xxx      xxx     xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 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.

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.

Republic of the PhilippinesSUPREME COURTManila

FIRST DIVISION

G.R. No. 88866             February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,vs.

COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

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 thewarrants. 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.

x x x           x x x          x x x

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with —

(a)     An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or

(b)     A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present controversy.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.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISION

G.R. No. 113236            March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,vs.

COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.

The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:

. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:

DATE

WITHDRAWAL SLIP NO.

AMOUNT

June 15, 1978

42127

P1,198,092.80

July 15, 1978

42128

940,190.00

Aug. 15, 1978

42129

880,000.00

Sep. 15, 1978

42130

981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence.

On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court. According to the appellate court, respondent bank notified the depositor to present the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25.     The CA grievously erred in holding that the [Luzon Development] Bank was free from any

fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New Civil Code.8

The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's current account with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.12 The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to

presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care.14

In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15

The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank — and petitioner as account-holder — must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.

Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. L-2516             September 25, 1950

ANG TEK LIAN, petitioner,vs.THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of Manila. The Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946, the check Exhibits A upon the China Banking Corporation for the sum of P4,000,

payable to the order of "cash". He delivered it to Lee Hua Hong in exchange for money which the latter handed in act. On November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to exchange Exhibit A — which he (appellant) then brought with him — with cash alleging that he needed badly the sum of P4,000 represented by the check, but could not withdraw it from the bank, it being then already closed; that in view of this request and relying upon appellant's assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to borrow money from each other, even before the war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts to notify him that the check had been dishonored by the bank, appellant could not be located any-where, until he was summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection therewith; and that appellant has not paid as yet the amount of the check, or any part thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is whether under the facts found, estafa had been accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post dating a check, or issuing such check in payment of an obligation the offender knowing that at the time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient to cover the amount of the check, and without informing the payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated check or an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to "cash" and had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the following line of reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did so with full knowledge that it would be dishonored upon presentment. In that sense, the appellant could not be said to have acted fraudulently because the complainant, in so accepting the check as it was drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he was running thereby." (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have undoubtedly occurred

wherein the Bank required the indorsement of the drawer before honoring a check payable to "cash." But cases there are too, where no such requirement had been made . It depends upon the circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.

Where a check is made payable to the order of "cash", the word cash "does not purport to be the name of any person", and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement. . . . (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and /or assurance against possible complications, — for instance, (a) forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its protection, that the indorsement of the drawer — or of some other person known to it — be obtained. But where the Bank is satisfied of the identity and /or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without further question; and it would incur no liability to the drawer in thus acting.

A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and is payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in falling to do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the holder identified and ordinarily may not be charged with negligence in failing to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for suspecting any irregularity, it will be protected in paying a bearer check, "no matter what facts unknown to it may have occurred prior to the presentment." 1 Morse, Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely reasonable for the bank to insist that holder give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected with its dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer had insufficient funds — not because the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the writ of certiorari is denied and the decision of the Court of Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISIONG.R. No. 85419  March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,vs.SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of action:

(1)     To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima Wei on June 9, 1983; and

(2)     To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the China Banking Corporation, to pay the balance due on the promissory note.

Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the complaint states no cause of action. The trial court granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged errors of the Court of Appeals: 1

(1)     THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.

(2)     THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.

The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.

The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise.

A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation of said legal right. 2

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the

grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part:

Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. . . .

Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. 3 Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 4 Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.

The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other respondents.

In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5

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

Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner Bank has a right of action against her for the balance due thereon.

However, insofar as the other respondents are concerned, petitioner Bank has no privity with

them. Since petitioner Bank never received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action against herco-respondents, if the allegations in the complaint are found to be true.With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of delivery. It therefore has no cause of action against the respondents, in the alternative or otherwise.

In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of action, the case is REMANDED to the trial court for a trial on the merits, consistent with this decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any amount under the promissory note allegedly signed by her.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

G.R. Nos. L-25836-37    January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,vs.JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1 and from the order of said court in the same case denying his motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R,

respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of action because:

a)      When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee.

b)      In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the following defenses: That he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

I

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on the following day.

However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a)      The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b)      The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof, with the defendant as only additional security of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a showing that the drawer is incapable of paying. This contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting 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. 36 As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera JJ., concur.

THIRD DIVISION[G. R. No. 116320. November 29, 1999]

ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS , HERBY COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME C. ONG, respondents.D E C I S I O NGONZAGA_REYES, J.:

Assailed in this petition for review on certiorari is the decision[1] of the Court of Appeals affirming the decision[2] rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case No. 35231 in favor of private respondents.

The controversy before this Court finds its origins in a Land Development and Construction Contract which was entered into on June 23, 1977 by A. Francisco Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco (Francisco) is the president, and private respondent Herby Commercial & Construction Corporation (HCCC), represented by its President and General Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at San Jose del Monte, Bulacan, financed by the Government Service Insurance System (GSIS). Under the contract, HCCC agreed to undertake the construction of 35 housing units and the development of 35 hectares of land. The payment of HCCC for its services was on a turn-key basis, that is, HCCC was to be paid on the basis of the completed houses and developed lands delivered to and accepted by AFRDC and the GSIS. To facilitate payment, AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to collect payments directly from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive Committee Account with the Insular Bank of Asia & America (IBAA) in the amount of P4,000,000.00 from which checks would be issued and co-signed by petitioner Francisco and the GSIS Vice-President Armando Diaz (Diaz).

On February 10, 1978, HCCC filed a complaint[3] with the Regional Trial Court of Quezon City against Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land Development and Construction Contract in the amount of P515,493.89 for completed and delivered housing units and land development. However, the parties eventually arrived at an amicable settlement of their differences, which was embodied in a Memorandum Agreement executed by HCCC and AFRDC on July 21, 1978. Under the agreement, the parties stipulated that HCCC had turned over 83 housing units which have been accepted and paid for by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50 representing incomplete construction of housing units, incomplete land development and 5% retention, which amount will be discharged when the defects and deficiencies are finally completed by HCCC. It was also provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the former agreed would be paid out of the proceeds from the 40 housing units still to be turned over by HCCC or from any amount due to HCCC from the GSIS. Consequently, the trial court dismissed the case upon the filing by the parties of a joint motion to dismiss.

Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz and Francisco had executed and signed seven checks[4], of various dates and amounts, drawn against the IBAA and payable to HCCC for completed and delivered work under the contract. Ong, however, claims that these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong learned that the GSIS gave Francisco custody of the checks since she promised that she would deliver the same to HCCC. Instead, Francisco forged the signature of Ong, without his knowledge or consent, at the dorsal portion of the said checks to make it appear that HCCC had indorsed the checks; Francisco then indorsed the checks for a second time by signing her name at the back of the checks and deposited the checks in her IBAA savings account. IBAA credited

Franciscos account with the amount of the checks and the latter withdrew the amount so credited.

On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging Francisco with estafa thru falsification of commercial documents. Francisco denied having forged Ongs signature on the checks, claiming that Ong himself indorsed the seven checks in behalf of HCCC and delivered the same to Francisco in payment of the loans extended by Francisco to HCCC. According to Francisco, she agreed to grant HCCC the loans in the total amount of P585,000.00 and covered by eighteen promissory notes in order to obviate the risk of the non-completion of the project. As a means of repayment, Ong allegedly issued a Certification authorizing Francisco to collect HCCCs receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to Franciscos claims and accordingly, dismissed the complaints, which dismissal was affirmed by the Minister of Justice in a resolution issued on June 5, 1981.

The present case was brought by private respondents on November 19, 1979 against Francisco and IBAA for the recovery of P370,475.00, representing the total value of the seven checks, and for damages, attorneys fees, expenses of litigation and costs. After trial on the merits, the trial court rendered its decision in favor of private respondents, the dispositive portion of which provides -

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to jointly and severally pay the plaintiffs the amount of P370.475.00 plus interest thereon at the rate of 12% per annum from the date of the filing of the complaint until the full amount is paid; moral damages to plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation expenses of P5,000.00; and attorneys fees of P50,000.00.

With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia Francisco, the latter is ordered to reimburse the former for the sums that the Bank shall pay to the plaintiff on the forged checks including the interests paid thereon.

Further, the defendants are ordered to pay the costs.

Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI), the trial court held that Francisco had indeed forged the signature of Ong to make it appear that he had indorsed the checks. Also, the court ruled that there were no loans extended, reasoning that it was unbelievable that HCCC was experiencing financial difficulties so as to compel it to obtain the loans from AFRDC in view of the fact that the GSIS had issued checks in favor of HCCC at about the same time that the alleged advances were made. The trial court stated that it was plausible that Francisco concealed the fact of issuance of the checks from private respondents in order to make it appear as if she were accommodating private respondents, when in truth she was lending HCCC its own money.

With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case No. Q-24628, the trial court held that the same did not make any mention of the forged checks since private respondents were as of yet unaware of their existence, that fact having been effectively concealed by Francisco, until private respondents acquired knowledge of Franciscos misdeeds in 1979.

IBAA was held liable to private respondents for having honored the checks despite such obvious irregularities as the lack of initials to validate the alterations made on the check, the absence of the signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on a second indorsement in the savings account of Francisco. However, the trial court allowed IBAA recourse against Francisco, who was ordered to reimburse the IBAA for any sums it shall have to pay to private respondents.[5]

Both Francisco and IBAA appealed the trial courts decision, but the Court of Appeals dismissed IBAAs appeal for its failure to file its brief within the 45-day extension granted by the appellate court. IBAAs motion for reconsideration and petition for review on certiorari filed with this Court were also similarly denied. On November 21, 1989, IBAA and HCCC entered into a Compromise Agreement which was approved by the trial court, wherein HCCC acknowledged receipt of the amount of P370,475.00 in full satisfaction of its claims against IBAA, without prejudice to the right of the latter to pursue its claims against Francisco.

On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence this petition for review on certiorari filed by petitioner, assigning the following errors to the appealed decision

1. The respondent Court of Appeals erred in concluding that private respondents did not owe Petitioner the sum covered by the Promissory Notes Exh.2-2-A-2-P (FRANCISCO). Such conclusion was based mainly on conjectures, surmises and speculation contrary to the unrebutted pleadings and evidence presented by petitioner.

2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of private respondent ONG on the checks in question without any authority therefor which is patently contradictory to the unrebutted pleading and evidence that petitioner was expressly authorized by respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to pay the loans extended to them. (Exhibit 3).

3. That respondent Court of Appeals erred in holding that the seven checks in question were not taken up in the liquidation and reconciliation of all outstanding account between AFRDC and HERBY as acknowledged by the parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and speculation contrary to the unrebutted evidence presented by petitioners. It is an inference made which is manifestly mistaken.

4. The respondent Court of Appeals erred in affirming the decision of the lower court and dismissing the appeal.[6]

The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven checks. In this connection, we uphold the lower courts finding that the subject matter of the present case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to November 1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed by the trial court, aside from there being absolutely no mention of the checks in the said agreement, the amounts represented by said checks could not have been included in the Memorandum Agreement executed in 1978 because private respondents only discovered Franciscos acts of forgery in 1979. The lower courts found that Francisco was able to easily conceal from private respondents even the fact of the issuance of the checks since she was a co-signatory thereof.[7] We also note that Francisco had custody of the checks, as proven by the check vouchers bearing her uncontested signature,[8] by which she, in effect, acknowledged having received the checks intended for HCCC. This contradicts Franciscos claims that the checks were issued to Ong who delivered them to Francisco already indorsed.[9]

As regards the forgery, we concur with the lower courts finding that Francisco forged the signature of Ong on the checks to make it appear as if Ong had indorsed said checks and that, after indorsing the checks for a second time by signing her name at the back of the checks, Francisco deposited said checks in her savings account with IBAA. The forgery was satisfactorily established in the trial court upon the strength of the findings of the NBI handwriting expert.[10] Other than petitioners self-serving denials, there is nothing in the records to rebut the NBIs findings. Well-entrenched is the rule that findings of trial courts which are factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is supported by substantial evidence on record,[11] as it is in the case at bench.

Petitioner claims that she was, in any event, authorized to sign Ongs name on the checks by virtue of the Certification executed by Ong in her favor giving her the authority to collect all the receivables of HCCC from the GSIS, including the questioned checks.[12] Petitioners alternative defense must similarly fail. The Negotiable Instruments Law provides that where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability.[13] An agent, when so signing, should indicate that he is merely signing in behalf of the principal and must disclose the name of his principal; otherwise he shall be held personally liable.[14] Even assuming that Francisco was authorized by HCCC to sign Ongs name, still, Francisco did not indorse the instrument in accordance with law. Instead of signing Ongs name, Francisco should have signed her own name and expressly indicated that she was signing as an agent of HCCC. Thus, the Certification cannot be used by Francisco to validate her act of forgery.

Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same.[15] Due to her forgery of Ongs signature which enabled her to deposit the checks in her own account, Francisco deprived HCCC of the money due it from the GSIS pursuant to the Land Development and Construction Contract. Thus, we affirm respondent courts award of compensatory damages in the amount of P370,475.00, but with a

modification as to the interest rate which shall be six percent (6%) per annum, to be computed from the date of the filing of the complaint since the amount of damages was alleged in the complaint;[16] however, the rate of interest shall be twelve percent (12%) per annum from the time the judgment in this case becomes final and executory until its satisfaction and the basis for the computation of this twelve percent (12%) rate of interest shall be the amount of P370,475.00. This is in accordance with the doctrine enunciated in Eastern Shipping Lines, Inc. vs. Court of Appeals, et al.,[17] which was reiterated in Philippine National Bank vs. Court of Appeals,[18] Philippine Airlines, Inc. vs. Court of Appeals[19]and in Keng Hua Paper Products Co., Inc. vs. Court of Appeals,[20] which provides that -

1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of six percent (6%) per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 of the Civil Code, exemplary damages are imposed by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Considering petitioners fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and reasonable. The grant of exemplary damages justifies the award of attorneys fees in the amount of P50,000.00, and the award of P5,000.00 for litigation expenses.[21]

The appellate courts award of P50,000.00 in moral damages is warranted. Under Article 2217 of the Civil Code, moral damages may be granted upon proof of physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social

humiliation and similar injury.[22] Ong testitified that he suffered sleepless nights, embarrassment, humiliation and anxiety upon discovering that the checks due his company were forged by petitioner and that petitioner had filed baseless criminal complaints against him before the fiscals office of Quezon City which disrupted HCCCs business operations.[23]

WHEREFORE, we AFFIRM the respondent courts decision promulgated on June 29, 1992, upholding the February 16, 1988 decision of the trial court in favor of private respondents, with the modification that the interest upon the actual damages awarded shall be at six percent (6%) per annum, which interest rate shall be computed from the time of the filing of the complaint on November 19, 1979. However, the interest rate shall be twelve percent (12%) per annum from the time the judgment in this case becomes final and executory and until such amount is fully paid. The basis for computation of the six percent and twelve percent rates of interest shall be the amount of P370,475.00. No pronouncement as to costs.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

FIRST DIVISION

[G.R. No. L-29432. August 6, 1975.]

JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF THE PHILIPPINE ISLAND, Respondent.

SYNOPSIS

Petitioner deposited in its current account with respondent bank several checks with a total face value of P8,030.58, all acquired from Antonio J. Ramirez, a regular bettor at the jai-alai games and a sale agent of the Inter-Island Gas Service, Inc., the payee of the checks. The deposits were all temporarily credited to petitioner’s account in accordance with the clause printed on the bank’s deposit slip. Subsequently, Ramirez resigned and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsement made on the cheeks purportedly by its cashiers, as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.", were forgeries. It informed petitioner, the respondent, the drawers and the drawee banks of the said checks and forgeries and filed a criminal complaint against its former employee. In view of these circumstances, the respondent Bank debited the petitioner’s current account and forwarded to the latter the checks containing the forged indorsements, which petitioner refused to accept. Later, petitioner drew against its current account a check for P135,000.00. This check was dishonored by respondent as its records showed that petitioner’s balance after netting out the value of the checks with the forged indorsement, was insufficient to cover the value of the check drawn. A complaint was filed by

petitioner with the Court of First Instance of Manila. The same was dismissed by the said court after due trial, as well as by the Court of Appeals, on appeal. Hence, this petition for review.

The Supreme Court ruled that respondent acted within legal bounds when it debited petitioner’s account; that the payments made by the drawee banks to the respondent on account of the checks with forged indorsements were ineffective; that on account thereof, no creditor-debtor relationship was created between the parties; that petitioner was grossly recreant in accepting the checks in question from Ramirez without making any inquiry as to authority to exchange checks belonging to the payee-corporation; and that petitioner, in indorsing the said checks when it deposited them with respondent, guaranteed the genuineness of all prior indorsement thereon so that the respondent, which relied upon its warranty, cannot be held liable for the resulting loss.

Judgment affirmed

SYLLABUS

1.      NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS EFFECT. — A forged signature in a negotiable instrument makes it wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery.

2.      ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE PARTIES CREATED EVEN IF DEPOSITARY OR COLLECTING BANK HAD ALREADY COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED PETITIONER’S ACCOUNT; REASON. — Where the indorsement made on the checks were forged prior to their delivery to depositor, the payments made by the drawee-banks to the collecting bank on account of the said checks were ineffective. Such being the case, the relationship of creditor and debtor between the depositor and the depository had not been validly effected, the checks not having properly and legitimately converted into cash.

3.      ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO DRAWEE-BANKS THE VALUE OF CHECKS CONTAINING FORGED INDORSEMENT; RULING IN THE CASE OF GREAT EASTERN LIFE INSURANCE CO. v. HONGKONG & SHANGHAI BANK. — In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 43 Phil. 678 (1992), the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or to anyone else upon a forged signature." "It was its duty to know," said the Court, "that (the payee’s) endorsement was genuine before cashing the check." The depositor must in turn shoulder the loss of the amounts which the respondent, as its collecting agent, had no reimburse to the drawee-banks.

4.      ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING IN THE CASE OF INSULAR DRUG CO. v. NATIONAL. — In Insular Drug Co. v. National, 58 Phil. 685 (1933), the Court made the pronouncement that." . .The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation which can act by agents, does so at his peril, and must abide by the consequences if the agent who endorses the same is without authority."cralaw virtua1aw library

5.      ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A BANK WHO RELIED ON INDORSER’S WARRANTY. — Under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Where the depositor indorsed the checks with forged indorsement when it deposited them with the collecting bank, the former as an endorser guaranteed the genuineness of all prior indorsement thereon. The collecting bank which relied upon this warranty cannot be held liable for the resulting loss.

6.      ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO COLLECTING BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. — The transfer by the drawee-banks of funds to the collecting bank on account of forged checks would be ineffectual when made under the mistaken and valid assumption that the indorsement of the payee thereon were genuine. Under Article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises," By virtue thereof, there can be no valid payment of money by drawee-banks to the collecting bank on account of forged checks.

D E C I S I O N

CASTRO, J.:

This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter referred to as the petitioner) for review of the decision of the Court of Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of the Philippine Islands (hereinafter referred to as the respondent).

From April 2, 1959 to May 18, 1959, ten checks with a total face value of P8,030.58 were deposited by the petitioner in its current account with the respondent bank. The particulars of these checks are as follows:chanrob1es virtual 1aw library

1.      Drawn by the Delta Engineering Service upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service Inc. or order:chanrob1es virtual 1aw library

Date    Check    Exhibit

Deposited       Number  Amount  Number

4/2/59  B-352680        P500.00 18

4/20/59 A-156907        372.32  19

4/24/59 A-156924        397.82  20

5/4/59  B-364764        250.00  23

5/6/59  B-364775        250.00  24

2.      Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library

4/13/59 B-335063        P 2108.70       21

4/27/59 B-335072        P2210.94        22

3.      Drawn by the Luzon Tinsmith & Company upon the China Banking Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:chanrob1es virtual 1aw library

5/18/59 VN430188        P940.8025cralaw:red

4.      Drawn by the Roxas Manufacturing, Inc. upon the Philippine National Bank and payable to the Inter-Island Gas Service, Inc. order:chanrob1es virtual 1aw library

5/14/59 1860160 P 500.00        26

5/18/59 1860660 P 500.00        27

All the foregoing checks, which were acquired by the petitioner from one Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular bettor at jai-alai games, were, upon deposit, temporarily credited to the petitioner’s account in accordance with the clause printed on the deposit slips issued by the respondent and which reads:jgc:chanrobles.com.ph

"Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received for deposit, is provisional only, until such time as the proceeds thereof, in current funds or

solvent credits, shall have been actually received by the Bank and the latter reserves to itself the right to charge back the item to the account of its depositor, at any time before that event, regardless of whether or not the item itself can be returned."cralaw virtua1aw library

About the latter part of July 1959, after Ramirez had resigned from the Inter-Island Gas and after the checks had been submitted to inter-bank clearing, the Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers, Santiago Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to the said company) as well as the rubber stamp impression thereon reading "Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island Gas advised the petitioner, the respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a criminal complaint against Ramirez with the Office of the City Fiscal of Manila. 1

The respondent’s cashier, Ramon Sarthou, upon receipt of the latter of Inter-Island Gas dated August 31, 1959, called up the petitioner’s cashier, Manuel Garcia, and advised the latter that in view of the circumstances he would debit the value of the checks against the petitioner’s account as soon as they were returned by the respective drawee-banks.

Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded reimbursement to their respective accounts from the drawee-banks, which in turn demanded from the respondent, as collecting bank, the return of the amounts they had paid on account thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value which the former in turn paid to the Inter-Island Gas. The respondent, for its part, debited the petitioner’s current account and forwarded to the latter the checks containing the forged indorsements, which the petitioner, however, refused to accept.

On October 8, 1959 the petitioner drew against its current account with the respondent a check for P135,000 payable to the order of the Mariano Olondriz y Cia. in payment of certain shares of stock. The check was, however, dishonored by the respondent as its records showed that as of October 8, 1959 the current account of the petitioner, after netting out the value of the checks P8,030.58) with the forged indorsements, had a balance of only P128,257.65.

The petitioner then filed a complaint against the respondent with the Court of First Instance of Manila, which was however dismissed by the trial court after due trial, and as well by the Court of Appeals, on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the instant petition may be briefly stated as follows:chanrob1es virtual 1aw library

(a) Whether the respondent had the right to debit the petitioner’s current account in the amount corresponding to the total value of the checks in question after more than three months had elapsed from the date their value was credited to the petitioner’s account:(b) Whether the

respondent is estopped from claiming that the amount of P8,030.58, representing the total value of the checks with the forged indorsements, had not been properly credited to the petitioner’s account, since the same had already been paid by the drawee-banks and received in due course by the respondent; and(c) On the assumption that the respondent had improperly debited the petitioner’s current account, whether the latter is entitled to damages.

These three issues interlock and will be resolved jointly.

In our opinion, the respondent acted within legal bounds when it debited the petitioner’s account. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner’s account, so that following the rule in Gullas v. Philippine National Bank 2 it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner’s funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties.

Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —

"When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority."cralaw virtua1aw library

Since under the foregoing provision, a forged signature in a negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment can be acquired through or under the forged signature except against a party who cannot invoke the forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on the checks had been forged prior to their delivery to the petitioner. In legal contemplation, therefore, the payments made by the drawee-banks to the respondent on account of the said checks were ineffective; and, such being the case, the relationship of creditor and debtor between the petitioner and the respondent had not been validly effected, the checks not having been properly and legitimately converted into cash. 4

In Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, 5 the Court ruled that it is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a forged signature." "It was its duty to know," said the Court, "that [the payee’s] endorsement was genuine before cashing the check." The petitioner must in turn

shoulder the loss of the amounts which the respondent; as its collecting agent, had to reimburse to the drawee-banks.

We do not consider material for the purposes of the case at bar that more than three months had elapsed since the proceeds of the checks in question were collected by the Respondent. The record shows that the respondent had acted promptly after being informed that the indorsements on the checks were forged. Moreover, having received the checks merely for collection and deposit, the respondent cannot he expected to know or ascertain the genuineness of all prior indorsements on the said checks. Indeed, having itself indorsed them to the respondent in accordance with the rules and practices of commercial banks, of which the Court takes due cognizance, the petitioner is deemed to have given the warranty prescribed in Section 66 of the Negotiable Instruments Law that every single one of those checks "is genuine and in all respects what it purports to be.."

The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks was a corporation — the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. v. National 6 the Court made the pronouncement that.

". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority." (underscoring supplied)

It must be noted further that three of the checks in question are crossed checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet, the petitioner negligently accepted them for cash. That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would not, in our view, exculpate the petitioner from liability with respect to them. The fact that they are bearer checks and at the same time crossed checks should have aroused the petitioner’s suspicion as to the title of Ramirez over them and his authority to cash them (apparently to purchase jai-alai tickets from the petitioner), it appearing on their face that a corporate entity — the Inter Island Gas Service, Inc. — was the payee thereof and Ramirez delivered the said checks to the petitioner ostensibly on the strength of the payee’s cashiers’ indorsements.

At all events, under Section 67 of the Negotiable Instruments Law, "Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser," and under Section 66 of the same statute a general indorser warrants that the instrument "is genuine and in all respects what it purports to be." Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser

guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner’s warranty should not be held liable for the resulting loss. This conclusion applied similarly to exh. 22 which is an uncrossed bearer instrument, for under Section 65 of the Negotiable Instrument Law. "Every person negotiating an instrument by delivery . . . warrants (a) That the instrument is genuine and in all respects what it purports to be." Under that same section this warranty "extends in favor of no holder other than the immediate transferee," which, in the case at bar, would be the Respondent.

The provision in the deposit slip issued by the respondent which stipulates that it "reserves to itself the right to charge back the item to the account of its depositor," at any time before "current funds or solvent credits shall have been actually received by the Bank," would not materially affect the conclusion we have reached. That stipulation prescribes that there must be an actual receipt by the bank of current funds or solvent credits; but as we have earlier indicated the transfer by the drawee-banks of funds to the respondent on account of the checks in question was ineffectual because made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine. Under article 2154 of the New Civil Code "If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises." There was, therefore, in contemplation of law, no valid payment of money made by the drawee-banks to the respondent on account of the questioned checks.

ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at petitioner’s cost.

Makasiar, Esguerra, Muñoz Palma and Martin, JJ., concur.