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The purchase order for the garrett skidders bearing No. 0051 and dated December22, 1975 (Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described inthe bulletin

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon asarranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE

EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will beopened within ninety (90) days after date of shipment. at first installment will bedue one hundred eighty (180) days after date of shipment. Interest-14% perannum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the delivery of one (1) unit of the bidders, complete with tools andcables, to Cagayan de Oro, on or before Saturday, April 24,1976, on board aLorenzo shipping vessel, with the information that an irrevocable Domestic Letter

of Credit would be opened in plaintiff's favor on or before June 30, 1976 underthe terms and conditions agreed upon (Exhibit "B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid theshipping cost in the amount of P10,640.00 because of the verbal assurance ofdefendant Casville that it would be covered by the letter of credit soon to beopened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount ofP300,000.00 postdated August 4, 1976, which was followed by another check ofsame date. Plaintiff considered these checks either as partial payment for theskidder that was already delivered to Cagayan de Oro or as reimbursement for themarginal deposit that plaintiff was supposed to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that their application for a letter of credit for the payment of the Garrett



skidders had been approved by the Equitable Banking Corporation. However, thedefendants said that they would need the sum of P300,000.00 to stand ascollateral or marginal deposit in favor of Equitable Banking Corporation and anadditional amount of P100,000.00, also in favor of Equitable BankingCorporation, to clear the title of the Estrada property belonging to defendant

Casals which had been approved as security for the trust receipts to be issued bythe bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by defendantCasville Enterprises, plaintiff agreed to advance the necessary amount in order tofacilitate the transaction. Accordingly, on August 5,1976, plaintiff issued a checkin the amount of P400,000.00 (Exhibit "2") drawn against the First National CityBank and made payable to the order of Equitable Banking Corporation and withthe following notation or memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment

of balance on Estrada Property to be used as security for trustreceipt for opening L/C of Garrett Skidders in favor of the EdwardJ. Nell Co." Said check together with the cash disbursementvoucher (Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening ofL/C for account of Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were presented to Severino Santos, executive vice president of defendant bank, Santosdid not accept them because the terms and conditions required by the bank for the

opening of the letter of credit had not yet been agreed on.On August 9, 1976, defendant Casville wrote the bank applying for two letters ofcredit to cover its purchase from plaintiff of two Garrett skidders, under thefollowing terms and conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Creditfor P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real EstateCollateral to secure the Trust Receipts; e) We shall chattel mortgage theequipments purchased even after payment of the first L/C as additional securityfor the balance of the second L/C and f) Other conditions you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied statingthat it was ready to open the letters of credit upon defendant's compliance of thefollowing terms and conditions:



c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure theTrust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Otherterms and conditions that our bank may impose.

Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing

three postdated checks. In said letter, plaintiff was informed of the requirementsimposed by the defendant bank pointing out that the "cash marginal requiredunder paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plus anotherP100,000.00 to clean up the Estrada property or a total of P427,300.00" and thatthe check covering said amount should be made payable "to the Order ofEQUITABLE BANKING CORPORATION for the account of CasvilleEnterprises Inc." Defendant Casville also stated that the three (3) enclosed postdated checks were intended as replacement of the checks that were previouslyissued to plaintiff to secure the sum of P427,300.00 that plaintiff would advanceto defendant bank for the account of defendant Casville. All the new checks were postdated November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"),

P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H").On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 ofthe Register of Deeds of Quezon City and TCT No. 50851 of the Register ofDeeds of Rizal covering two pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a representative of defendant Casville, went to see Severino Santos to find outthe status of the credit line being sought by defendant Casville. Santos assuredUmali that the letters of credit would be opened as soon as the requirementsimposed by defendant bank in its letter dated August 11, 1976 had been complied

with by defendant Casville.On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the"order of EQUITABLE BANKING CORPORATION A/C CASVILLEENTERPRISES, INC." and drawn against the first National City Bank (Exhibit"E-l"). The check did not contain the notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance of said notation was reproduced ina covering letter dated August 16,1976 that went with the check (Exhibit"E").<äre||anº•1àw> Both the check and the covering letter were sent todefendant bank through defendant Casals. Plaintiff entrusted the delivery of thecheck and the latter to defendant Casals because it believed that no one, includingdefendant Casals, could encash the same as it was made payable to the defendant bank alone. Besides, defendant Casals was known to the bank as the onefollowing up the application for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendantCasals immediately deposited it with the defendant bank and the bank telleraccepted the same for deposit in defendant Casville's checking account. After



depositing said check, defendant Casville, acting through defendant Casals, thenwithdrew all the amount deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that thethree checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that

were issued by defendant Casville as collateral were all dishonored for having been drawn against a closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latterforeclosed the mortgage executed by defendant Casville on the Estrada propertywhich was sold in a public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters ofcredit knowing that it took time to process the same. However, when the threechecks issued to it by defendant Casville were dishonored, plaintiff becameapprehensive and sent Umali on November 29, 1976, to inquire about the status of

the application for the letters of credit. When plaintiff was informed that no lettersof credit were opened by the defendant bank in its favor and then discovered thatdefendant Casville had in the meanwhile withdrawn the entire amount ofP427,300.00, without paying its obligation to the bank plaintiff filed the instantaction.

While the the instant case was being tried, defendants Casals and Casvilleassigned the garrett skidder to plaintiff which credited in favor of defendants theamount of P450,000.00, as partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not

only did they show lack of interest in disputing plaintiff's claim by not appearingin most of the hearings, but they also assigned to plaintiff the garrett skidderwhich is an action of clear recognition of their liability.

What is left for the Court to determine, therefore, is only the liability of defendant bank to plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto,the pertinent portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporationare ordered to pay plaintiff, jointly and severally, the sum of P427,300.00,representing the amount of plaintiff's check which defendant bank erroneouslycredited to the account of defendant Casville and which defendants Casal and



Casville misappropriated, with 12% interest thereon from April 5, 1977, until thesaid sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney'sfees in the sum of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly,the Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for the value ofthe second check issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OFCASVILLE ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously credited to theCasville account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay NELL the value of the check in the sum of P427,300.00, with legal interest. Explained theTrial Court:

The Court finds that the check in question was payable only to the defendant bankand to no one else. Although the words "A/C OF CASVILLE ENTERPRISESINC. "appear on the face of the check after or under the name of defendant bank,

the payee was still the latter. The addition of said words did not in any way makeCasville Enterprises, Inc. the Payee of the instrument for the words merelyindicated for whose account or in connection with what account the check wasissued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was notnegotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee'sAccount Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976EQUITABLE BANKING CORPORATION.

But said teller should have exercised more prudence in the handling of Id check

because it was not made out in the usual manner. The addition of the words A/COF CASVILLE ENTERPRISES INC." should have placed the teller on guard andhe should have clarified the matter with his superiors. Instead of doing so,however, the teller decided to rely on his own judgment and at the risk of makinga wrong decision, credited the entire amount in the name of defendant Casvillealthough the latter was not the payee named in the check. Such mistake wascrucial and was, without doubt, the proximate cause of plaintiffs defraudation.



xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the

account of Casville Enterprises, Inc. In the light of the other facts, the directivewas for the appellant bank to apply the value of the check as payment for theletter of credit which Casville Enterprises, Inc. had previously applied for in favorof the appellee (Exhibit D-1, p. 5). The issuance of the subject check was precisely to meet the bank's prior requirement of payment before issuing the letterof credit previously applied for by Casville Enterprises in favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:Pay to the EQUITABLE BANKING CORPORATION Order of A/C OFCASVILLE ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law.3 As worded, it could be accepted as deposit to the account of the party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, forCasville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to betakencontra proferentem that is, construed against NELL who caused the ambiguity and couldhave also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code,

provides:Art. 1377. The interpretation of obscure words or stipulations in a contract shallnot favor the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, notnon-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face ofthe subject check of the words "Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was madeonly by the Bank teller in accordance with customary bank practice, and not by NELL as thedrawer of the check, and simply meant that thereafter the same check could no longer be

negotiated.3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause ofits own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to theorder solely of "Equitable Banking Corporation." NELL changed the payee in the subject check,Exhibit "E", however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.,"



upon Casals request. NELL also eliminated both the cash disbursement voucher accompanyingthe check which read:

Payment for marginal deposit and other expense re opening of L/C for account ofCasville Enterprises.

and the memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance onEstrada Property to be used as security for trust receipt for opening L/C of GarrettSkidders in favor of the Edward Ashville J Nell Co.

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who,

obviously, had his own antagonistic interests to promote. Thus it was that Casals did not purposely present the subject check to the Executive Vice-President of the Bank, who was awareof the negotiations regarding the Letter of Credit, and who had rejected the previous check,Exhibit "2," including its three documents because the terms and conditions required by the Bankfor the opening of the Letter of Credit had not yet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for theseller of goods, the price of which is to be covered by a letter of credit, to advance the marginaldeposit for the same.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine tosecure the subject check and had accepted the deposit with it of two (2) titles of real properties ascollateral for said postdated checks. Thus, NELL was erroneously confident that its interestswere sufficiently protected. Never had it suspected that those postdated checks would bedishonored, nor that the subject check would be utilized by Casals for a purpose other than foropening the letter of credit.

In the last analysis, it was NELL's own acts, which put it into the power of Casals and CasvilleEnterprises to perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau,et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai BankingCorporation, 89 Phil. 780 [1951]; Republic of the Philippines vs. Equitable Banking Corporation,

L-15895, January 30,1964, 10 SCRA 8).... As between two innocent persons, one of whom must suffer the consequence ofa breach of trust, the one who made it possible by his act of confidence must bearthe loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for



Reconsideration, are hereby SET ASIDE. The Decision of the then Court of First Instance ofRizal, Branch XI. is modified in that petitioner Equitable Banking Corporation is absolved fromany and all liabilities to the private respondent, Edward J. Nell Company, and the AmendedComplaint against petitioner bank is hereby ordered dismissed. No costs.

SO ORDERED.Yap, C.J., Paras and Sarmiento, J.J., concur.

Padilla, J., took no part.

G.R. No. L-16968 July 31, 1962

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.CONCEPCION MINING COMPANY, INC., ET AL., defendants-appellants.

Ramon B. de los Reyes for plaintiff-appellee. Demetrio Miraflor for defendants-appellants.

LABRADOR,J.:

Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. GustavoVictoriano, presiding, sentencing defendants Concepcion Mining Company and Jose Sarte to pay jointly and severally to the plaintiff the amount of P7,197.26 with interest up to September 29,

1959, plus a daily interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10%of the amount as attorney's fees, and costs of this suit.

The present action was instituted by the plaintiff to recover from the defendants the face of a promissory note the pertinent part of which reads as follows:

Manila, March 12, 1954

NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . .

In case it is necessary to collect this note by or through an attorney-at-law, the makers andindorsers shall pay ten percent (10%) of the amount due on the note as attorney's fees, which inno case shall be less than P100.00 exclusive of all costs and fees allowed by law as stipulated inthe contract of real estate mortgage. Demand and Dishonor Waived . Holder may accept partial payment reserving his right of recourse again each and all indorsers.

(Purpose — mining industry)CONCEPCION MINING COMPANY, INC.,



By:(Sgd.) VICENTE LEGARDAPresident(Sgd.) VICENTE LEGARDA(Sgd.) JOSE S SARTE

"Please issue check to — Mr. Jose S. Sarte"

Upon the filing of the complaint the defendants presented their answer in which they allege thatthe co-maker the promissory note Don Vicente L. Legarda died on February 24, 1946 and hisestate is in the process of judicial determination in Special Proceedings No. 29060 of the Courtof First Instance of Manila. On the basis of this allegation it is prayed, as a special defense, thatthe estate of said deceased Vicente L. Legarda be included as party-defendant. The court in itsdecision ruled that the inclusion of said defendant is unnecessary and immaterial, in accordancewith the provisions of Article 1216 of the Deny Civil Code and section 17 (g) of the Negotiable

Instruments Law.A motion to reconsider this decision was denied and thereupon defendants presented a petitionfor relief, asking that the effects of the judgment be suspended for the reason that the deceasedVicente L. Legarda should have been included as a party-defendant and his liability should bedetermined in pursuance of the provisions of the promissory note. This motion for relief was alsodenied, hence defendant appealed to this Court.

Section 17 (g) of the Negotiable Instruments Law provides as follows:

SEC. 17.Construction where instrument is ambiguous . — Where the language of the

instrument is ambiguous or there are omissions therein, the following rules ofconstruction apply:

x x x x x x x x x

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

And Article 1216 of the Civil Code of the Philippines also provides as follows:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some of

them simultaneously. The demand made against one of them shall not be an obstacle tothose which may subsequently be directed against the others so long as the debt has not been fully collected.

In view of the above quoted provisions, and as the promissory note was executed jointly andseverally by the same parties, namely, Concepcion Mining Company, Inc. and Vicente L.Legarda and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any



bank the following sums with interest thereon at 16% per annum from the datesindicated, to wit:

Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interestfrom January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the

sum of P40,000.00 with interest from November 27, 1980; under the promissorynote (Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981;under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest fromJanuary 29, 1981; under the promissory note (Exhibit "G"), the sum ofP12,703.70 with interest from November 27, 1980; under the promissory note(Exhibit "H"), the sum of P281,875.91 with interest from January 29, 1981; andunder the promissory note (Exhibit "I"), the sum of P200,000.00 with interestfrom January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch ManufacturingCorporation (formerly named Worldwide Garment Manufacturing, Inc.), and

Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank thesum of P367,000.00 with interest of 16% per annum from January 29, 1980 untilfully paid

Under the promissory note (Exhibit "F") defendant corporation Pinch (formerlyWorldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 withinterest at 16% per annum from November 27, 1980 until fully paid.

Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff thesum of P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until fully

paid.All the defendants are also ordered to pay, jointly and severally, the plaintiff thesum of P100,000.00 as and for reasonable attorney's fee and the further sumequivalent to 3% per annum of the respective principal sums from the dates abovestated as penalty charge until fully paid, plus one percent (1%) of the principalsums as service charge.

With costs against the defendants.

SO ORDERED.1

From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court(now the Court Appeals). His contention was that inasmuch as he signed the promissory notes inhis capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not beheld personally liable for such authorized corporate acts that he performed. It is now thecontention of the petitioner Republic Planters Bank that having unconditionally signed the nine(9) promissory notes with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas issolidarity liable with Shozo Yamaguchi on each of the nine notes.



We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and privaterespondent Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, ofWorldwide Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1,

1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized toapply for credit facilities with the petitioner Republic Planters Bank in the forms of exportadvances and letters of credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly worded inthe following manner:

___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,Philippines, the sum of ___________ PESOS(....) Philippine Currency...

On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi

and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity"typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds ofthis note to:

________ Savings Account ______XX Current Account

No. 1372-00257-6

of WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line which ran horizontally

across the pages.In the promissory notes marked as Exhibits C, D and F, the name Worldwide GarmentManufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporatename to Pinch Manufacturing Corporation.

On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of moneycovered among others, by the nine promissory notes with interest thereon, plus attorney's fees

and penalty charges. The complainant was originally brought against Worldwide GarmentManufacturing, Inc.inter alia , but it was later amended to drop Worldwide Manufacturing, Inc.as defendant and substitute Pinch Manufacturing Corporation it its place. Defendants PinchManufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed toappear at the scheduled pre-trial conference despite due notice. Only private respondent FerminCanlas filed an Amended Answer wherein he, denied having issued the promissory notes inquestion since according to him, he was not an officer of Pinch Manufacturing Corporation, butinstead of Worldwide Garment Manufacturing, Inc., and that when he issued said promissory



notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, thetypewritten entries not appearing therein prior to the time he affixed his signature.

In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch

Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes.We hold that private respondent Fermin Canlas is solidarily liable on each of the promissorynotes bearing his signature for the following reasons:

The promissory motes are negotiable instruments and must be governed by the NegotiableInstruments Law.2

Under the Negotiable lnstruments Law, persons who write their names on the face of promissorynotes are makers and are liable as such. 3 By signing the notes, the maker promises to pay to theorder of the payee or any holder4according to the tenor thereof. 5 Based on the above provisions

of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons,they are deemed to be jointly and severally liable thereon. 6 An instrument which begins" with"I" ,We" , or "Either of us" promise to, pay, when signed by two or more persons, makes themsolidarily liable.7 The fact that the singular pronoun is used indicates that the promise isindividual as to each other; meaning that each of the co-signers is deemed to have made anindependent singular promise to pay the notes in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and

certain, without reason for ambiguity, by the presence of the phrase "joint and several" asdescribing the unconditional promise to pay to the order of Republic Planters Bank. A joint andseveral note is one in which the makers bind themselves both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or moreas the object of the suit.8 A joint and several obligation in common law corresponds to a civillaw solidary obligation; that is, one of several debtors bound in such wise that each is liable forthe entire amount, and not merely for his proportionate share.9 By making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlasassumed the solidary liability of a debtor and the payee may choose to enforce the notes againsthim alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity" below thesignatures of the makers in the notes will affect the liability of the makers, We do not find itnecessary to resolve and decide, because it is immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a co-maker ofeach of the notes and his liability is that of a solidary debtor.



Finally, the respondent Court made a grave error in holding that an amendment in a corporation'sArticles of Incorporation effecting a change of corporate name, in this case from WorldwideGarment manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality ofthe original corporation.

The corporation, upon such change in its name, is in no sense a new corporation, nor thesuccessor of the original corporation. It is the same corporation with a different name, and itscharacter is in no respect changed. 10

A change in the corporate name does not make a new corporation, and whether effected byspecial act or under a general law, has no affect on the identity of the corporation, or on its property, rights, orliabilities . 11

The corporation continues, as before, responsible in its new name for all debts or other liabilitieswhich it had previously contracted or incurred. 12

As a general rule, officers or directors under the old corporate name bear no personal liability foracts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch assuch officers acted in their capacity as agent of the old corporation and the change of namemeant only the continuation of the old juridical entity, the corporation bearing the same name isstill bound by the acts of its agents if authorized by the Board. Under the Negotiable InstrumentsLaw, the liability of a person signing as an agent is specifically provided for as follows:

Sec. 20. Liability of a person signing as agent and so forth . Where the instrumentcontains 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 theinstrument if he was duly authorized; but the mere addition of words describing

him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.

Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he isacting in a representative capacity or the name of the third party for whom he might have actedas agent, the agent is personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is notadmissible to avoid the agent's personal liability.13

On the private respondent's contention that the promissory notes were delivered to him in blankfor his signature, we rule otherwise. A careful examination of the notes in question shows thatthey are the stereotype printed form of promissory notes generally used by commercial bankinginstitutions to be signed by their clients in obtaining loans. Such printed notes are incomplete because there are blank spaces to be filled up on material particulars such as payee's name,amount of the loan, rate of interest, date of issue and the maturity date. The terms and conditionsof the loan are printed on the note for the borrower-debtor 's perusal. An incomplete instrumentwhich has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which provides, in so far as relevant to this case, thus:



Sec. 14. Blanks: when may be filled . — Where the instrument is wanting in anymaterial particular, the person in possesion thereof has a prima facie authority tocomplete it by filling up the blanks therein. ... In order, however, that any suchinstrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance

with the authority given and within a reasonable time...Proof that the notes were signed in blank was only the self-serving testimony of privaterespondent Fermin Canlas, as determined by the trial court, so that the trial court ''doubts thedefendant (Canlas) signed in blank the promissory notes". We chose to believe the bank'stestimony that the notes were filled up before they were given to private respondent FerminCanlas and defendant Shozo Yamaguchi for their signatures as joint and several promissors. Forsigning the notes above their typewritten names, they bound themselves as unconditional makers.We take judicial notice of the customary procedure of commercial banks of requiring theirclientele to sign promissory notes prepared by the banks in printed form with blank spacesalready filled up as per agreed terms of the loan, leaving the borrowers-debtors to do nothing but

read the terms and conditions therein printed and to sign as makers or co-makers. When the noteswere given to private respondent Fermin Canlas for his signature, the notes were complete in thesense that the spaces for the material particular had been filled up by the bank as per agreement.The notes were not incomplete instruments; neither were they given to private respondentFermin Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments Law is notapplicable.

The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing theinterest rate on the promissory notes from 16% to 12% per annum does not squarely apply to theinstant petition. In the abovecited case, the rate of 12% was applied to forebearances of money,goods or credit and court judgemets thereon, only in the absence of any stipulation between the parties.

In the case at bar however , it was found by the trial court that the rate of interest is 9% perannum, which interest rate the plaintiff may at any time without notice, raise within the limitsallowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% perannum.

This Court has held that the rates under the Usury Law, as amended by Presidential Decree No.116, are applicable only to interests by way of compensation for the use or forebearance ofmoney. Article 2209 of the Civil Code, on the other hand, governs interests by way ofdamages. 15 This fine distinction was not taken into consideration by the appellate court, whichinstead made a general statement that the interest rate be at 12% per annum.

Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% perannum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling oninterest rates.16



In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter, the decision of the respondent: Court of Appeals absolving privaterespondent Fermin Canlas is REVERSED and SET ASIDE. Judgement is hereby rendereddeclaring private respondent Fermin Canlas jointly and severally liable onall the nine promissory notes with the following sums and at 16% interest per annum from the dates

indicated, to wit:Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest fromJanuary 29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum ofP40,000.00 with interest from November 27, 1980: under the promissory note denominated asExhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissorynote denominated as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981until fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 withinterest from January 29, 1981; under the promissory note marked as Exhibit F, the sum ofP140,000.00 with interest from November 27, 1980 until fully paid; under the promissory notemarked as Exhibit G, the amount of P12,703.70 with interest from November 27, 1980; the

promissory note marked as Exhibit H, the sum of P281,875.91 with interest from January 29,1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest onJanuary 29, 1981.

The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide GarmentManufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of thetrial court, shall be adjudged in accordance with the judgment rendered by the Courta quo .

With respect to attorney's fees, and penalty and service charges, the private respondent FerminCanlas is hereby held jointly and solidarity liable with defendants for the amounts found, by theCourta quo . With costs against private respondent.

SO ORDERED.

Narvasa, C.J., (Chairman), Feliciano, Regalado and Nocon, JJ., concur.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.VERGARA, petitioners,

vs.IFC LEASING AND ACCEPTANCE CORPORATION,respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.



GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions oflaw a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17,1985, as well as its resolution dated October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of loggingactivities for the year 1978 the opening of additional roads, and simultaneous logging operationsalong the route of said roads, in its logging concession area at Baganga, Manay, and Caraga,Davao Oriental. For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company ofManila, through its sister company and marketing arm, Industrial Products Marketing (the"seller-assignor"), a corporation dealing in tractors and other heavy equipment business, offered

to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-Band the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28,1980, p. 44) and to determine the capability of the "Used" tractors being offered, petitioner-corporation requested the seller-assignor to inspect the job site. After conducting said inspection,the seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors whichwere being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment,

petitioner-corporation through petitioners Wee and Vergara, president and vice- president,respectively, agreed to purchase on installment said two (2) units of "Used" Allis CrawlerTractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh."3-A"). At the same time, the deed of sale with chattel mortgage with promissory note wasexecuted (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with promissorynote, the seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights andinterest in the chattel mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics tosupervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke downand after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp.68-69).



On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the factthat the tractors broke down and requested for the seller-assignor's usual prompt attention underthe warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-

assignor sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable (t. s. n., May28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous loggingoperations of petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments as listed in the promissory note would likewise bedelayed until the seller-assignor completely fulfills its obligation under its warranty (t.s.n, May28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale.The proceeds were to be given to the respondent and the excess, if any, to be divided between theseller-assignor and petitioner-corporation which offered to bear one-half (1/2) of thereconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and despiteseveral follow-up calls, the seller-assignor did nothing with regard to the request, until thecomplaint in this case was filed by the respondent against the petitioners, the corporation, Wee,and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos &71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six HundredEighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at therate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine ThousandEighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and askingthe trial court to order the respondent to pay the petitioners damages in an amount at the sounddiscretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and FiveThousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for suchother and further relief as would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and personalcapacities the principal sum of ONE MILLION NINETY THREE THOUSAND



SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) withaccrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDREDEIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruinginterest thereafter at the rate of 12% per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed bythe petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein thefollowing errors:

ITHAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULFAND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS AHOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirmingintoto the decision of the trial court. The pertinent portions of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of theconsidered opinion that aside from the fact that no provision of warranty appearsor is provided in the Deed of Sale of the tractors and even admitting that in acontract of sale unless a contrary intention appears, there is an implied warranty,the defense of breach of warranty, if there is any, as in this case, does not lie in

favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this caseonly between Industrial Products Marketing and Consolidated PlywoodIndustries, Inc. The plaintiff-appellant herein upon application by appellantcorporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx



Holding that breach of warranty if any, is not a defense available to appellantseither to withdraw from the contract and/or demand a proportionate reduction ofthe price with damages in either case (Art. 1567, New Civil Code). We now cometo the issue as to whether the plaintiff-appellee is a holder in due course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financingcorporation engaged in financing and receivable discounting extending creditfacilities to consumers and industrial, commercial or agricultural enterprises bydiscounting or factoring commercial papers or accounts receivable dulyauthorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiableinstrument which was discounted or sold to the IFC Leasing and AcceptanceCorporation for P800,000.00 (Exh. "A") considering the following. it is in writingand signed by the maker; it contains an unconditional promise to pay a certain

sum of money payable at a fixed or determinable future time; it is payable toorder (Sec. 1, NIL); the promissory note was negotiated when it was transferredand delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and regular uponits face before the same was overdue and without notice, that it had been previously dishonored and that the note is in good faith and for value withoutnotice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFCLeasing and Acceptance Corporation held the instrument free from any defect oftitle of prior parties and free from defenses available to prior parties amongthemselves and may enforce payment of the instrument for the full amount thereofagainst all parties liable thereon (Sec. 57, NIL); the appellants engaged that theywould pay the note according to its tenor, and admit the existence of the payeeIPM and its capacity to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note, Weopine that the same is legally and conclusively enforceable against thedefendants-appellants.

WHEREFORE, finding the decision appealed from according to law andevidence, We find the appeal without merit and thus affirm the decision in toto .With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by theIntermediate Appellate Court in its resolution dated October 17, 1985, a copy of which wasreceived by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.



ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLEINSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TOORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MEREASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT ANDTHE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THEPETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT AREAVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTSMARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THELAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR INFAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THETRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANYCOURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN

AFFIXED THEREON OR CANCELLED.The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985,as well as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed on February20, 1986, contended that the petition was filed out of time; that the promissory note is a



negotiable instrument and respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a negotiable instrumentso as to bar completely all the available defenses of the petitioner against the respondent-

assignee.Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time because the petitioners' motion for reconsideration actually raised new issues.It cannot, therefore, be considered pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty becausethe findings of the trial court, adopted by the respondent appellate court, that "14 days afterdelivery, the first tractor broke down and 9 days, thereafter, the second tractor became

inoperable" are sustained by the records. The petitioner was clearly a victim of a warranty nothonored by the maker.

The Civil Code provides that:

ART. 1561.The vendor shall be responsible for warranty against the hiddendefects which the thing sold may have, should they render it unfit for the use forwhich it is intended , or should they diminish its fitness for such use to such anextent that, had the vendee been aware thereof, he would not have acquired it orwould have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if

the vendee is an expert who, by reason of his trade or profession, should haveknown them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to thequality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods are acquired, and it appears that thebuyer relies on the sellers skill or judge judgment (whether he be the grower ormanufacturer or not), there is an implied warranty that the goods shall bereasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade.

xxx xxx xxx



ART. 1566.The vendor is responsible to the vendee for any hidden faults ordefects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendorwas not aware of the hidden faults or defects in the thing sold. (Emphasis

supplied).It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner.This liability as a general rule, extends to the corporation to whom it assigned its rights andinterests unless the assignee is a holder in due course of the promissory note in question,assuming the note is negotiable, in which case the latter's rights are based on the negotiableinstrument and assuming further that the petitioner's defenses may not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor's sister company, AG & P, about the breakdown based onthe seller-assignor's express 90-day warranty, with which the latter complied by sending its

mechanics. However, due to the seller-assignor's delay and its failure to comply with itswarranty, the tractors became totally unserviceable and useless for the purpose for which theywere purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191.The power to rescind obligations is implied in reciprocal ones, incase one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of theobligation with the payment of damages in either case . He may also seekrescission, even after he has chosen fulfillment, if the latter should becomeimpossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566,the vendeemay elect between withdrawing from the contract and demanding a proportionatereduction of the price, with damages in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:



In other words, the party who deems the contract violated may consider itresolved or rescinded, and act accordingly,without previous court action, but it

proceeds at its own risk. For it is only the final judgment of the correspondingcourt that will conclusively and finally settle whether the action taken was or wasnot correct in law. But the law definitely does not require that the contracting

party who believes itself injured must first file suit and wait for adjudgementbefore taking extrajudicial steps to protect its interest. Otherwise, the partyinjured by the other's breach will have to passively sit and watch its damagesaccumulate during the pendency of the suit until the final judgment of rescissionis rendered when the law itself requires that he should exercise due diligence tominimize its own damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a negotiableinstrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to theINDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS &71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of themonth thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order or bearer, " it cannot be denied that the promissorynote in question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These wordsserve as an expression of consent that the instrument may be transferred. Thisconsent is indispensable since a maker assumes greater risk under a negotiableinstrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to orderwhere it is drawn payable to the order of a specified person or to him or his order.. . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable toorder. There must always be a specified person named in the instrument. It means



that the bill or note is to be paid to the person designated in the instrument or toany person to whom he has indorsed and delivered the same.Without the words"or order" or"to the order of, "the instrument is payable only to the persondesignated therein and is therefore non-negotiable. Any subsequent purchaserthereof will not enjoy the advantages of being a holder of a negotiable instrument

but will merely "step into the shoes" of the person designated in the instrumentand will thus be open to all defenses available against the latter." (Campos andCampos, Notes and Selected Cases on Negotiable Instruments Law, ThirdEdition, page 38). (Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable instrument, it followsthat the respondent can never be a holder in due course but remains a mere assignee of the notein question. Thus, the petitioner may raise against the respondent all defenses available to it asagainst the seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor when it was

sued by the respondent-assignee because the petitioner's defenses apply to both or either of eitherof them. Actually, the records show that even the respondent itself admitted to being a mereassignee of the promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned isthe Deed of Sale with Chattel Mortgage with the promissory notewhich is as testified to by the witness was indorsed? (Counsel forPlaintiff nodding his head.) Then we have no further questions oncross,

COURT:

You confirm his manifestation? You are nodding your head? Doyou confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is atransaction between two persons; what is assigned are rights, therights of the mortgagee were assigned to the IFC Leasing &

Acceptance Corporation.COURT:

He puts it in a simple way as one-deed of sale and chattel mortgagewere assigned; . . . you want to make a distinction, one is anassignment of mortgage right and the other one is indorsement of



the promissory note. What counsel for defendants wants is that youstipulate that it is contained in one single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN.,February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is anegotiable instrument, the respondent cannot be a holder in due course for a more significantreason.

The evidence presented in the instant case shows that prior to the sale on installment of thetractors, there was an arrangement between the seller-assignor, Industrial Products Marketing,and the respondent whereby the latter would pay the seller-assignor the entire purchase price andthe seller-assignor, in turn, would assign its rights to the respondent which acquired the right to

collect the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed ofAssignment and the Disclosure of Loan/Credit Transaction shows that said documentsevidencing the sale on installment of the tractors were all executed on the same day by andamong the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, whichis the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to thecondition that the tractors -sold were not defective. The respondent knew that when the tractorsturned out to be defective, it would be subject to the defense of failure of consideration and

cannot recover the purchase price from the petitioners. Even assuming for the sake of argumentthat the promissory note is negotiable, the respondent, which took the same with actualknowledge of the foregoing facts so that its action in taking the instrument amounted to badfaith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be mostinequitous to the unfortunate buyer who is not only saddled with two useless tractors but mustalso face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of anyfact, which would justify its act of taking the promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holderin due course is a holder who has taken the instrument under the followingconditions:



xxx xxx xxx

xxx xxx xxx

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

(d) That the time it was negotiated by him he had no notice of any infirmity in theinstrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56.WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute noticeof an infirmity in the instrument or defect in the title of the person negotiating the

same, the person to whom it is negotiated must have had actual knowledge of theinfirmity or defect, or knowledge of such facts that his action in taking theinstrument amounts to bad faith . (Emphasis supplied)

We subscribe to the view ofCampos and Campos that a financing company is not a holder ingood faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to coverthe purchase price. Many times, in pursuance of a previous arrangement with theseller, a finance company pays the full price and the note is indorsed to it,subrogating it to the right to collect the price from the buyer, with interest. Withthe increasing frequency of installment buying in this country, it is most probablethat the tendency of the courts in the United States to protect the buyer against thefinance company will , the finance company will be subject to the defense of

failure of consideration and cannot recover the purchase price from the buyer. Asagainst the argument that such a rule would seriously affect "a certain mode oftransacting business adopted throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business methods and will impose a greater burden on the financecompanies. We think the buyer-Mr. & Mrs. General Public-shouldhave some protection somewhere along the line. We believe thefinance company is better able to bear the risk of the dealer'sinsolvency than the buyer and in a far better position to protect hisinterests against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which win afford public protection to the general buying public against unscrupulousdealers in personal property. . . . (Mutual Finance Co. v. Martin, 63So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes andSelected Cases on Negotiable Instruments Law, Third Edition, p.128).



FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount ofP300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), CebuBranch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981,

Philfinance, also on 9 February 1981, issued the following documents to petitioner:(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one(1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a termof 32 days at 17.0% per annum ;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale ofDMC PN No. 2731 to petitioner, with the notation that the said security was incustodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, andInsular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.However, the checks were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by privaterespondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK

Makati Stock Exchange Bldg.,Ayala Avenue, Makati,Metro Manila



TO Raul Sesbreño



On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas,Makati Branch, and handed her a demand letter informing the bank that his placement withPhilfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding,

and that he in effect was asking for the physical delivery of the underlying promissory note.Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value ofP2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respectthereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinasallegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas andPhilfinance. Philfinance did not provide the appropriate instructions; Pilipinas never releasedDMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, hadassigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed withPhilfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against PhilfinancePN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of theSecurities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to theSEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21,against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August



1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause ofaction, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decisiondated 21 March 1989, the Court of Appeals denied the appeal and held: 6

Be that as it may, from the evidence on record, if there is anyone that appearsliable for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff andcharging it against DMC PN No. 2731 when its entire face valuewas already obligated or earmarked for set-off or compensation isdifficult to comprehend and may have been motivated with badfaith. Philfinance, therefore, is solely and legally obligated toreturn the investment of plaintiff, together with its earnings, and to

answer all the damages plaintiff has suffered incident thereto.Unfortunately for plaintiff, Philfinance was not impleaded as oneof the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, thesame is hereby affirmedin toto . Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review onCertiorari .

After consideration of the allegations contained and issues raised in the pleadings, the Courtresolved to give due course to the petition and required the parties to file their respectivememoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contendsthat respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold privaterespondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisionsstipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veilof corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering

that the three (3) entities belong to the "Silverio Group of Companies" under the leadership ofMr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationshipof petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas.Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case,neither the trial court nor the Court of Appeals acquired jurisdiction over the person of



Philfinance. It is, consequently, not necessary for present purposes to deal with this thirdrelationship, except to the extent it necessarily impinges upon or intersects the first and secondrelationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rightsvis-a-vis Delta in respect ofthe Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 asthe same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as toconstitute the transferee the holder of the instrument (Sec. 30, Negotiable

Instruments Law). A person not a holder cannot sue on the instrument in his ownname and cannot demand or receive payment (Section 51,id .) 9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Deltaas debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned tohim by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise

transferred by Philfinance as manifested by the word "non-negotiable" stampacross the face of the Note 10 and because maker Delta and payee Philfinanceintended that this Note would be offset against the outstanding obligation ofPhilfinance represented by Philfinance PN No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta'sconsent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitionerwas valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-

A. 11

We consider Delta's arguments seriatim .

Firstly, it is important to bear in mind that thenegotiation of a negotiable instrument must bedistinguished from theassignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statutemay benegotiated either by indorsement thereof coupled with delivery, or by delivery alone



where the negotiable instrument is in bearer form. A negotiable instrument may, however,instead of being negotiated, also beassigned or transferred . The legal consequences ofnegotiation as distinguished from assignment of a negotiable instrument are, of course, different.A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned ortransferred, absent an express prohibition against assignment or transfer written in the face of the

instrument:The words"not negotiable," stamped on the face of the bill of lading,did notdestroy its assignability , but the sole effect was to exempt the bill from thestatutory provisions relative thereto,and a bill , thoughnot negotiable , may betransferred by assignment ; the assignee taking subject to the equities between theoriginal parties. 12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," wasnot at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance fromassigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and whichshould be quoted in full:

Philippine Underwriters Finance Corp.Benavidez St., Makati,Metro Manila.

Attention: Mr. Alfredo O. BanariaSVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by yourPromissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.



As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [ sic ] againstyour PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.



We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibitionupon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturitythereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth anexplicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against anassignee or transferee of the Note who parted with valuable consideration in good faith andwithout notice of such prohibition. It is not disputed that petitioner was such an assignee ortransferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Deltawere doing by their exchange of their promissory notes was this: Delta invested, by making amoney market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, byissuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cashand the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the



validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument thatPhilfinance's sale or assignment of part of its rights to DMC PN No. 2731 constitutedconventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventionalsubrogation, which in the first place is never lightly inferred, 15 must be clearly established by theunequivocal terms of the substituting obligation or by the evident incompatibility of the new and

old obligations on every point. 16

Nothing of the sort is present in the instant case.It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No.2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments andother securities, and more generally, in money market transactions. In Perez v. Court of

Appeals , 17 the Court, speaking through Mme. Justice Herrera, made the following importantstatement:

There is another aspect to this case. What is involved here is a money markettransaction. As defined by Lawrence Smith "the money market is a marketdealing in standardized short-term credit instruments (involving large amounts)

where lenders and borrowers do not deal directly with each other but through amiddle manor a dealer in the open market." It involves "commercial papers"which are instruments "evidencing indebtness of any person or entity. . ., whichare issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of themoney market device in its operation is to match and bring together in a mostimpersonal manner both the "fund users" and the "fund suppliers."The moneymarket is an "impersonal market", free from personal considerations. "Themarket mechanism is intended to provide quick mobility of money and securities."

The impersonal character of the money market device overlooks the individuals

or entities concerned.The issuer of a commercial paper in the money marketnecessarily knows in advance that it would be expenditiously transacted andtransferred to any investor/lender without need of notice to said issuer. In

practice, no notification is given to the borrower or issuer of commercial paper ofthe sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novelinstitution in the Philippine commercial scene. It has been intended to facilitatethe flow and acquisition of capital on an impersonal basis. And as specificallyrequired by Presidential Decree No. 678,the investing public must be givenadequate and effective protection in availing of the credit of a borrower in thecommercial paper market. 18(Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note thatat the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation



had as yet taken place and indeed none could have taken place. The essential requirements ofcompensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) Thateach one of the obligors be bound principally, and that he be at the sametime a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due areconsumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasissupplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. Thiswas explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance,where Delta acknowledged that the relevant promissory notes were "to be offsetted ( sic ) against[Philfinance] PN No. 143-Aupon co-terminal maturity ."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49)days before the "co-terminal maturity" date, that is to say, before any compensation had taken

place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of theassignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors anddebtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitionerwas a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to theextent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to himonly on 14 July 1981,19that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other

words, petitioner notified Delta of his rights as assignee after compensation had taken place byoperation of law because the offsetting instruments had both reached maturity . It is a firmlysettled doctrine that the rights of an assignee are not any greater that the rights of the assignor,since the assignee is merely substituted in the place of the assignor20 and that the assigneeacquires his rights subject to the equities — i.e., the defenses — which the debtor could have setup against the original assignor before notice of the assignment was given to the debtor. Article1285 of the Civil Code provides that:



We turn now to the relationship between petitioner and private respondent Pilipinas. Petitionercontends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issuedDCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of

the above securities fully assigned to you — . 23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liabilityin solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as aconfirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 ofa certain face value, to mature on 6 April 1981 and payable to the order ofPhilfinance;

(2) Pilipinas was , from and after said date of the assignment by Philfinance to petitioner (9 February 1981),holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance ; 24

(3) petitioner may inspect the Note either "personally or by authorizedrepresentative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding

in [petitioner's] favor thirty (30) days after its maturity."Thus, we find nothing written in printers ink on the DCR which could reasonably be read asconverting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,either upon maturity thereof or any other time. We note that both in his complaint and in histestimony before the trial court, petitioner referred merely to the obligation of private respondentPilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner'stheory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed onlyafter the trial court had ruled against him. The solidary liability that petitioner seeks to imputePilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is asolidary liability only when the law or the nature of the obligation requires solidarity," Therecord here exhibits no express assumption of solidary liabilityvis-a-vis petitioner, on the part ofPilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinasnor has petitioner argued that the very nature of the custodianship assumed by private respondentPilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.



We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respectof petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis anddeliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance indesignating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; theobligation of the depository was owed, however, to petitioner Sesbreño as beneficiary of thecustodianship or depository agreement. We do not consider that this is a simple case of astipulation pour autri . The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note withPilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed,the constituting of the depositary or custodianship agreement was equivalent to constructivedelivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market

by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placedsafely beyond their reach, that those instruments will be there available to the placers of fundsshould they have need of them. The depositary in a contract of deposit is obliged to return thesecurity or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in thesaid contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runscounter to the fundamental purpose of that agreement or which was not brought to the notice ofand accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If thereis any party that needs the equalizing protection of the law in money market transactions, it is themembers of the general public whom place their savings in such market for the purpose ofgenerating interest revenues. 27 The custodian bank, if it is not related either in terms of equityownership or management control to the borrower of the funds, or the commercial paper dealer,is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). Thecustodian bank would have every incentive to protect the interest of its client the borrower ordealer as against the placer of funds. The providers of such funds must be safeguarded from theimpact of stipulations privately made between the borrowers or dealers and the custodian banks,and disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the securitydeposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. Wemust again note, in this connection, that on 2 April 1981, DMC PN No. 2731 hadnot yetmatured and therefore, compensation or offsetting against Philfinance PN No. 143-A hadnot yettaken place. Instead of complying with the demand of the petitioner, Pilipinas purported torequire and await the instructions of Philfinance, in obvious contravention of its undertakingunder the DCR to effect physical delivery of the Note upon receipt of "written instructions"from petitioner Sesbreño . The ostensible term written into the DCR (i.e., "should this [DCR]remain outstanding in your favor thirty [30] days after its maturity") was not a defense against



petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such termwas never brought to the attention of petitioner Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose ofthe custodianship or depositary agreement as an integral part of a money market transaction; andthirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above.

Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held byPilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damagessustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner asdepositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from suchconversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie , the damages suffered by petitioner consisted of P304,533.33, the portionof the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the

Note by compensation, plus legal interest of six percent (6%) per annum containing from 14March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursementas Pilipinas may havevis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta andPilipinas should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquiredeither by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seekto implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporateentities, but has been able only to cite the presence of a common Director — Mr. RicardoSilverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neitheralleged nor proved that one or another of the three (3) concededly related companies used theother two (2) as merealter egos or that the corporate affairs of the other two (2) wereadministered and managed for the benefit of one. There is simply not enough evidence of recordto justify disregarding the separate corporate personalities of delta and Pilipinas and to hold themliable for any assumed or undetermined liability of Philfinance to petitioner. 28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals inC.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are herebyMODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is herebyORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal



interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As somodified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

G.R. No. 107898 December 19, 1995

MANUEL LIM and ROSITA LIM, petitioners,vs.COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

BELLOSILLO, J.: MANUEL LIM and ROSITA LIM, spouses, were charged before the Regional Trial Court ofMalabon with estafa on three (3) counts under Art. 315, par. 2 (d), ofThe Revised Penal Code ,docketed as Crim. Cases Nos. 1696-MN to 1698-MN. The Informations substantially allegedthat Manuel and Rosita, conspiring together, purchased goods from Linton CommercialCompany, Inc. (LINTON), and with deceit issued seven Consolidated Bank and Trust Company(SOLIDBANK) checks simultaneously with the delivery as payment therefor. When presented tothe drawee bank for payment the checks were dishonored as payment on the checks had beenstopped and/or for insufficiency of funds to cover the amounts. Despite repeated notice anddemand the Lim spouses failed and refused to pay the checks or the value of the goods.

On the basis of the same checks, Manuel and Rosita Lim were also charged with seven (7)counts of violation of B.P. Blg. 22, otherwise known as the Bouncing Checks Law , docketed asCrim. Cases Nos. 1699-MN to 1705-MN. In substance, the Informations alleged that the Limsissued the checks with knowledge that they did not have sufficient funds or credit with thedrawee bank for payment in full of such checks upon presentment. When presented for paymentwithin ninety (90) days from date thereof the checks were dishonored by the drawee bank forinsufficiency of funds. Despite receipt of notices of such dishonor the Lims failed to pay theamounts of the checks or to make arrangements for full payment within five (5) banking days.

Manuel Lim and Rosita Lim are the president and treasurer, respectively, of Rigi Bilt Industries,

Inc. (RIGI). RIGI had been transacting business with LINTON for years, the latter supplying theformer with steel plates, steel bars, flat bars and purlin sticks which it uses in the fabrication,installation and building of steel structures. As officers of RIGI the Lim spouses were allowed30, 60 and sometimes even up to 90 days credit.

On 27 May 1983 the Lims ordered 100 pieces of mild steel plates worth P51,815.00 fromLINTON which were delivered on the same day at their place of business at 666 7th Avenue, 8th



Street, Kalookan City. To pay LINTON for the delivery the Lims issued SOLIDBANK Check No. 027700 postdated 3 September 1983 in the amount of P51,800.00. 1

On 30 May 1983 the Lims ordered another 65 pieces of mild steel plates worth P63,455.00 fromLINTON which were delivered at their place of business on the same day. They issued as

payment SOLIDBANK Check No. 027699 in the amount of P63,455.00 postdated 20 August1983. 2

The Lim spouses also ordered 2,600 "Z" purlins worth P241,800.00 which were delivered tothem on various dates, to wit: 15 and 22 April 1983; 11, 14, 20, 23, 25, 28 and 30 May 1983;and, 2 and 9 June 1983. To pay for the deliveries, they issued seven SOLIDBANK checks, fiveof which were —

Check No . Date of Issue Amount

027683 16 July 1983 P27,900.00 3

027684 23 July 1983 P27,900.00 4

027719 6 Aug. 1983 P32,550.00 5 027720 13 Aug. 1983 P27,900.00 6 027721 27 Aug. 1983 P37,200.00 7

William Yu Bin, Vice President and Sales Manager of LINTON, testified that when those seven(7) checks were deposited with the Rizal Commercial Banking Corporation they weredishonored for "insufficiency of funds" with the additional notation "payment stopped" stampedthereon. Despite demand Manuel and Rosita refused to make good the checks or pay the value ofthe deliveries.

Salvador Alfonso, signature verifier of SOLIDBANK, Grace Park Branch, Kalookan City, wherethe Lim spouses maintained an account, testified on the following transactions with respect to theseven (7) checks:

CHECK NO . DATE PRESENTED REASON FOR DISHONOR

027683 22 July 1983 Payment Stopped (PS) 8 027684 23 July 1983 PS and Drawn AgainstInsufficient Fund (DAIF) 9 027699 24 Aug. 1983 PS and DAIF 10 027700 5 Sept. 1983 PS and DAIF 11

027719 9 Aug. 1983 DAIF12

027720 16 Aug. 1983 PS and DAIF 13 027721 30 Aug. 1983 PS and DAIF 14

Manuel Lim admitted having issued the seven (7) checks in question to pay for deliveries made by LINTON but denied that his company's account had insufficient funds to cover the amountsof the checks. He presented the bank ledger showing a balance of P65,752.75. Also, he claimed



that he ordered SOLIDBANK to stop payment because the supplies delivered by LINTON werenot in accordance with the specifications in the purchase orders.

Rosita Lim was not presented to testify because her statements would only be corroborative.

On the basis of the evidence thus presented the trial court held both accused guilty of estafa andviolation of B.P. Blg. 22 in its decision dated 25 January 1989. In Crim. Case No. 1696-MN theywere sentenced to an indeterminate penalty of six (6) years and one (1) day of prision mayor asminimum to twelve (12) years and one (1) day ofreclusion temporal as maximum plus one (1)year for each additional P10,000.00 with all the accessory penalties provided for by law, and to pay the costs. They were also ordered to indemnify LINTON in the amount of P241,800.00.Similarly sentences were imposed in Crim. Cases Nos. 1697-MN and 1698-MN except as to theindemnities awarded, which were P63,455.00 and P51,800.00, respectively.

In Crim. Case No. 1699-MN the trial court sentenced both accused to a straight penalty of one(1) year imprisonment with all the accessory penalties provided for by law and to pay the costs.

In addition, they were ordered to indemnify LINTON in the amount of P27,900.00. Again,similar sentences were imposed in Crim. Cases Nos. 1700-MN to 1705-MN except for theindemnities awarded, which were P32,550.00, P27,900.00, P27,900.00, P63,455.00, P51,800.00and P37,200.00 respectively. 15

On appeal, the accused assailed the decision as they imputed error to the trial court as follows:(a) the regional Trial Court of malabon had no jurisdiction over the cases because the offensescharged ere committed outside its territory; (b) they could not be held liable for estafa becausethe seven (7) checks were issued by them several weeks after the deliveries of the goods; and, (c)neither could they be held liable for violating B.P. Blg. 22 as they ordered payment of the checksto be stopped because the goods delivered were not those specified by them, besides they had

sufficient funds to pay the checks.In the decision of 18 September 1992 16 respondent Court of Appeals acquitted accused-appellants of estafa on the ground that indeed the checks were not made in payment of anobligation contracted at the time of their issuance. However it affirmed the finding of the trialcourt that they were guilty of having violated B.P. Blg. 22. 17 On 6 November 1992 their motionfor reconsideration was denied. 18

In the case at bench petitioners maintain that the prosecution failed to prove that any of theessential elements of the crime punishable under B.P. Blg. 22 was committed within the jurisdiction of the Regional Trial Court of Malabon. They claim that what was proved was thatall the elements of the offense were committed in Kalookan City. The checks were issued at their place of business, received by a collector of LINTON, and dishonored by the drawee bank, all inKalookan City. Furthermore, no evidence whatsoever supports the proposition that they knewthat their checks were insufficiently funded. In fact, some of the checks were funded at the timeof presentment but dishonored nonetheless upon their instruction to the bank to stop payment. Infine, considering that the checks were all issued, delivered, and dishonored in Kalookan City, thetrial court of Malabon exceeded its jurisdiction when it tried the case and rendered judgmentthereon.



The petition has no merit. Section 1, par. 1, of B.P. Blg. 22 punishes "[a]ny person who makes ordraws and issues any check to apply on account or for value, knowing at the time of issue that hedoes not have sufficient funds in or credit with the drawee bank for the payment of such check infull upon its presentment, which check is subsequently dishonored by the drawee bank forinsufficiency of funds or credit or would have been dishonored for the same reason had not the

drawer, without any valid reason, ordered the bank to stop payment . . ." The gravamen of theoffense is knowingly issuing a worthless check. 19 Thus, a fundamental element isknowledge onthe part of the drawer of the insufficiency of his funds in 20 or credit with the drawee bank for the payment of such check in full upon presentment. Another essential element issubsequentdishonor of the check by the drawee bank for insufficiency of funds or credit orwould have been dishonored for the same reason had not the drawer, without any valid reason,ordered the bank to stop payment. 21

It is settled that venue in criminal cases is a vital ingredient of jurisdiction. 22 Section 14, par. (a),Rule 110, of the Revised Rules of Court, which has been carried over in Sec. 15, par. (a), Rule110 of the 1985 Rules on Criminal Procedure, specifically provides:

Sec. 14. Place where action is to be instituted . — (a) In all criminal prosecutionsthe action shall be instituted and tried in the court of the municipality or provincewherein the offense was committed or anyone of the essential ingredients thereoftook place.

If all the acts material and essential to the crime and requisite of its consummation occurred inone municipality or territory, the court therein has the sole jurisdiction to try the case. 23 Thereare certain crimes in which some acts material and essential to the crimes and requisite to theirconsummation occur in one municipality or territory and some in another, in which event, thecourt of either has jurisdiction to try the cases, it being understood that the first court taking

cognizance of the case excludes the other. 24

These are the so-called transitory or continuingcrimes under which violation of B.P. Blg. 22 is categorized. In other words, a person chargedwith a transitory crime may be validly tried in any municipality or territory where the offensewas in part committed. 25

In determining proper venue in these cases, the following acts material and essential to eachcrime and requisite to its consummation must be considered: (a) the seven (7) checks were issuedto LINTON at its place of business in Balut, Navotas; b) they were delivered to LINTON at thesame place; (c) they were dishonored in Kalookan City; and, (d) petitioners had knowledge ofthe insufficiency of their funds in SOLIDBANK at the time the checks were issued. Since thereis no dispute that the checks were dishonored in Kalookan City, it is no longer necessary todiscuss where the checks were dishonored.

Under Sec. 191 of the Negotiable Instruments Law the term "issue" means the first delivery ofthe instrument complete in form to a person who takes it as a holder. On the other hand, the term"holder" refers to the payee or indorsee of a bill or note who is in possession of it or the bearerthereof. In People v . Yabut 26 this Court explained —



. . . The place where the bills were written, signed, or dated does not necessarilyfix or determine the place where they were executed. What is of decisiveimportance is the delivery thereof. The delivery of the instrument is the finalact essential to its consummation as an obligation. An undelivered bill or note isinoperative. Until delivery, the contract is revocable. And the issuance as well as

the delivery of the check must be to a person who takes it as aholder , whichmeans "(t)he payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof." Delivery of the check signifies transfer of possession, whetheractual or constructive, from one person to another with intent totransfertitle thereto . . .

Although LINTON sent a collector who received the checks from petitioners at their place of business in Kalookan City, they were actually issued and delivered to LINTON at its place of business in Balut, Navotas. The receipt of the checks by the collector of LINTON is not theissuance and delivery to the payee in contemplation of law. The collector was not the person whocould take the checks as a holder,i.e., as a payee or indorsee thereof, with the intent to transfer

title thereto. Neither could the collector be deemed an agent of LINTON with respect to thechecks because he was a mere employee. As this Court further explained in People v . Yabut 27 —

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut orGeminiano Yabut, Jr., in Caloocan City cannot, contrary to the holding of therespondent Judges, be licitly taken as delivery of the checks to the complainantAlicia P. Andan at Caloocan City to fix the venue there. He did not take deliveryof the checks as holder,i.e., as "payee" or "indorsee." And there appears to be nocontract of agency between Yambao and Andan so as to bind the latter for the actsof the former. Alicia P. Andan declared in that sworn testimony before theinvestigating fiscal that Yambao is but her "messenger " or "part-time employee."There was no special fiduciary relationship that permeated their dealings. For acontract of agency to exist, the consent of both parties is essential. The principalconsents that the other party, the agent, shall act on his behalf, and the agentconsents so as to act. It must exist as a fact . The law makes no presumptionthereof. The person alleging it has the burden of proof to show, not only the factof its existence, but also its nature and extent . . .

Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of insufficient fundsas follows —

The making, drawing and issuance of a check payment of which is refused by the bank because of insufficient funds in or credit with such bank, when presentedwithin ninety (90) days from the date of the check, shall be prima facie evidenceof knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon, or makes arrangement for payment in full by the drawee of such check within five (5) banking days afterreceiving notice that such check has not been paid by the drawee.



The prima facie evidence has not been overcome by petitioners in the cases before us becausethey did not pay LINTON the amounts due on the checks; neither did they make arrangementsfor payment in full by the drawee bank within five (5) banking days after receiving notices thatthe checks had not been paid by the drawee bank. In People v . Grospe 28 citing Peoplev. Manzanilla 29 we held that ". . . knowledge on the part of the maker or drawer of the check of

the insufficiency of his funds is by itself a continuing eventuality, whether the accused be withinone territory or another."

Consequently, venue or jurisdiction lies either in the Regional Trial Court of Kalookan City orMalabon. Moreover, we ruled in the sameGrospe and Manzanilla cases as reiterated in Limv. Rodrigo 30 that venue or jurisdiction is determined by the allegations in the Information. TheInformations in the cases under consideration allege that the offenses were committed in theMunicipality of Navotas which is controlling and sufficient to vest jurisdiction upon theRegional Trial Court of Malabon. 31

We therefore sustain likewise the conviction of petitioners by the Regional Trial Court of

Malabon for violation of B.P. Blg. 22 thus — Accused-appellants claim that they ordered payment of the checks to be stopped because the goods delivered were not those specified by them. They maintain thatthey had sufficient funds to cover the amount of the checks. The records of the bank, however, reveal otherwise. The two letters (Exhs. 21 and 22) dated July 23,and August 10, 1983 which they claim they sent to Linton Commercial,complaining against the quality of the goods delivered by the latter, did not referto the delivery of mild steel plates (6mm x 4 x 8) and "Z" purlins (16 x 7 x 2-1/2mts) for which the checks in question were issued. Rather, the letters referred toB.1. Lally columns (Sch. #20), which were the subject of other purchase orders.

It is true, as accused-appellants point out, that in a case brought by them againstthe complainant in the Regional Trial Court of Kalookan City (Civil Case No. C-10921) the complainant was held liable for actual damages because of thedelivery of goods of inferior quality (Exh. 23). But the supplies involved in thatcase were those of B.I. pipes, while the purchases made by accused-appellants, forwhich they issued the checks in question, were purchases of mild steel plates and"Z" purlins.

Indeed, the only question here is whether accused-appellants maintained fundssufficient to cover the amounts of their checks at the time of issuance and presentment of such checks. Section 3 of B.P. Blg. 22 provides that"notwithstanding receipt of an order to stop payment, the drawee bank shall statein the notice of dishonor that there were no sufficient funds in or credit with such bank for the payment in full of the check, if such be the fact."

The purpose of this provision is precisely to preclude the maker or drawer of aworthless check from ordering the payment of the check to be stopped as a pretextfor the lack of sufficient funds to cover the check.



In the case at bar, the notice of dishonor issued by the drawee bank, indicates notonly that payment of the check was stopped but also that the reason for such orderwas that the maker or drawer did not have sufficient funds with which to coverthe checks. . . . Moreover, the bank ledger of accused-appellants' account inConsolidated Bank shows that at the time the checks were presented for

encashment, the balance of accused-appellants' account was inadequate to coverthe amounts of the checks. 32 . . .

WHEREFORE, the decision of the Court of Appeals dated 18 September 1992 affirming theconviction of petitioners Manuel Lim and Rosita Lim —

In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN); CA-G.R. CR No.07278 (RTC Crim. Case No. 1700-MN); CA-G.R. CR No. 07279 (RTC Crim.Case No. 1701-MN); CA-G.R. CR No. 07280 (RTC Crim. Case No. 1702-MN);CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN); CA-G.R. CA No.07282 (RTC Crim. Case No. 1704-MN); and CA-G.R. CR No. 07283 (RTC Crim

Case No. 1705-MN), the Court finds the accused-appellantsMANUEL LIM and ROSITA LIM guilty beyond reasonable doubt of violation ofBatas Pambansa Bilang 22 and are hereby sentenced to suffer a STRAIGHTPENALTY OF ONE (1) YEAR IMPRISONMENT in each case, together with allthe accessory penalties provided by law, and to pay the costs.

In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN), both accused-appellants are hereby ordered to indemnify the offended party in the sum ofP27,900.00.

In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN) both accused-appellants are hereby ordered to indemnify the offended party in the sum ofP32,550.00.



In CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN) both accused arehereby ordered to indemnify the offended party in the sum of P63,455.00.

In CA-G.R CR No. 07282 (RTC Crim. Case No. 1704-MN) both accused-appellants are hereby ordered to indemnify the offended party in the sum ofP51,800.00, and



In CA-G.R. CR No. 07283 (RTC Crim. Case No. 1705-MN) both accused-appellants are hereby ordered to indemnify the offended party in the sum ofP37,200.0033 —

as well as its resolution of 6 November 1992 denying reconsideration thereof, is

AFFIRMED. Costs against petitioners.SO ORDERED.

Padilla, Davide, Jr., Kapunan and Hermosisima, Jr., JJ., concur.

G.R. No. 111190 June 27, 1995

LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personalcapacity as garnishee, petitioner,vs.

HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.SESBREÑO,respondents.

BELLOSILLO, J.:

RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the defendants to pay P11,000.00 to the plaintiff, privaterespondent herein. The decision having become final and executory, on motion of the latter, the

trial court ordered its execution. This order was questioned by the defendants before the Court ofAppeals. However, on 15 January 1992 a writ of execution was issued.

On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria asCity Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed. The noticedirected petitioner not to disburse, transfer, release or convey to any other person except to thedeputy sheriff concerned the salary checks or other checks, monies, or cash due or belonging toMabanto, Jr., under penalty of law.1 On 10 March 1992 private respondent filed a motion beforethe trial court for examination of the garnishees.

On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial

court, finding no more legal obstacle to act on the motion for examination of the garnishees,directed petitioner on 4 November 1992 to submit his report showing the amount of thegarnished salaries of Mabanto, Jr., within fifteen (15) days from receipt2 taking intoconsideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.

On 24 November 1992 private respondent filed a motion to require petitioner to explain why heshould not be cited in contempt of court for failing to comply with the order of 4 November1992.



On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishmentclaiming that he was not in possession of any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his salary and RATA checks, but that said checks were not yet properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public funds which could not be subject to garnishment.

On 9 March 1993 the trial court denied both motions and ordered petitioner to immediatelycomply with its order of 4 November 1992.3 It opined that the checks of Mabanto, Jr., hadalready been released through petitioner by the Department of Justice duly signed by the officerconcerned. Upon service of the writ of garnishment, petitioner as custodian of the checks wasunder obligation to hold them for the judgment creditor. Petitioner became a virtual party to, or aforced intervenor in, the case and the trial court thereby acquired jurisdiction to bind him to itsorders and processes with a view to the complete satisfaction of the judgment. Additionally,there was no sufficient reason for petitioner to hold the checks because they were no longergovernment funds and presumably delivered to the payee, conformably with the last sentence ofSec. 16 of the Negotiable Instruments Law.

With regard to the contempt charge, the trial court was not morally convinced of petitioner'sguilt. For, while his explanation suffered from procedural infirmities nevertheless he took painsin enlightening the court by sending a written explanation dated 22 July 1992 requesting for thelifting of the notice of garnishment on the ground that the notice should have been sent to theFinance Officer of the Department of Justice. Petitioner insists that he had no authority tosegregate a portion of the salary of Mabanto, Jr. The explanation however was not submitted tothe trial court for action since the stenographic reporter failed to attach it to the record.4

On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it wasnot the duty of the garnishee to inquire or judge for himself whether the issuance of the order of

execution, writ of execution and notice of garnishment was justified. His only duty was to turnover the garnished checks to the trial court which issued the order of execution.5

Petitioner raises the following relevant issues: (1) whether a check still in the hands of the makeror its duly authorized representative is owned by the payee before physical delivery to the latter:and, (2) whether the salary check of a government official or employee funded with public fundscan be subject to garnishment.

Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., becausethey were not yet delivered to him, and that petitioner as garnishee has no legal obligation tohold and deliver them to the trial court to be applied to Mabanto, Jr.'s judgment debt. The thesisof petitioner is that the salary checks still formed part of public funds and therefore beyond thereach of garnishment proceedings.

Petitioner has well argued his case.

Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor owing to him from a stranger to the litigation.6 Emphasis is laid on the phrase"belonging to the judgment debtor" since it is the focal point in resolving the issues raised.



As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives hiscompensation in the form of checks from the Department of Justice through petitioner as CityFiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law,every contract on a negotiable instrument is incomplete and revocable untildelivery of theinstrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the

transfer of the possession of the instrument by the maker or drawerwith intent to transfer title tothe payee and recognize him as the holder thereof. 7

According to the trial court, the checks of Mabanto, Jr., were already released by the Departmentof Justice duly signed by the officer concerned through petitioner and upon service of the writ ofgarnishment by the sheriff petitioner was under obligation to hold them for the judgmentcreditor. It recognized the role of petitioner ascustodian of the checks. At the same time howeverit considered the checks as no longer government funds and presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law which states: "Andwhere the instrument is no longer in the possession of a party whose signature appears thereon, avalid and intentional delivery by him is presumed." Yet, the presumption is not conclusive

because the last portion of the provision says "until the contrary is proved." However this phrasewas deleted by the trial court for no apparent reason. Proof to the contrary is its own finding thatthe checks were in the custody of petitioner. Inasmuch as said checks had not yet been deliveredto Mabanto, Jr., theydid not belong to him and still had the character of public funds. InTirov. Hontanosas 8 we ruled that —

The salary check of a government officer or employee such as a teacher does not belong to him before it is physically delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual delivery of thecheck, the payee has no power over it; he cannot assign it without the consent ofthe Government.

As a necessary consequence of being public fund, the checks may not be garnished to satisfy the judgment.9 The rationale behind this doctrine is obvious consideration of public policy. TheCourt succinctly stated inCommissioner of Public Highways v. San Diego 10 that —

The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from their legitimate andspecific objects, as appropriated by law.

In denying petitioner's motion for reconsideration, the trial court expressed the additionalratiocination that it was not the duty of the garnishee to inquire or judge for himself whether theissuance of the order of execution, the writ of execution, and the notice of garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals . 11 Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is valid." Butthat is invoking only the general rule. We have also established therein the compelling reasons,as exceptions thereto, which were not taken into account by the trial court, e.g., a defect on theface of the writ or actual knowledge by the garnishee of lack of entitlement on the part of thegarnisher. It is worth to note that the ruling referred to the validity of advance execution of



served, the garnishment would be valid, as the checks would then cease to be property of theGovernment and would become property of Mabanto. Upon the expiration of such period andmonth, the sums indicated therein were deemed automatically segregated from the budgetaryallocations for the Department of Justice under the General Appropriations Act.

It must be recalled that the public policy against execution, attachment, or garnishment isdirected to public funds.

Thus, in the case of Director of the Bureau of Commerce and Industry vs . Concepcion 1 wherethe core issue was whether or not the salary due from the Government to a public officer oremployee can, by garnishment, be seized before being paid to him and appropriated to the payment of his judgment debts, this Court held:

A rule, which has never been seriously questioned, is that money in the hands of public officers, although it may be due government employees, is not liable to thecreditors of these employees in the process of garnishment. One reason is, that the

State, by virtue of its sovereignty, may not be sued in its own courts except byexpress authorization by the Legislature, and to subject its officers to garnishmentwould be to permit indirectly what is prohibited directly. Another reason is thatmoneys sought to be garnished, as long as they remain in the hands of thedisbursing officer of the Government, belong to the latter, although the defendantin garnishment may be entitled to a specific portion thereof. And still anotherreason which covers both of the foregoing is that every consideration of public

policy forbids it.

The United States Supreme Court, in the leading case of Buchanan vs. Alexander([1846], 4 How., 19), in speaking of the right of creditors of seamen, by process

of attachment, to divert the public money from its legitimate and appropriateobject, said:

To state such a principle is to refute it. No government cansanction it. At all times it would be found embarrassing, and undersome circumstances it might be fatal to the public service. . . .Solong as money remains in the hands of a disbursing officer, it is asmuch the money of the United States, as if it had not been drawn

from the treasury . Until paid over by the agent of the governmentto the person entitled to it, the fund cannot, in any legal sense, beconsidered a part of his effects ." (See, further, 12 R.C.L., p. 841;Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871],23 La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed[Tenn.], 379). (emphasis supplied)

The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were publicfunds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank(PNB) in the account of the Irrigation Service Unit in Republic vs. Palacio ; 2 (b) the deposits ofthe National Media Production Center inTraders Royal Bank vs. Intermediate Appellate



Court ; 3 and (c) the deposits of the Bureau of Public Highways with the PNB under a currentaccount, which may be expended only for their legitimate object as authorized by thecorresponding legislative appropriation inCommissioner of Public Highways vs. Diego . 4

Neither isTiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular

No. 21, series of 1969, issued by the Director of Public Schools which directed that "henceforthno cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may beauthorized under a power of attorney or other forms of authority to collect the salary of anemployee, except when the persons so designated and authorized is an immediate member of thefamily of the employee concerned, and in all other cases except upon proper authorization of theAssistant Executive Secretary for Legal and Administrative Matters, with the recommendation ofthe Financial Assistant." Private respondent Zafra Financing Enterprise, which had extendedloans to public school teachers in Cebu City and obtained from the latter promissory notes and

special powers of attorney authorizing it to take and collect their salary checks from the DivisionOffice in Cebu City of the Bureau of Public Schools, sought,inter alia , to nullify the Circular. Itis clear that the teachers had in fact assigned to or waived in favor of Zafra their future salaries

which were still public funds. That assignment or waiver was contrary to public policy.I would therefore vote to grant the petition only if the salary and RATA checks garnishedcorresponds to an unexpired payroll period and RATA month, respectively.

Padilla, J., concurs.

Separate Opinions

DAVIDE, JR ., J., concurring and dissenting:This Court may take judicial notice of the fact that checks for salaries of employees of variousDepartments all over the country are prepared in Manila not at the end of the payroll period, butdays before it to ensure that they reach the employees concerned not later than the end of the payroll period. As to the employees in the provinces or cities, the checks are sent through theheads of the corresponding offices of the Departments. Thus, in the case of Prosecutors andAssistant Prosecutors of the Department of Justice, the checks are sent through the ProvincialProsecutors or City Prosecutors, as the case may be, who shall then deliver the checks to the payees.

Involved in the instant case are the salary and RATA checks of then Assistant City FiscalBienvenido Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) ofMandaue City. Conformably with the aforesaid practice, these checks were sent to Mabanto thruthe petitioner who was then the City Fiscal of Mandaue City.

The ponencia failed to indicate the payroll period covered by the salary check and the month towhich the RATA check corresponds.



I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll period and to a month which had already lapsed at the time the notice of garnishment wasserved, the garnishment would be valid, as the checks would then cease to be property of theGovernment and would become property of Mabanto. Upon the expiration of such period andmonth, the sums indicated therein were deemed automatically segregated from the budgetary

allocations for the Department of Justice under the General Appropriations Act.It must be recalled that the public policy against execution, attachment, or garnishment isdirected to public funds.

Thus, in the case of Director of the Bureau of Commerce and Industry vs . Concepcion 1 wherethe core issue was whether or not the salary due from the Government to a public officer oremployee can, by garnishment, be seized before being paid to him and appropriated to the payment of his judgment debts, this Court held:

A rule, which has never been seriously questioned, is that money in the hands of

public officers, although it may be due government employees, is not liable to thecreditors of these employees in the process of garnishment. One reason is, that theState, by virtue of its sovereignty, may not be sued in its own courts except byexpress authorization by the Legislature, and to subject its officers to garnishmentwould be to permit indirectly what is prohibited directly. Another reason is thatmoneys sought to be garnished, as long as they remain in the hands of thedisbursing officer of the Government, belong to the latter, although the defendantin garnishment may be entitled to a specific portion thereof. And still anotherreason which covers both of the foregoing is that every consideration of public

policy forbids it.

The United States Supreme Court, in the leading case of Buchanan vs. Alexander([1846], 4 How., 19), in speaking of the right of creditors of seamen, by processof attachment, to divert the public money from its legitimate and appropriateobject, said:

To state such a principle is to refute it. No government cansanction it. At all times it would be found embarrassing, and undersome circumstances it might be fatal to the public service. . . .Solong as money remains in the hands of a disbursing officer, it is asmuch the money of the United States, as if it had not been drawn

from the treasury . Until paid over by the agent of the governmentto the person entitled to it, the fund cannot, in any legal sense, beconsidered a part of his effects ." (See, further, 12 R.C.L., p. 841;Keene vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson [1871],23 La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed[Tenn.], 379). (emphasis supplied)

The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were publicfunds, to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank



(PNB) in the account of the Irrigation Service Unit in Republic vs. Palacio ; 2 (b) the deposits ofthe National Media Production Center inTraders Royal Bank vs. Intermediate AppellateCourt ; 3 and (c) the deposits of the Bureau of Public Highways with the PNB under a currentaccount, which may be expended only for their legitimate object as authorized by thecorresponding legislative appropriation inCommissioner of Public Highways vs. Diego . 4

Neither isTiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No. 21, series of 1969, issued by the Director of Public Schools which directed that "henceforthno cashier or disbursing officer shall pay to attorneys-in-fact or other persons who may beauthorized under a power of attorney or other forms of authority to collect the salary of anemployee, except when the persons so designated and authorized is an immediate member of thefamily of the employee concerned, and in all other cases except upon proper authorization of theAssistant Executive Secretary for Legal and Administrative Matters, with the recommendation ofthe Financial Assistant." Private respondent Zafra Financing Enterprise, which had extendedloans to public school teachers in Cebu City and obtained from the latter promissory notes and

special powers of attorney authorizing it to take and collect their salary checks from the Division

Office in Cebu City of the Bureau of Public Schools, sought,inter alia , to nullify the Circular. Itis clear that the teachers had in fact assigned to or waived in favor of Zafra their future salarieswhich were still public funds. That assignment or waiver was contrary to public policy.

I would therefore vote to grant the petition only if the salary and RATA checks garnishedcorresponds to an unexpired payroll period and RATA month, respectively.

Padilla, J., concurs.

G.R. No. 85419 March 9, 1993

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

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.

Eduardo G. Castelo for Sima Wei.

Monsod, Tamargo & Associates for Producers Bank.

Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:



On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaintfor 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 theProducers Bank of the Philippines, on two causes of action:

(1) To enforce payment of the balance of P1,032,450.02 on a promissory noteexecuted 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 balancedue on the promissory note.

Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a commonground 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 byCertiorari , assigning the

following as the alleged errors of the Court of Appeals: 1

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

(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13,RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVEDEFENDANTS 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 latterexecuted and delivered to the former a promissory note, engaging to pay the petitioner Bank ororder 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 November18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against ChinaBanking Corporation, bearing respectively the serial numbers 384934, for the amount ofP550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issuedin full settlement of the drawer's account evidenced by the promissory note. These two checkswere not delivered to the petitioner-payee or to any of its authorized representatives. For reasonsnot shown, these checks came into the possession of respondent Lee Kian Huat, who depositedthe checks without the petitioner-payee's indorsement (forged or otherwise) to the account ofrespondent 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 theassurance of respondent Samson Tung, President of Plastic Corporation, that the transaction waslegal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and tocredit 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, petitionerfiled the complaint as aforestated.

The main issue before Us is whether petitioner Bank has a cause of action against any or all ofthe 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 orrights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlativeobligation of the defendant; and (3) an act or omission of the defendant in violation of said legalright. 2

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have longrecognized the business custom of using printed checks where blanks are provided for the date ofissuance, the name of the payee, the amount payable and the drawer's signature. All the drawerhas 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 acheck is, is not only a written evidence of a contract right but is also a species of property. Just asa deed to a piece of land must be delivered in order to convey title to the grantee, so must anegotiable instrument be delivered to the payee in order to evidence its existence as a bindingcontract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part:

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

Thus, the payee of a negotiable instrument acquires no interest with respect thereto until itsdelivery to him. 3Delivery of an instrument means transfer of possession, actual or constructive,

from one person to another. 4

Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended togive effect to the instrument.

The allegations of the petitioner in the original complaint show that the two (2) China Bankchecks, 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 orinterest therein and cannot therefore assert any cause of action, founded on said checks , whetheragainst 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. Onappeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that itscause of action was not based on collecting the sum of money evidenced by the negotiableinstruments stated but onquasi-delict — a claim for damages on the ground of fraudulent actsand evident bad faith of the alternative respondents. This was clearly an attempt by the petitionerBank 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



HI-TRI DEVELOPMENTCORPORATION and LUZ R.BAKUNAWA,

Respondents.

SERENO, andREYES, JJ.

Promulgated:

June 13, 2012x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

SERENO, J. :

Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal

Commercial Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation

(Hi-Tri) and Luz R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November2009 Decision and 27 May 2010 Resolution of the Court of Appeals (CA),[1] which reversed and

set aside the 19 May 2008 Decision and 3 November 2008 Order of the Makati City Regional

Trial Court (RTC) in Civil Case No. 06-244.[2] The case before the RTC involved the Complaint

for Escheat filed by the Republic of the Philippines (Republic) pursuant to Act No. 3936, as

amended by Presidential Decree No. 679 (P.D. 679), against certain deposits, credits, and

unclaimed balances held by the branches of various banks in the Philippines. The trial court

declared the amounts, subject of the special proceedings, escheated to the Republic and orderedthem deposited with the Treasurer of the Philippines (Treasurer) and credited in favor of the

Republic.[3] The assailed RTC judgments included an unclaimed balance in the amount of

₱1,019,514.29, maintained by RCBC in its Ermita Business Center branch.

We quote the narration of facts of the CA[4] as follows:

x x x Luz [R.] Bakunawa and her husband Manuel, now deceased(―Spouses Bakunawa‖) are registered owners of six (6) parcels of land covered byTCT Nos. 324985 and 324986 of the Quezon City Register of Deeds, and TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. Theselots were sequestered by the Presidential Commission on Good Government[(PCGG)].

Sometime in 1990, a certain Teresita Millan (―Millan‖), through herrepresentative, Jerry Montemayor, offered to buy said lots for ―₱6,724,085.71‖,

http://sc.judiciary.gov.ph/jurisprudence/2012/june2012/192413.htm#_ftn1

















with the promise that she will take care of clearing whatever preliminary obstaclesthere may[]be to effect a ―completion of the sale‖. The Spouses Bakunawa gaveto Millan the Owner‘s Copies of said TCTs and in turn, Millan made adown[]payment of ―₱1,019,514.29‖ for the intended purchase. However, for onereason or another, Millan was not able to clear said obstacles. As a result, the

Spouses Bakunawa rescinded the sale and offered to return to Millan herdown[]payment of ₱1,019,514.29. However, Millan refused to accept back the₱1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, throughtheir company, the Hi-Tri Development Corporation (―Hi -Tri‖) took out onOctober 28, 1991, a Manager‘s Check from RCBC -Ermita in the amount of₱1,019,514.29, payable to Millan‘s company Rosmil Realty and DevelopmentCorporation (―Rosmil‖) c/o Teresita Millan and used this as one of their basis fora complaint against Millan and Montemayor which they filed with the RegionalTrial Court of Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719[in 1991], praying that:

1. That the defendants Teresita Mil[l]an and Jerry Montemayormay be ordered to return to plaintiffs spouses the Owners‘Copies of Transfer Certificates of Title Nos. 324985, 324986,103724, 98827, 98828 and 98829;

2. That the defendant Teresita Mil[l]an be correspondinglyordered to receive the amount of One Million NineteenThousand Five Hundred Fourteen Pesos and Twenty NineCentavos (₱1,019,514.29);

3. That the defendants be ordered to pay to plaintiffs spousesmoral damages in the amount of ₱2,000,000.00; and

4. That the defendants be ordered to pay plaintiffs attorney‘sfees in the amount of ₱50,000.00.

Being part and parcel of said complaint, and consistent with their prayer inCivil Case No. Q-91-10719 that ―Teresita Mil[l]an be correspondingly ordered toreceive the amount of One Million Nineteen Thousand Five Hundred FourteenPesos and Twenty Nine [Centavos] (―₱1,019,514.29‖)[‖], the Spouses Bakunawa,upon advice of their counsel, retained custody of RCBC Manager‘s Check No. ER034469 and refrained from canceling or negotiating it.

All throughout the proceedings in Civil Case No. Q-91-10719, especiallyduring negotiations for a possible settlement of the case, Millan was informed thatthe Manager‘s Check was available for her withdrawal, she being the payee.

On January 31, 2003, during the pendency of the abovementioned caseand without the knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBCreported the ―₱1,019,514.29 -credit existing in favor of Rosmil‖ to the Bureau ofTreasury as among its ―unclaimed balances‖ as of January 31, 2003. Allegedly, a



letter from RCBC noting the absence of fund movement andadvising the Corporation that the deposit would be treated asdormant.‖

On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBCreiterating their position as above-quoted.

In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Triand Spouses Bakunawa] that:

―The Bank‘s Ermita BC informed Hi -Tri and/or its principalsregarding the inclusion of Manager‘s Check No. ER034469 in theescheat proceedings docketed as Civil Case No. 06-244, as well asthe status thereof, between 28 January 2008 and 1 February 2008.

xxx xxx xxx

Contrary to what Hi-Tri hopes for, the funds covered by theManager‘s Check No. ER034469 does not form part of the Bank‘sown account. By simple operation of law, the funds covered by themanager‘s check in issue became a deposit/credit susceptible forinclusion in the escheat case initiated by the OSG and/or Bureau ofTreasury.

xxx xxx xxx

Granting arguendo that the Bank was duty-bound to make good thecheck, the Bank‘s obligation to do so prescribed as early as

October 2001.‖ (Emphases, citations, and annotations were omitted.)

The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial

court rendered its assailed Decision declaring the deposits, credits, and unclaimed balances

subject of Civil Case No. 06-244 escheated to the Republic. Among those included in the order

of forfeiture was the amount of ₱1,019,514.29 held by RCBC as allocated fu nds intended for the

payment of the Manager‘s Check issued in favor of Rosmil. The trial court ordered the deposit of

the escheated balances with the Treasurer and credited in favor of the Republic. Respondents



claim that they were not able to participate in the trial, as they were not informed of the ongoing

escheat proceedings.

Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the partial reconsideration of the RTC Decision insofar as it escheated the fund allocated for the

payment of the Manager‘s Check. They asked that they be included as party -defendants or, in the

alternative, allowed to intervene in the case and their motion considered as an answer-in-

intervention. Respondents argued that they had meritorious grounds to ask reconsideration of the

Decision or, alternatively, to seek intervention in the case. They alleged that the deposit was

subject of an ongoing dispute (Civil Case No. Q-91-10719) between them and Rosmil since

1991, and that they were interested parties to that case.[5]

On 3 November 2008, the RTC issued an Order denying the motion of respondents. The

trial court explained that the Republic had proven compliance with the requirements of

publication and notice, which served as notice to all those who may be affected and prejudiced

by the Complaint for Escheat. The RTC also found that the motion failed to point out the

findings and conclusions that were not supported by the law or the evidence presented, as

required by Rule 37 of the Rules of Court. Finally, it ruled that the alternative prayer to intervenewas filed out of time.

The CA Ruli ng

On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008

Decision and 3 November 2008 Order of the RTC. According to the appellate court,[6]

RCBCfailed to prove that the latter had communicated withthe purchaser of the Manager‘s Check (Hi -

Tri and/or Spouses Bakunawa) or the designated payee (Rosmil) immediately before the bank

filed its Sworn Statement on the dormant accounts held therein. The CA ruled that the bank‘s

failure to notify respondents deprived them of an opportunity to intervene in the escheat

proceedings and to present evidence to substantiate their claim, in violation of their right to due











process. Furthermore, the CA pronounced that the Makati City RTC Clerk of Court failed to

issue individual notices directed to all persons claiming interest in the unclaimed balances, as

well as to require them to appear after publication and show cause why the unclaimed balances

should not be deposited with the Treasurer of the Philippines. It explained that the jurisdictionalrequirement of individual notice by personal service was distinct from the requirement of notice

by publication. Consequently, the CA held that the Decision and Order of the RTC were void for

want of jurisdiction.

I ssue

After a perusal of the arguments presented by the parties, we cull the main issues as

follows:

I. Whether the Decision and Order of the RTC were void for failure to send

separate notices to respondents by personal service

II. Whether petitioner had the obligation to notify respondents immediately

before it filed its Sworn Statement with the Treasurer

III. Whether or not the allocated funds may be escheated in favor of the Republic

Discussion

Petitioner bank assails[7] the CA judgments insofar as they ruled that notice by personal

service upon respondents is a jurisdictional requirement in escheat proceedings. Petitioner

contends that respondents were not the owners of the unclaimed balances and were thus not

entitled to notice from the RTC Clerk of Court. It hinges its claim on the theory that the funds

represented by the Manager‘s Check were deemed transferred to the c redit of the payee or holder

upon its issuance.







We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of

processes, to wit:

Sec. 3. Whenever theSolicitor General shall be informed of such unclaimed balances, heshall commence an action or actions in the name of the People ofthe Republic of the Philippines in the Court of First Instance of the province orcity where the bank, building and loan association or trust corporation islocated,in which shall be joined as parties the bank , building and loanassociation or trust corporationand all such creditors or depositors. All or anyof such creditors or depositors or banks, building and loan association or trustcorporations may be included in one action.Service of process in such action oractions shall bemade by delivery of a copy of the complaint and summons tothe president, cashier, or managing officer of each defendant bank , buildingand loan association or trust corporation andby publication of a copy of such

summons in a newspaper of general circulation, either in English, in Filipino, orin a local dialect, published in the locality where the bank, building and loanassociation or trust corporation is situated, if there be any, and in case there isnone, in the City of Manila, at such time as the court may order. Upon the trial,the court must hear all parties who have appeared therein , and if it bedetermined that such unclaimed balances in any defendant bank , buildingand loan association or trust corporationare unclaimed as hereinbefore stated,then the court shall render judgment in favor of the Government of theRepublic of the Philippines, declaring that said unclaimed balances haveescheated to the Government of the Republic of the Philippines and commandingsaid bank, building and loan association or trust corporation to forthwith deposit

the same with the Treasurer of the Philippines to credit of the Government of theRepublic of the Philippines to be used as the National Assembly may direct.

At the time of issuing summons in the action above provided for, theclerk ofcourt shall also issue a notice signed by him, giving the title and number of saidaction, and referring to the complaint therein, anddirected to all persons, otherthan those named as defendants therein, claiming any interest in anyunclaimed balance mentioned in said complaint, and requiring them toappear within sixty days after the publication or first publication, if there areseveral, of such summons,and show cause, if they have any, why theunclaimed balances involved in said action should not be deposited with theTreasurer of the Philippines as in this Act provided andnotifying them that ifthey do not appear and show cause, the Government of the Republic of thePhilippines will apply to the court for the relief demanded in thecomplaint. A copy of said notice shall be attached to, and published with thecopy of, said summons required to be published as above, and at the end of thecopy of such notice so published, there shall be a statement of the date of publication, or first publication, if there are several, of said summons andnotice.Any person interested may appear in said action and become a party



thereto. Upon the publication or the completion of the publication, if there areseveral,of the summons and notice, and the service of the summons on thedefendant banks, building and loan associations or trust corporations,the courtshall have full and complete jurisdiction in the Republic of the Philippinesover the said unclaimed balances and over the persons having or claiming

any interest in the said unclaimed balances, or any of them, and shall havefull and complete jurisdiction to hear and determine the issues herein, andrender the appropriate judgment thereon. (Emphasis supplied.)

Hence, insofar asbanks are concerned, service of processes is made by delivery of a

copy of the complaint and summons upon the president, cashier, or managing officer of the

defendant bank .[8] On the other hand, as todepositor s or other claimants of th e unclaimed

balances , service is made by publication of a copy of the summons in a newspaper of general

circulation in the locality where the institution is situated.[9] A notice about the forthcoming

escheat proceedings must also be issued and published, directing and requiring all persons who

may claim any interest in the unclaimed balances to appear before the court and show cause why

the dormant accounts should not be deposited with the Treasurer.

Accordingly, the CA committed reversible error when it ruled that the issuance of

individual notices upon respondents was a jurisdictional requirement, and that failure to effect

personal service on them rendered the Decision and the Order of the RTC void for want of

jurisdiction. Escheat proceedings are actionsin rem ,[10] whereby an action is brought against the

thing itself instead of the person.[11] Thus, an action may be instituted and carried to judgment

without personal service upon the depositors or other claimants.[12] Jurisdiction is secured by the

power of the court over theres .[13] Consequently, a judgment of escheat is conclusive upon

persons notified by advertisement, as publication is considered a general and constructive notice

to all persons interested.[14]

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds

allocated for the payment of the Manager‘s Check in the escheat proceedings.































Escheat proceedings refer to the judicial process in which the state, by virtue of its

sovereignty, steps in and claims abandoned, left vacant, or unclaimed property, without there

being an interested person having a legal claim thereto.[15] In the case of dormant accounts, the

state inquires into the status, custody, and ownership of the unclaimed balance to determinewhether the inactivity was brought about by the fact of death or absence of or abandonment by

the depositor .[16] If after the proceedings the property remains without a lawful owner interested

to claim it, the property shall be reverted to the state ―to forestall an open invitation to self -

service by the first comers.‖ [17] However, if interested parties have come forward and lain claim

to the property, the courts shall determine whether the credit or deposit should pass to the

claimants or be forfeited in favor of the state.[18] We emphasize that escheat is not a proceeding

to penalize depositors for failing to deposit to or withdraw from their accounts. It is a proceeding

whereby the state compels the surrender to it of unclaimed deposit balances when there is

substantial ground for a belief that they have been abandoned, forgotten, or without an owner .[19]

Act No. 3936, as amended, outlines the proper procedure to be followed by banks and

other similar institutions in filing a sworn statement with the Treasurer concerning dormant

accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month ofJanuary of every odd year,all banks, building and loan associations, and trustcorporationsshall forward to the Treasurer of the Philippines a statement ,under oath, of their respective managing officers,of all credits and deposits heldby them in favor of persons known to be dead, orwho have not made furtherdeposits or withdrawals during the preceding ten years or more, arranged inalphabetical order according to the names of creditors and depositors,and showing:

(a) The names and last known place of residence or post office addresses of the persons in whose favor such unclaimed balances stand;

(b) The amount and the date of the outstanding unclaimed balance and whetherthe same is in money or in security, and if the latter, the nature of the same;






















(c) The date when the person in whose favor the unclaimed balance stands died,if known, or the date when he made his last deposit or withdrawal; and

(d) The interest due on such unclaimed balance, if any, and the amount thereof.

A copy of the above sworn statement shall be posted in a conspicuous placein the premises of the bank , building and loan association, or trust corporationconcerned for at least sixty days from the date of filing thereof:Provided,That immediately before filing the above sworn statement, the bank , buildingand loan association, and trust corporationshall communicate with the person

in whose favor the unclaimed balance stands at his last known place ofresidence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the SolicitorGeneral from time to time the existence of unclaimed balances held by banks, building and loan associations, and trust corporations. (Emphasis supplied.)

As seen in the afore-quoted provision, the law sets a detailed system for notifying

depositors of unclaimed balances. This notification is meant to inform them that their depositcould be escheated if left unclaimed. Accordingly, before filing a sworn statement, banks and

other similar institutions are under obligation to communicate with owners of dormant accounts.

The purpose of this initial notice is for a bank to determine whether an inactive account has

indeed been unclaimed, abandoned, forgotten, or left without an owner. If the depositor simply

does not wish to touch the funds in the meantime, but still asserts ownership and dominion over

the dormant account, then the bank is no longer obligated to include the account in its sworn

statement.[20] It is not the intent of the law to force depositors into unnecessary litigation and

defense of their rights, as the state is only interested in escheating balances that have been

abandoned and left without an owner.

In case the bank complies with the provisions of the law and the unclaimed balances

are eventually escheatedto the Republic, the bank ―shall not thereafter be liable to any person for







the same and any action which may be brought by any person against in any bank xxx for

unclaimed balances so deposited xxx shall be defended by the Solicitor General without cost to

such bank.‖ [21] Otherwise, should it fail to comply with the legally outlined procedure to the

prejudice of the depositor, the bank may not raise the defense provided under Section 5 of Act No. 3936, as amended.

Petitioner asserts[22] that the CA committed a reversible error when it required RCBC to

send prior notices to respondents about the forthcoming escheat proceedings involving the funds

allocated for the payment of the Manager‘s Check. It explains that, pursuant to the law, only

those ―whose favor such unclaimed balances stand‖ are entitled to receive notices. Petitioner

argues that, since the fundsrepresented by the Manager‘s Check were deemed transferred to thecredit of the payee upon issuance of the check, the proper party entitled to the notices was the

payee – Rosmil – and not respondents. Petitioner then contends that, in any event, it is not liable

for failing to send a separate notice to the payee, because it did not have the address of Rosmil.

Petitioner avers that it was not under any obligation to record the address of the payee of a

Manager‘s Check.

In contrast, respondents Hi-Tri and Bakunawa allege[23] that they have a legal interest inthe fund allocated for the payment of the Manager‘s Check. They reason that, since the funds

were part of the Compromise Agreement between respondents and Rosmil in a separate civil

case, the approval and eventual execution of the agreement effectively reverted the fund to the

credit of respondents. Respondents further posit that their ownership of the funds was evidenced

by their continued custody of the Manager‘s Check.

An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank

(drawee),[24] requesting the latter to pay a person named therein (payee) or to the order of the

payee or to the bearer, a named sum of money.[25] The issuance of the check does not of itself

operate as an assignment of any part of the funds in the bank to the credit of the drawer .[26] Here,

the bank becomes liable only after it accepts or certifies the check .[27] After the check is accepted





























for payment, the bank would then debit the amount to be paid to the holder of the check from the

account of the depositor-drawer.

There are checks of a special type calledmanager’s or cashier’s checks . These are billsof exchange drawn by the bank‘s manager or cashier, in the name of the bank, against the bank

itself .[28] Typically, a manager‘s or a cashier‘s check is procured from the bank by allocating a

particular amount of funds to be debited from the depositor‘s account or by directly paying or

depositing to the bank the value of the check to be drawn. Since the bank issues the check in its

name, with itself as the drawee, the check is deemed accepted in advance.[29] Ordinarily, the

check becomes the primary obligation of the issuing bank and constitutes its written promise to

pay upon demand.[30]

Nevertheless, the mere issuance of a manager‘s check does not ipso facto work as an

automatic transfer of funds to the account of the payee. In case the procurer of the manager‘s or

cashier‘s check retains custody of the instrument, does not tender it to the intended payee, or fails

to make an effective delivery, we find the following provision on undelivered instruments under

the Negotiable Instruments Law applicable:[31]

Sec. 16. Delivery; when effectual; when presumed. – Every contract on anegotiable instrument isincomplete and revocable until delivery of theinstrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course,the delivery, in order to be effectual, must be made either by or under theauthority of the party making, drawing, accepting, or indorsing, as the casemay be; and, in such case, the delivery may be shown to have been conditional, orfor a special purpose only, and not for the purpose of transferring the property inthe instrument. But where the instrument is in the hands of a holder in due course,

a valid delivery thereof by all parties prior to him so as to make them liable to himis conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentionaldelivery by him is presumed until the contrary is proved. (Emphasis supplied.)



















Petitioner acknowledges that the Manager‘s Check was procured by respondents, and that

the amount to be paid for the check would be sourced from the deposit account of Hi-

Tri.[32] When Rosmil did not accept the Manager‘s Check offered by respondents, the latter

retained custody of the instrumentinstead of cancelling it. As the Manager‘s Check neither wentto the hands of Rosmil nor was it further negotiated to other persons, the instrument remained

undelivered. Petitioner does not dispute the fact that respondents retained custody of the

instrument.[33]

Since there was no delivery, presentment of the check to the bank for payment did not

occur. An order to debit the account of respondents was never made. In fact, petitioner confirms

that the Manager‘s Check was never negotiated or presented for payment to its Ermita Branch,and that the allocated fund is still held by the bank .[34] As a result, the assigned fund is deemed to

remain part of the account of Hi-Tri, which procured the Manager‘s Check. The doctrine that the

deposit represented by a manager‘s check automatically passes to the payee is inappli cable,

because the instrument – although accepted in advance – remains undelivered. Hence,

respondents should have been informed that the deposit had been left inactive for more than 10

years, and that it may be subjected to escheat proceedings if left unclaimed.

After a careful review of the RTC records, we find that it is no longer necessary to

remand the case for hearing to determine whether the claim of respondents was valid. There was

no contention that they were the procurers of the Manager‘s Check. I t is undisputed that there

was no effective delivery of the check, rendering the instrument incomplete. In addition, we have

already settled that respondents retained ownership of the funds. As it is obvious from their

foregoing actions that they have not abandoned their claim over the fund, we rule that the

allocated deposit, subject of the Manager‘s Check, should be excluded from the escheat proceedings. We reiterate our pronouncement that the objective of escheat proceedings is state

forfeiture of unclaimed balances. We further note that there is nothing in the records that would

show that the OSG appealed the assailed CA judgments. We take this failure to appeal as an

indication of disinterest in pursuing the escheat proceedings in favor of the Republic.















WHEREFORE the Petition isDENIED. The 26 November 2009 Decision and 27 May

2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are herebyAFFIRMED.

SO ORDERED.

G.R. No. 158312 November 14, 2008

JOHN DY, petitioner,vs.PEOPLE OF THE PHILIPPINES and The HONORABLE COURT OFAPPEALS, respondents.

D E C I S I O N QUISUMBING,Acting C.J. :

This appeal prays for the reversal of the Decision1 dated January 23, 2003 and theResolution2 dated May 14, 2003 of the Court of Appeals in CA-G.R. CR No. 23802. Theappellate court affirmed with modification the Decision3 dated November 17, 1999 of theRegional Trial Court (RTC), Branch 82 of Quezon City, which had convicted petitioner John Dyof two counts ofestafa in Criminal Cases Nos. Q-93-46711 and Q-93-46713, and two counts ofviolation of Batas Pambansa Bilang 224 ( B.P. Blg. 22 ) in Criminal Cases Nos. Q-93-46712 andQ-93-46714.

The facts are undisputed:

Since 1990, John Dy has been the distributor of W.L. Food Products (W.L. Foods) in Naga City,Bicol, under the business name Dyna Marketing. Dy would pay W.L. Foods in either cash orcheck upon pick up of stocks of snack foods at the latter's branch or main office in Quezon City.At times, he would entrust the payment to one of his drivers.

On June 24, 1992, Dy's driver went to the branch office of W.L. Foods to pick up stocks of snackfoods. He introduced himself to the checker, Mary Jane D. Maraca, who upon confirming Dy'scredit with the main office, gave him merchandise worth P106,579.60. In return, the driver

handed her a blank Far East Bank and Trust Company (FEBTC) Check with Check No. 553602 postdated July 22, 1992. The check was signed by Dy though it did not indicate a specificamount.

Yet again, on July 1, 1992, the same driver obtained snack foods from Maraca in the amountofP226,794.36 in exchange for a blank FEBTC Check with Check No. 553615 postdated July 31,1992.

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JERRY DY ALDEN (JOHN DY), ordering the latter to pay to the former the total sumof P333,373.96 plus interest thereon at the rate of 12% per annum from September 28,1992 until fully paid; and, (2) the costs of this suit.

SO ORDERED.9

Dy brought the case to the Court of Appeals. In the assailed Decision of January 23, 2003, theappellate court affirmed the RTC. It, however, modified the sentence and deleted the payment ofinterests in this wise:

WHEREFORE, in view of the foregoing, the decision appealed from isherebyAFFIRMED with MODIFICATION. In Criminal Case No. Q-93-46711 (forestafa), the accused-appellant JOHN JERRY DY ALDEN (JOHN DY) is herebysentenced to suffer an indeterminate penalty of imprisonment ranging from six (6) yearsand one (1) day of prision mayor as minimum to twenty (20) years ofreclusiontemporal as maximum plus eight (8) years in excess of [P]22,000.00. InCriminal Case

No. Q-93-46712 (for violation of BP 22), accused-appellant is sentenced to suffer animprisonment of one (1) year and to indemnify W.L. Food Products, represented byRodolfo Borjal, the amount of ONE HUNDRED SIX THOUSAND FIVE HUNDREDSEVENTY NINE PESOS and 60/100 ([P]106,579.60). InCriminal Case No. Q-93-46713 (for estafa), accused-appellant is hereby sentenced to suffer an indeterminate penalty of imprisonment ranging from eight (8) years and one (1) day of prision mayor asminimum to thirty (30) years as maximum. Finally, inCriminal Case No. Q-93-46714(for violation of BP 22), accused-appellant is sentenced to suffer an imprisonment of one(1) year and to indemnify W.L. Food Products, represented by Rodolfo Borjal, theamount of TWO HUNDRED TWENTY SIX THOUSAND SEVEN HUNDRED NINETY FOUR PESOS AND 36/100 ([P]226,794.36).

SO ORDERED.10

Dy moved for reconsideration, but his motion was denied in the Resolution dated May 14, 2003.

Hence, this petition which raises the following issues:

I.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERREDIN FINDING THAT THE PROSECUTION HAS PROVEN THE GUILT OF

ACCUSED BEYOND REASONABLE DOUBT OF ESTAFA ON TWO (2) COUNTS?II.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERREDIN FINDING THAT THE PROSECUTION HAS PROVEN THE GUILT OFACCUSED BEYOND REASONABLE DOUBT OF VIOLATION OF BP 22 ON TWO(2) COUNTS?











III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY ERREDIN AWARDING DAMAGES TO PRIVATE COMPLAINANT, W.L. FOODPRODUCTS, THE TOTAL SUM OF [P]333,373.96?11

Essentially, the issue is whether John Dy is liable forestafa and for violation of B.P. Blg. 22.

First, is petitioner guilty ofestafa?

Mainly, petitioner contends that the checks were ineffectively issued. He stresses that not onlywere the checks blank, but also that W.L. Foods' accountant had no authority to fill the amounts.Dy also claims failure of consideration to negate any obligation to W.L. Foods. Ultimately, petitioner denies having deceived Lim inasmuch as only the two checks bounced since he begandealing with him. He maintains that it was his long established business relationship with Limthat enabled him to obtain the goods, and not the checks issued in payment for them. Petitioner

renounces personal liability on the checks since he was absent when the goods were delivered.The Office of the Solicitor General (OSG), for the State, avers that the delivery of the checks byDy's driver to Maraca, constituted valid issuance. The OSG sustains Ong's prima facie authorityto fill the checks based on the value of goods taken. It observes that nothing in the recordsshowed that W.L. Foods' accountant filled up the checks in violation of Dy's instructions or their previous agreement. Finally, the OSG challenges the present petition as an inappropriate remedyto review the factual findings of the trial court.

We find that the petition is partly meritorious.

Before an accused can be held liable forestafa under Article 315, paragraph 2(d) of the RevisedPenal Code, as amended by Republic Act No. 4885,12 the following elements must concur: (1) postdating or issuance of a check in payment of an obligation contracted at the time the checkwas issued; (2) insufficiency of funds to cover the check; and (3) damage to the payeethereof .13 These elements are present in the instant case.

Section 191 of the Negotiable Instruments Law14 defines "issue" as the first delivery of aninstrument, complete in form, to a person who takes it as a holder. Significantly, delivery is thefinal act essential to the negotiability of an instrument. Delivery denotes physical transfer of theinstrument by the maker or drawer coupled with an intention to convey title to the payee andrecognize him as a holder .15 It means more than handing over to another; it imports such transfer

of the instrument to another as to enable the latter to hold it for himself .16

In this case, even if the checks were given to W.L. Foods in blank, this alone did not make itsissuance invalid. When the checks were delivered to Lim, through his employee, he became aholder with prima facie authority to fill the blanks. This was, in fact, accomplished by Lim'saccountant.

The pertinent provisions of Section 14 of the Negotiable Instruments Law are instructive:

























SEC. 14. Blanks; when may be filled .-Where the instrument is wanting in any material particular,the person in possession thereof has aprima facie authority to complete itby filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiableinstrument operates as a prima facie authority to fill it up as such for any amount. ….

(Emphasis supplied.)Hence, the law merely requires that the instrument be in the possession of a person other than thedrawer or maker. From such possession, together with the fact that the instrument is wanting in amaterial particular, the law presumes agency to fill up the blanks.17 Because of this, the burdenof proving want of authority or that the authority granted was exceeded, is placed on the personquestioning such authority.18 Petitioner failed to fulfill this requirement.

Next, petitioner claims failure of consideration. Nevertheless, in a letter 19 dated November 10,1992, he expressed willingness to pay W.L. Foods, or to replace the dishonored checks. This wasa clear acknowledgment of receipt of the goods, which gave rise to his duty to maintain or

deposit sufficient funds to cover the amount of the checks.More significantly, we are not swayed by petitioner's arguments that the single incident ofdishonor and his absence when the checks were delivered belie fraud. Indeed damage and deceitare essential elements of the offense and must be established with satisfactory proof to warrantconviction.20 Deceit as an element ofestafa is a specie of fraud. It is actual fraud which consistsin any misrepresentation or contrivance where a person deludes another, to his hurt. There isdeceit when one is misled -- by guile, trickery or by other means -- to believe as true what isreally false.21

Prima facie evidence of deceit was established against petitioner with regard to FEBTC Check

No. 553615 which was dishonored for insufficiency of funds. The letter 22

of petitioner's counseldated November 10, 1992 shows beyond reasonable doubt that petitioner received notice of thedishonor of the said check for insufficiency of funds. Petitioner, however, failed to deposit theamounts necessary to cover his check within three banking days from receipt of the notice ofdishonor. Hence, as provided for by law,23 the presence of deceit was sufficiently proven.

Petitioner failed to overcome the said proof of deceit. The trial court found no pre-existingobligation between the parties. The existence of prior transactions between Lim and Dy alone didnot rule out deceit because each transaction was separate, and had a different consideration fromthe others. Even as petitioner was absent when the goods were delivered, by the principle ofagency, delivery of the checks by his driver was deemed as his act as the employer. The evidenceshows that as a matter of course, Dy, or his employee, would pay W.L. Foods in either cash orcheck upon pick up of the stocks of snack foods at the latter's branch or main office. Despitetheir two-year standing business relations prior to the issuance of the subject check, W.L Foodsemployees would not have parted with the stocks were it not for the simultaneous delivery of thecheck issued by petitioner .24 Aside from the existing business relations between petitioner andW.L. Foods, the primary inducement for the latter to part with its stocks of snack foods was theissuance of the check in payment of the value of the said stocks.



































In a number of cases,25 the Court has considered good faith as a defense to a charge ofestafa by postdating a check. This good faith may be manifested by making arrangements for paymentwith the creditor and exerting best efforts to make good the value of the checks. In the instantcase petitioner presented no proof of good faith. Noticeably absent from the records is sufficient proof of sincere and best efforts on the part of petitioner for the payment of the value of the

check that would constitute good faith and negate deceit.With the foregoing circumstances established, we find petitioner guilty ofestafa with regard toFEBTC Check No. 553615 for P226,794.36.

The same, however, does not hold true with respect to FEBTC Check No. 553602for P106,579.60. This check was dishonored for the reason that it was drawn against uncollecteddeposit. Petitioner hadP160,659.39 in his savings deposit account ledger as of July 22, 1992. Wedisagree with the conclusion of the RTC that since the balance included a regional clearing checkworth P55,000 deposited on July 20, 1992, which cleared only five (5) days later, then petitionerhad inadequate funds in this instance. Since petitioner technically and retroactively had sufficient

funds at the time Check No. 553602 was presented for payment then the second element(insufficiency of funds to cover the check) of the crime is absent. Also there is no prima facie evidence of deceit in this instance because the check was not dishonored for lack orinsufficiency of funds. Uncollected deposits are not the same as insufficient funds. The prima

facie presumption of deceit arises only when a check has been dishonored for lack orinsufficiency of funds. Notably, the law speaks of insufficiency of funds but not of uncollecteddeposits. Jurisprudence teaches that criminal laws are strictly construed against the Governmentand liberally in favor of the accused.26 Hence, in the instant case, the law cannot be interpreted orapplied in such a way as to expand its provision to encompass the situation of uncollecteddeposits because it would make the law more onerous on the part of the accused.

Clearly, the estafa punished under Article 315, paragraph 2(d) of the Revised Penal Code iscommitted when a check is dishonored for being drawn against insufficient funds or closedaccount, and not against uncollected deposit.27 Corollarily, the issuer of the check is not liable forestafa if the remaining balance and the uncollected deposit, which was duly collected, couldsatisfy the amount of the check when presented for payment.

Second, did petitioner violate B.P. Blg. 22 ?

Petitioner argues that the blank checks were not valid orders for the bank to pay the holder ofsuch checks. He reiterates lack of knowledge of the insufficiency of funds and reasons that thechecks could not have been issued to apply on account or for value as he did not obtain deliveryof the goods.

The OSG maintains that the guilt of petitioner has been proven beyond reasonable doubt. It cites pieces of evidence that point to Dy's culpability: Maraca's acknowledgment that the checks wereissued to W.L. Foods as consideration for the snacks; Lim's testimony proving that Dy received acopy of the demand letter; the bank manager's confirmation that petitioner had insufficient balance to cover the checks; and Dy's failure to settle his obligation within five (5) days fromdishonor of the checks.















Once again, we find the petition to be meritorious in part.

The elements of the offense penalized under B.P. Blg. 22 are as follows: (1) the making, drawingand issuance of any check to apply to account or for value; (2) the knowledge of the maker,drawer or issuer that at the time of issue he does not have sufficient funds in or credit with the

drawee bank for the payment of such check in full upon its presentment; and (3) subsequentdishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for thesame reason had not the drawer, without any valid cause, ordered the bank to stop payment.28 The case at bar satisfies all these elements.

During the joint pre-trial conference of this case, Dy admitted that he issued the checks, and thatthe signatures appearing on them were his.29 The facts reveal that the checks were issued in blank because of the uncertainty of the volume of products to be retrieved, the discount that can be availed of, and the deduction for bad orders. Nevertheless, we must stress that what the law punishes is simply the issuance of a bouncing check and not the purpose for which it was issuednor the terms and conditions relating thereto.30 If inquiry into the reason for which the checks are

issued, or the terms and conditions of their issuance is required, the public's faith in the stabilityand commercial value of checks as currency substitutes will certainly erode.31

Moreover, the gravamen of the offense under B.P. Blg. 22 is the act of making or issuing aworthless check or a check that is dishonored upon presentment for payment. The act effectivelydeclares the offense to be one ofmalum prohibitum . The only valid query, then, is whether thelaw has been breached,i.e., by the mere act of issuing a bad check, without so much regard as tothe criminal intent of the issuer .32 Indeed, non-fulfillment of the obligation is immaterial. Thus, petitioner's defense of failure of consideration must likewise fall. This is especially so since asstated above, Dy has acknowledged receipt of the goods.

On the second element, petitioner disputes notice of insufficiency of funds on the basis of thecheck being issued in blank. He relies on Dingle v. Intermediate Appellate Cour t 33 and Lao v.Court of Appeal s34 as his authorities. In both actions, however, the accused were co-signatories,who were neither apprised of the particular transactions on which the blank checks were issued,nor given notice of their dishonor. In the latter case, Lao signed the checks without knowledge ofthe insufficiency of funds, knowledge she was not expected or obliged to possess under theorganizational structure of the corporation.35 Lao was only a minor employee who had nothing todo with the issuance, funding and delivery of checks.36 In contrast, petitioner was the proprietorof Dyna Marketing and the sole signatory of the checks who received notice of their dishonor.

Significantly, under Section 237 of B.P. Blg. 22, petitioner was prima facie presumed to know ofthe inadequacy of his funds with the bank when he did not pay the value of the goods or makearrangements for their payment in full within five (5) banking days upon notice. His letter dated November 10, 1992 to Lim fortified such presumption.

Undoubtedly, Dy violated B.P. Blg. 22 for issuing FEBTC Check No. 553615. When said checkwas dishonored for insufficient funds and stop payment order, petitioner did not pay or makearrangements with the bank for its payment in full within five (5) banking days.










































Petitioner should be exonerated, however, for issuing FEBTC Check No. 553602, which wasdishonored for the reason DAUD or drawn against uncollected deposit. When the check was presented for payment, it was dishonored by the bank because the check deposit made by petitioner, which would make petitioner's bank account balance more than enough to cover theface value of the subject check, had not been collected by the bank.

In Tan v. People ,38 this Court acquitted the petitioner therein who was indicted under B.P. Blg.22, upon a check which was dishonored for the reason DAUD, among others. We observed that:

In the second place, even without relying on the credit line, petitioner's bank accountcovered the check she issued because even though there were some deposits that werestill uncollected the deposits became "good" and the bank certified that the check was"funded."39

To be liable under Section 140 of B.P. Blg. 22, the check must be dishonored by the drawee bankfor insufficiency of funds or credit or dishonored for the same reason had not the drawer, without

any valid cause, ordered the bank to stop payment.In the instant case, even though the check which petitioner deposited on July 20, 1992 becamegood only five (5) days later, he was considered by the bank to retroactively havehad P160,659.39 in his account on July 22, 1992. This was more than enough to cover the checkhe issued to respondent in the amount of P106,579.60. Under the circumstance obtaining in thiscase, we find the petitioner had issued the check, with full ability to abide by hiscommitment41 to pay his purchases.

Significantly, like Article 315 of the Revised Penal Code, B.P. Blg. 22 also speaks only ofinsufficiency of funds and does not treat of uncollected deposits. To repeat, we cannot interpret

the law in such a way as to expand its provision to encompass the situation of uncollecteddeposits because it would make the law more onerous on the part of the accused. Again, criminalstatutes are strictly construed against the Government and liberally in favor of the accused.42

As regards petitioner's civil liability, this Court has previously ruled that an accused may be heldcivilly liable where the facts established by the evidence so warrant.43 The rationale for this issimple. The criminal and civil liabilities of an accused are separate and distinct from each other.One is meant to punish the offender while the other is intended to repair the damage suffered bythe aggrieved party. So, for the purpose of indemnifying the latter, the offense need not be proved beyond reasonable doubt but only by preponderance of evidence.44

We therefore sustain the appellate court's award of damages to W.L. Foods in the total amountofP333,373.96, representing the sum of the checks petitioner issued for goods admittedlydelivered to his company.

As to the appropriate penalty, petitioner was charged withestafa under Article 315, paragraph2(d) of the Revised Penal Code, as amended by Presidential Decree No. 81845 (P.D. No. 818).

































Under Section 146 of P.D. No. 818, if the amount of the fraud exceeds P22,000, the penaltyof reclusión temporal is imposed in its maximum period, adding one year for eachadditional P10,000 but the total penalty shall not exceed thirty (30) years, which shall betermedreclusión perpetua .47 R eclusión perpetua is not the prescribed penalty for the offense, butmerely describes the penalty actually imposed on account of the amount of the fraud involved.

WHEREFORE, the petition isPARTLY GRANTED. John Dy is herebyACQUITTED inCriminal Case No. Q-93-46711 forestafa , and Criminal Case No. Q-93-46712 for violation ofB.P. Blg. 22, but he isORDERED to pay W.L. Foods the amount of P106,579.60 for goodsdelivered to his company.

In Criminal Case No. Q-93-46713 forestafa , the Decision of the Court of Appealsis AFFIRMED with MODIFICATION. Petitioner is sentenced to suffer an indeterminate penalty of twelve (12) years of prisión mayor , as minimum, to thirty (30) years ofreclusión perpetua , as maximum.

In Criminal Case No. Q-93-46714 for violation of B.P. Blg. 22, the Decision of the Court ofAppeals isAFFIRMED, and John Dy is hereby sentenced to one (1) year imprisonment andordered to indemnify W.L. Foods in the amount of P226,794.36.

SO ORDERED.

G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,vs.

SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO.,LTD., defendants-appellants.

Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.

Diosdado Garingalao for defendants-appellants.

DE CASTRO, J.:

The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to thisCourt the issue issued therein being one purely of law.

On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok SonsMotors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthlyinstallments, beginning May 18, 1969, with interest at the rate of one percent per month. It isfurther provided that in case on non-payment of any of the installments, the total principal sum










then remaining unpaid shall become due and payable with an additional interest equal to twenty-five percent of the total amount due.

On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sistercompany of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former,

negotiated and indorsed the note in favor of plaintiff Metropol Financing & InvestmentCorporation with the following indorsement:

Pay to the order of Metropol Bacolod Financing & Investment Corporation withrecourse. Notice of Demand; Dishonor; Protest; and Presentment are herebywaived.

SAMBOK MOTORS CO.(BACOLOD)

By:

RODOLFO G. NONILLO Asst. General Manager

The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, soon October 30, 1969 plaintiff formally presented the promissory note for payment to the maker.Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok asindorsee of said note of the fact that the same has been dishonored and demanded payment.

Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of asum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny itsliability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel

has been declared insolvent.During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, onOctober 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant toSection 21, Rule 3 of the Rules of Court.1

On plaintiff's motion for summary judgment, the trial court rendered its decision datedSeptember 12, 1973, the dispositive portion of which reads as follows:

WHEREFORE, judgment is rendered:

(a) Ordering Sambok Motors Company to pay to the plaintiff the sum ofP15,939.00 plus the legal rate of interest from October 30, 1969;

(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% ofP15,939.00 plus interest thereon until fully paid; and

(c) To pay the cost of suit.



Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a loneassignment of error as follows:

The trial court erred in not dismissing the complaint by finding defendantappellant Sambok Motors Company as assignor and a qualified indorsee of the

subject promissory note and in not holding it as only secondarily liable thereof.Appellant Sambok argues that by adding the words "with recourse" in the indorsement of thenote, it becomes a qualified indorser that being a qualified indorser, it does not warrant that ifsaid note is dishonored by the maker on presentment, it will pay the amount to the holder; that itonly warrants the following pursuant to Section 65 of the Negotiable Instruments Law: (a) thatthe instrument is genuine and in all respects what it purports to be; (b) that he has a good title toit; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any factwhich would impair the validity of the instrument or render it valueless.

The appeal is without merit.

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

"Recourse" means resort to a person who is secondarily liable after the default of the person whois primarily liable.3 Appellant, by indorsing the note "with recourse" does not make itself a

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

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

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

SO ORDERED.



Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur.

Aquino, J., is on leave.

G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,vs.THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OFCOMMUNICATIONS, respondents.

L.B. Camins for petitioner.

Angara, Abello, Concepcion, Regals & Cruz for private respondent

CAMPOS, JR., J.:

From the adverse decision* of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right ofthe drawer to recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting the same against the drawer's account.

The records show that on January 23, 1985, petitioner filed a Complaint against the privaterespondent Philippine Bank of Communications (respondent drawee Bank) for recovery of themoney value of eighty-two (82) checks charged against the petitioner's account with the

respondent drawee Bank on the ground that the payees' indorsements were forgeries. TheRegional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered adecision on November 17, 1987 dismissing the complaint as well as the respondent draweeBank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22,1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitionerherein) gross negligence in issuing the checks was the proximate cause of the loss and (2)assuming that the bank was also negligent, the loss must nevertheless be borne by the partywhose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors ofthe respondent Court: 1

ITHE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THERESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER ISPRECLUDED FROM SETTING UP THE FORGERY OR WANT OFAUTHORITY.



amounts in excess of her actual obligations to the various payees as shown in their correspondinginvoices. To mention a few:

. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 infavor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was

only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18,1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67)appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) inCheck No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor ofMarchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) inCheck No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10(Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) inCheck No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart forP11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) inCheck No. 651863 dated August 11, 1984 in favor of Grocer's International FoodCorp. in the amount of P11,335.60 (Exh. A-66), her obligation was only

P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 infavor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligationwas only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 forthe amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), thelatter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh.A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2

Practically, all the checks issued and honored by the respondent drawee bank were crossedchecks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, thelatter also furnished her with a monthly statement of her transactions, attaching thereto all thecancelled checks she had issued and which were debited against her current account. It was onlyafter the lapse of more two (2) years that petitioner found out about the fraudulent manipulationsof her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L.Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, withoutauthority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in theaccounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend ofAlfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in SavingsAccount No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch,and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of thechecks were deposited in Account No. 0443-4, under the name of Benito Lam at the Elcaño branch of the respondent drawee Bank.

About thirty (30) of the payees whose names were specifically written on the checks testifiedthat they did not receive nor even see the subject checks and that the indorsements appearing atthe back of the checks were not theirs.



The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches' operations failed to discover, check or stop the unauthorizedacts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Managerand no other official of the respondent drawee bank, may accept a second indorsement on acheck for deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in

question were initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers ofthe Ongpin and Elcaño branches accepted the deposits made in the Buendia branch and creditedthe accounts of Alfredo Y. Romero and Benito Lam in their respective branches.

On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credither account with the money value of the eighty-two (82) checks totalling P1,208.606.89 forhaving been wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional TrialCourt.

This is not a suit by the party whose signature was forged on a check drawn against the drawee

bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine,who instituted this action to recover from the drawee bank the money value of eighty-two (82)checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. How and by whom the forgeries were committed are not established on therecord, but the respective payees admitted that they did not receive those checks and thereforenever indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretoforereferred to as the NIL). Section 23 of the NIL provides:

When a signature is forged or made without the authority of the person whosesignature it purports to be, it is wholly inoperative, and no right to retain theinstrument, 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 upthe forgery or want of authority.

Under the aforecited provision, forgery is a real or absolute defense by the party whosesignature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Sincehis signature does not appear in the instrument, he cannot be held liable thereon byanyone, not even by a holder in due course. Thus, if a person's signature is forged as amaker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, thedrawee bank cannot charge the amount thereof against the drawer's account because henever gave the bank the order to pay. And said section does not refer only to the forgedsignature of the maker of a promissory note and of the drawer of a check. It covers also aforged indorsement,i.e., the forged signature of the payee or indorsee of a note or check.Since under said provision a forged signature is "wholly inoperative", no one can gaintitle to the instrument through such forged indorsement. Such an indorsement preventsany subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to



the forged indorsement, not one of them can acquire rights against parties prior to theforgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.

As a matter of practical significance, problems arising from forged indorsements of checks maygenerally be broken into two types of cases: (1) where forgery was accomplished by a person notassociated with the drawer — for example a mail robbery; and (2) where the indorsement wasforged by an agent of the drawer. This difference in situations would determine the effect of thedrawer's negligence with respect to forged indorsements. While there is no duty resting on thedepositor to look for forged indorsements on his cancelled checks in contrast to a duty imposedupon him to look for forgeries of his own name, a depositor is under a duty to set up anaccounting system and a business procedure as are reasonably calculated to prevent or renderdifficult the forgery of indorsements, particularly by the depositor's own employees. And if thedrawer (depositor) learns that a check drawn by him has been paid under a forged indorsement,the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or

failure either to discover or to report promptly the fact of such forgery to the drawee, the drawerloses his right against the drawee who has debited his account under a forged indorsement. 6 Inother words, he is precluded from using forgery as a basis for his claim for re-crediting of hisaccount.

In the case at bar, petitioner admitted that the checks were filled up and completed by her trustedemployee, Alicia Galang, and were given to her for her signature. Her signing the checks madethe negotiable instrument complete. Prior to signing the checks, there was no valid contract yet.

Every contract on a negotiable instrument is incomplete and revocable until delivery of theinstrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the

instrument, complete in form, to the payee who takes it as a holder, is called issuance of theinstrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument.

Petitioner completed the checks by signing them as drawer and thereafter authorized heremployee Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Insteadof issuing the checks to the payees as named in the checks, Alicia Galang delivered them to theChief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L.Boon. It was established that the signatures of the payees as first indorsers were forged. Therecord fails to show the identity of the party who made the forged signatures. The checks werethen indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, andwere deposited in the latter's accounts as earlier noted. The second indorsements were allgenuine signatures of the alleged holders. All the eighty-two (82) checks bearing the forgedindorsements of the payees and the genuine second indorsements of Alfredo Y. Romero andBenito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to thecredit of their respective savings accounts in the Buendia, Ongpin and Elcaño branches of thesame bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, werecredited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, anddebited against petitioner's checking account No. 13-00038-1, Caloocan branch.



As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannotcharge the drawer's account for the amount of said check. An exception to this rule is where thedrawer is guilty of such negligence which causes the bank to honor such a check or checks. If acheck is stolen from the payee, it is quite obvious that the drawer cannot possibly discover theforged indorsement by mere examination of his cancelled check. This accounts for the rule that

although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgeryof his own signature, he has no similar duty as to forged indorsements. A different situationarises where the indorsement was forged by an employee or agent of the drawer, or done with theactive participation of the latter. Most of the cases involving forgery by an agent or employeedeal with the payee's indorsement. The drawer and the payee often time shave business relationsof long standing. The continued occurrence of business transactions of the same nature providesthe opportunity for the agent/employee to commit the fraud after having developed familiaritywith the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially truewhen the agent perpetrates a series of forgeries as in the case at bar.

The negligence of a depositor which will prevent recovery of an unauthorized payment is basedon failure of the depositor to act as a prudent businessman would under the circumstances. In thecase at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, anddid not even verify the accuracy of amounts of the checks she signed against the invoicesattached thereto. Furthermore, although she regularly received her bank statements, sheapparently did not carefully examine the same nor the check stubs and the returned checks, anddid not compare them with the same invoices. Otherwise, she could have easily discovered thediscrepancies between the checks and the documents serving as bases for the checks. With suchdiscovery, the subsequent forgeries would not have been accomplished. It was not until twoyears after the bookkeeper commenced her fraudulent scheme that petitioner discovered thateighty-two (82) checks were wrongfully charged to her account, at which she notified therespondent drawee bank.

It is highly improbable that in a period of two years, not one of Petitioner's suppliers complainedof non-payment. Assuming that even one single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequateinvestigation on the matter. Had this been done, the discrepancies would have been discovered,sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence whichresulted in the bank's honoring of the subsequent checks with forged indorsements. On the otherhand, since the record mentions nothing about such a complaint, the possibility exists that thechecks in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies she was actually getting. A depositor may not sitidly by, after knowledge has come to her that her funds seem to be disappearing or that theremay be a leak in her business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and if taken, would result in stopping thecontinuance of the fraudulent scheme. If she fails to take steps, the facts may establish hernegligence, and in that event, she would be estopped from recovering from the bank. 9



One thing is clear from the records — that the petitioner failed to examine her records withreasonable diligence whether before she signed the checks or after receiving her bank statements.Had the petitioner examined her records more carefully, particularly the invoice receipts,cancelled checks, check book stubs, and had she compared the sums written as amounts payablein the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered

that in some checks, the amounts did not tally with those appearing in the sales invoices. Had shenoticed these discrepancies, she should not have signed those checks, and should have conductedan inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant ingoing over her current account by taking careful note of the daily reports made by respondentdrawee Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered thefraud being perpetrated by Alicia Galang, and could have reported the matter to the respondentdrawee Bank. The respondent drawee Bank then could have taken immediate steps to preventfurther commission of such fraud. Thus, petitioner's negligence was the proximate cause of herloss. And since it was her negligence which caused the respondent drawee Bank to honor theforged checks or prevented it from recovering the amount it had already paid on the checks,

petitioner cannot now complain should the bank refuse to recredit her account with the amountof such checks.10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account.

The doctrine in the case ofGreat Eastern Life Insurance Co . vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently takenand the signature of the payee was forged not by an agent or employee of the drawer. The drawerwas not found to be negligent in the handling of its business affairs and the theft of the check bya total stranger was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent, thedrawee was duty-bound to restore to the drawer's account the amount theretofore paid under thecheck with a forged payee's indorsement because the drawee did not pay as ordered by thedrawer.

Petitioner argues that respondent drawee Bank should not have honored the checks because theywere crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not tohonor such a check. It is more of a warning to the holder that the check cannot be presented tothe drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but itcan only be deposited and the drawee bank may only pay to another bank in the payee's orindorser's account.

Petitioner likewise contends that banking rules prohibit the drawee bank from having checkswith more than one indorsement. The banking rule banning acceptance of checks for deposit orcash payment with more than one indorsement unless cleared by some bank officials does notinvalidate the instrument; neither does it invalidate the negotiation or transfer of the said check.In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation byindorsement of only the payee. Under the NIL, the only kind of indorsement which stops the



further negotiation of an instrument is a restrictive indorsement which prohibits the furthernegotiation thereof.

Sec. 36. When indorsement restrictive. — An indorsement is restrictive whicheither

(a) Prohibits further negotiation of the instrument; or

xxx xxx xxx

In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written inexpress words at the back of the instrument, so that any subsequent party may be forewarned thatceases to be negotiable. However, the restrictive indorsee acquires the right to receive paymentand bring any action thereon as any indorser, but he can no longer transfer his rights as suchindorsee where the form of the indorsement does not authorize him to do so.12

Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legallyrefuse to honor a negotiable bill of exchange or a check drawn against it with more than oneindorsement if there is nothing irregular with the bill or check and the drawer has sufficientfunds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee willmake itself liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check.

Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery byreason of her gross negligence. But under Section 196 of the NIL, any case not provided for in

the Act shall be governed by the provisions of existing legislation. Under the laws ofquasi-delict , she cannot point to the negligence of the respondent drawee Bank in the selection andsupervision of its employees as being the cause of the loss because negligence is the proximatecause thereof and under Article 2179 of the Civil Code, she may not be awarded damages.However, under Article 1170 of the same Code the respondent drawee Bank may be held liablefor damages. The article provides —

Those who in the performance of their obligations are guilty of fraud, negligenceor delay, and those who in any manner contravene the tenor thereof, are liable fordamages.

There is no question that there is a contractual relation between petitioner as depositor (obligee)and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract itenters into with any of its depositors. When it violated its internal rules that second endorsementsare not to be accepted without the approval of its branch managers and it did accept the sameupon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation atthe very least, if it were not actually guilty of fraud or negligence.



Furthermore, the fact that the respondent drawee Bank did not discover the irregularity withrespect to the acceptance of checks with second indorsement for deposit even without theapproval of the branch manager despite periodic inspection conducted by a team of auditors fromthe main office constitutes negligence on the part of the bank in carrying out its obligations to itsdepositors. Article 1173 provides —

The fault or negligence of the obligor consists in the omission of that diligencewhich is required by the nature of the obligation and corresponds with thecircumstance of the persons, of the time and of the place. . . .

We hold that banking business is so impressed with public interest where the trust andconfidence of the public in general is of paramount importance such that the appropriate standardof diligence must be a high degree of diligence, if not the utmost diligence. Surely, respondentdrawee Bank cannot claim it exercised such a degree of diligence that is required of it. There isno way We can allow it now to escape liability for such negligence. Its liability as obligor is notmerely vicarious but primary wherein the defense of exercise of due diligence in the selection

and supervision of its employees is of no moment.Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which provides:

Responsibility arising from negligence in the performance of every kind ofobligation is also demandable, but such liability may be regulated by the courtsaccording to the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is being made clear that thedecision to hold the drawee bank liable is based on law and substantial justice and not on mere

equity. And although the case was brought before the court not on breach of contractualobligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate causeof her loss does not preclude her from recovering damages. The reason why the decision dealt ona discussion on proximate cause is due to the error pointed out by petitioner as allegedlycommitted by the respondent court. And in breaches of contract under Article 1173, duediligence on the part of the defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for thereception of evidence to determine the exact amount of loss suffered by the petitioner,considering that she partly benefited from the issuance of the questioned checks since theobligation for which she issued them were apparently extinguished, such that only the excessamount over and above the total of these actual obligations must be considered as loss of whichone half must be paid by respondent drawee bank to herein petitioner.

SO ORDERED.

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



G.R. No. 168274 August 20, 2008

FAR EAST BANK & TRUST COMPANY, petitioner,vs.GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and

Kho Soon Huat, respondent.D E C I S I O N

NACHURA,J. :

For the review of the Court through a Rule 45 petition are the following issuances of the Court ofAppeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision1 which reversed thetrial court's ruling, and (2) the May 26, 2005 Resolution2 which denied the motion forreconsideration of the said CA decision.

The instant controversy traces its roots to a transaction consummated sometime in June 1998,when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold PalaceJewellery Co.'s (Gold Palace's) store at SM-North EDSA several pieces of jewelry valuedat P258,000.00.3 In payment of the same, he offered Foreign Draft No. M-069670 issued by theUnited Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressedto the Land Bank of the Philippines, Manila (LBP), and payable to the respondent companyfor P380,000.00.4

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace,inquired from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch,its neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar

to a manager's check, but advised her not to release the pieces of jewelry until the draft had beencleared.5Following the bank's advice, Yang issued Cash Invoice No. 16096 to the foreigner,asked him to come back, and informed him that the pieces of jewelry would be released when thedraft had already been cleared.7 Respondent Julie Yang-Go, the manager of Gold Palace,consequently deposited the draft in the company's account with the aforementioned Far East branch on June 2, 1998.8

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, thelatter cleared the same9-UOB's account with LBP was debited,10 and Gold Palace's account withFar East was credited with the amount stated in the draft.11

The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchasedgoods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft was more than the value of thegoods purchased, she issued, as his change, Far East Check No.173088112 for P122,000.00.13 This check was later presented for encashment and was, in fact, paid by the said bank .14

http://www.lawphil.net/judjuris/juri2008/aug2008/gr_168274_2008.html#fnt1





















































On June 26, 1998, or after around three weeks, LBP informed Far East that the amount inForeign Draft No. M-069670 had been materially altered from P300.00 to P380,000.00 and thatit was returning the same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate officer ofthe drawer, UOB.15 It is noted at this point that the material alteration was discovered by UOB

after LBP had informed it that its funds were being depleted following the encashment of thesubject draft.16 Intending to debit the amount from respondent's account, Far East subsequentlyrefunded the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20,1998, as the outstanding balance of its account was already inadequate, Far East was able todebit onlyP168,053.36,17 but this was done without a prior written notice to the accountholder .18 Far East only notified by phone the representatives of the respondent company.19

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or thedifference between the amount in the materially altered draft and the amount debited from the

respondent company's account.20

Because Gold Palace did not heed the demand, Far Eastconsequently instituted Civil Case No. 99-296 for sum of money and damages before theRegional Trial Court (RTC), Branch 64 of Makati City.21

In their Answer, respondents specifically denied the material allegations in the complaint andinterposed as a defense that the complaint states no cause of action-the subject foreign drafthaving been cleared and the respondent not being the party who made the material alteration.Respondents further counterclaimed for actual damages, moral and exemplary damages, andattorney's fees considering, among others, that the petitioner had confiscated without basis GoldPalace's balance in its account resulting in operational loss, and had maliciously imputed to thelatter the act of alteration.22

After trial on the merits, the RTC rendered its July 30, 2001 Decision23 in favor of Far East,ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 asattorney's fees.24The trial court ruled that, on the basis of its warranties as a general indorser,Gold Palace was liable to Far East.25

On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling of the trialcourt and awarded respondents' counterclaim. It ruled in the main that Far East failed to undergothe proceedings on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor;thus, Far East could not charge Gold Palace on its secondary liability as an indorser .27 Theappellate court further ruled that the drawee bank had cleared the check, and its remedy should be against the party responsible for the alteration. Considering that, in this case, Gold Palaceneither altered the draft nor knew of the alteration, it could not be held liable.28 The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decisiondated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is herebyREVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED; andappellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold

























































Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legalinterest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages, andPhp50,000.00 for attorney's fees. Costs against appellee Far East Bank and TrustCompany.29

The appellate court, in the further challenged May 26, 2005 Resolution,30

denied petitioner'sMotion for Reconsideration,31 which prompted the petitioner to institute before the Court theinstant Petition for Review on Certiorari.32

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, byaccepting the instrument, engages that he will pay itaccording to the tenor of hisacceptance .33 This provision applies with equal force in case the drawee pays a bill withouthaving previously accepted it. His actual payment of the amount in the check implies not onlyhis assent to the order of the drawer and a recognition of his corresponding obligation to pay the

aforementioned sum, but also, his clear compliance with that obligation.34

Actual payment by thedrawee is greater than his acceptance, which is merely a promise in writing to pay. The paymentof a check includes its acceptance.35

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draftand forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace'saccount the payment it received. Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with thetenor of hisacceptance . Thetenor of the acceptance is determined by the terms of the bill as it is when thedrawee accepts.36 Stated simply, LBP was liable on its payment of the check according to thetenor of the check at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made toa due course holder. We note at this point that Gold Palace was not a participant in the alterationof the draft, was not negligent, and was a holder in due course-it received the draft complete andregular on its face, before it became overdue and without notice of any dishonor, in good faithand for value, and absent any knowledge of any infirmity in the instrument or defect in the titleof the person negotiating it.37 Having relied on the drawee bank's clearance and payment of thedraft and not being negligent (it delivered the purchased jewelry only when the draft was clearedand paid), respondent is amply protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee bank'sclearance and payment of a check or draft.38

This construction and application of the law gives effect to the plain language of the NIL39 and isin line with the sound principle that where one of two innocent parties must suffer a loss, the lawwill leave the loss where it finds it.40 It further reasserts the usefulness, stability and currency ofnegotiable paper without seriously endangering accepted banking practices. Indeed, bankinginstitutions can readily protect themselves against liability on altered instruments either byqualifying their acceptance or certification, or by relying on forgery insurance and special paperwhich will make alterations obvious.41This is not to mention, but we state nevertheless for





















































emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder, toverify with the drawer the matters stated in the instrument. As we have observed in this case,were it not for LBP's communication with the drawer that its account in the Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration would nothave been discovered. What we cannot understand is why LBP, having the most convenient

means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOBMalaysia, the true amount in the draft. It was left with no option but to rely on therepresentations of LBP that the draft was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused incommon law jurisdictions thata drawee bank, having paid to an innocent holder the amount ofan uncertified, altered check in good faith and without negligence which contributed to the loss,could recover from the person to whom payment was made as for money paid bymistake .42 However, given the foregoing discussion, we find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States ofAmerica,if an unaccepted draft is presented to a drawee for payment or acceptance and thedrawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of

presentment, and a previous transferor of the draft, at the time of transfer, warrant to the draweemaking payment or accepting the draft in good faith that the draft has not beenaltered .43 Nonetheless, absent any similar provision in our law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, itscollecting agent, Far East, should not have debited the money paid by the drawee bank from

respondent company's account. When Gold Palace deposited the check with Far East, the latter,under the terms of the deposit and the provisions of the NIL, became an agent of the former forthe collection of the amount in the draft.44 The subsequent payment by the drawee bank and thecollection of the amount by the collecting bank closed the transaction insofar as the drawee andthe holder of the check or his agent are concerned, converted the check into a merevoucher ,45 and, as already discussed, foreclosed the recovery by the drawee of the amount paid.This closure of the transaction is a matter of course; otherwise, uncertainty in commercialtransactions, delay and annoyance will arise if a bank at some future time will call on the payeefor the return of the money paid to him on the check .46

As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to thedrawee bank was already acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank whenit debited respondent's account, because, as already explained, the drawee bank had no right torecover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor whoindorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.47 It did not in any way transfer the title of the instrument to the



























collecting bank. Far East did not own the draft, it merely presented it for payment. Consideringthat the warranties of a general indorser as provided in Section 66 of the NIL are based upon atransfer of title and are available only to holders in due course,48 these warranties did not attachto the indorsement for deposit and collection made by Gold Palace to Far East. Without any legalright to do so, the collecting bank, therefore, could not debit respondent's account for the amount

it refunded to the drawee bank.The foregoing considered, we affirm the ruling of the appellate court to the extent that Far Eastcould not debit the account of Gold Palace, and for doing so, it must return what it haderroneously taken. Far East's remedy under the law is not against Gold Palace but against thedrawee-bank or the person responsible for the alteration. That, however, is another issue whichwe do not find necessary to discuss in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents havenot shown that they are entitled to moral, temperate or compensatory damages.49 Neither was petitioner impelled by malice or bad faith in debiting the account of the respondent company and

in pursuing its cause.50

On the contrary, petitioner was honestly convinced of the propriety of thedebit. We also delete the award of attorney's fees for, in a plethora of cases, we have ruled that itis not a sound public policy to place a premium on the right to litigate. No damages can becharged to those who exercise such precious right in good faith, even if done erroneously.51

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005Resolution of the Court of Appeals in CA-G.R. CV No. 71858 areAFFIRMED WITH THEMODIFICATION that the award of exemplary damages and attorney's fees isDELETED.

SO ORDERED.

G.R. No. 149275 September 27, 2004

VICKY C. TY, petitioner,vs.PEOPLE OF THE PHILIPPINES, respondent.

D E C I S I O N

TINGA, J. :

Petitioner Vicky C. Ty ("Ty") filed the instant Petition for Review under Rule 45, seeking to setaside the Decision 1of the Court of Appeals Eighth Division in CA-G.R. CR No. 20995, promulgated on 31 July 2001. The Decision affirmed with modification the judgment of theRegional Trial Court (RTC) of Manila, Branch 19, dated 21 April 1997, finding her guilty ofseven (7) counts of violation of Batas Pambansa Blg. 222 (B.P. 22), otherwise known as theBouncing Checks Law.



















This case stemmed from the filing of seven (7) Informations for violation of B.P. 22 against Ty before the RTC of Manila. The Informations were docketed as Criminal Cases No. 93-130459 to No. 93-130465. The accusatory portion of the Information in Criminal Case No. 93-130465reads as follows:

That on or about May 30, 1993, in the City of Manila, Philippines, the said accused didthen and there willfully, unlawfully and feloniously make or draw and issue to ManilaDoctors‘ Hospital to apply on account or for value to Editha L. Vecino Check No.Metrobank 487712 dated May 30, 1993 payable to Manila Doctors Hospital in theamount of P30,000.00, said accused well knowing that at the time of issue she did nothave sufficient funds in or credit with the drawee bank for payment of such check in fullupon its presentment, which check when presented for payment within ninety (90) daysfrom the date hereof, was subsequently dishonored by the drawee bank for "AccountClosed" and despite receipt of notice of such dishonor, said accused failed to pay saidManila Doctors Hospital the amount of the check or to make arrangement for full payment of the same within five (5) banking days after receiving said notice.

Contrary to law.3

The other Informations are similarly worded except for the number of the checks and dates ofissue. The data are hereunder itemized as follows:

Cri min al Case No. Check No. Postdated Amount

93-130459 487710 30 March 1993 P30,000.00

93-130460 487711 30 April 1993 P30,000.00

93-130461 487709 01 March 1993 P30,000.0093-130462 487707 30 December 1992 P30,000.00

93-130463 487706 30 November 1992 P30,000.00

93-130464 487708 30 January 1993 P30,000.00

93-130465 487712 30 May 1993 P30,000.00

The cases were consolidated and jointly tried. At her arraignment, Ty pleaded not guilty.5

The evidence for the prosecution shows that Ty‘s mother Chua Lao So Un was confined at theManila Doctors‘ Hospital (hospital) from 30 October 1990 until 4 June 1992. Being the patient‘sdaughter, Ty signed the "Acknowledgment of Responsibility for Payment" in the Contract ofAdmission dated 30 October 1990.6 As of 4 June 1992, the Statement of Account7 shows thetotal liability of the mother in the amount of P657,182.40. Ty‘s sister, Judy Chua, was al soconfined at the hospital from 13 May 1991 until 2 May 1992, incurring hospital bills in theamount of P418,410.55.8 The total hospital bills of the two patients amounted to P1,075,592.95.On 5 June 1992, Ty executed a promissory note wherein she assumed payment of the obligation



in installments.9 To assure payment of the obligation, she drew several postdated checks againstMetrobank payable to the hospital. The seven (7) checks, each covering the amountof P30,000.00, were all deposited on their due dates. But they were all dishonored by the drawee bank and returned unpaid to the hospital due to insufficiency of funds, with the "AccountClosed" advice. Soon thereafter, the complainant hospital sent demand letters to Ty by registered

mail. As the demand letters were not heeded, complainant filed the seven(7) Informations subject of the instant case.10

For her defense, Ty claimed that she issued the checks because of "an uncontrollable fear of agreater injury." She averred that she was forced to issue the checks to obtain release for hermother whom the hospital inhumanely and harshly treated and would not discharge unless thehospital bills are paid. She alleged that her mother was deprived of room facilities, such as theair-condition unit, refrigerator and television set, and subject to inconveniences such as thecutting off of the telephone line, late delivery of her mother‘s food and refusal to change thelatter‘s gown and bedsheets. She also bewailed the hospital‘s suspending medical treatment ofher mother. The "debasing treatment," she pointed out, so affected her mother‘s mental,

psychological and physical health that the latter contemplated suicide if she would not bedischarged from the hospital. Fearing the worst for her mother, and to comply with the demandsof the hospital, Ty was compelled to sign a promissory note, open an account with Metrobankand issue the checks to effect her mother‘s immediate discharge. 11

Giving full faith and credence to the evidence offered by the prosecution, the trial court foundthat Ty issued the checks subject of the case in payment of the hospital bills of her mother andrejected the theory of the defense.12Thus, on 21 April 1997, the trial court rendereda Decision finding Ty guilty of seven (7) counts of violation of B.P. 22 and sentencing her to a prison term. The dispositive part of the Decision reads:

CONSEQUENTLY, the accused Vicky C. Ty, for her acts of issuing seven (7) checks in payment of a valid obligation, which turned unfounded on their respective dates ofmaturity, is found guilty of seven (7) counts of violations of Batas Pambansa Blg. 22, andis hereby sentenced to suffer the penalty of imprisonment of SIX MONTHS per count ora total of forty-two (42) months.

SO ORDERED.13

Ty interposed an appeal from the Decision of the trial court. Before the Court of Appeals, Tyreiterated her defense that she issued the checks "under the impulse of an uncontrollable fear of agreater injury or in avoidance of a greater evil or injury." She also argued that the trial courterred in finding her guilty when evidence showed there was absence of valuable considerationfor the issuance of the checks and the payee had knowledge of the insufficiency of funds in theaccount. She protested that the trial court should not have applied the law mechanically, withoutdue regard to the principles of justice and equity.14

In its Decision dated 31 July 2001, the appellate court affirmed the judgment of the trial courtwith modification. It set aside the penalty of imprisonment and instead sentenced Ty "to pay a



fine of sixty thousand pesos (P60,000.00) equivalent to double the amount of the check, in eachcase."15

In its assailed Decision , the Court of Appeals rejected Ty‘s defenses of involuntariness in theissuance of the checksand the hospital‘s knowledge of her checking account‘s lack of funds. It

held that B.P. 22 makes the mere act of issuing a worthless check punishable as a special offense,it being amalum prohibitum . What the law punishes is the issuance of a bouncing check and notthe purpose for which it was issued nor the terms and conditions relating to its issuance.16

Neither was the Court of Appeals convinced that there was no valuable consideration for theissuance of the checks as they were issued in payment of the hospital bills of Ty‘s mother. 17

In sentencing Ty to pay a fine instead of a prison term, the appellate court applied the caseof Vaca v. Court of Appeals 18 wherein this Court declared that in determining the penaltyimposed for violation of B.P. 22, the philosophy underlying the Indeterminate Sentence Lawshould be observed,i.e. , redeeming valuable human material and preventing unnecessary

deprivation of personal liberty and economic usefulness, with due regard to the protection of thesocial order.19

Petitioner now comes to this Court basically alleging the same issues raised before the Court ofAppeals. More specifically, she ascribed errors to the appellate court based on the followinggrounds:

A. THERE IS CLEAR AND CONVINCING EVIDENCE THAT PETITIONER WASFORCED TO OR COMPELLED IN THE OPENING OF THE ACCOUNT AND THEISSUANCE OF THE SUBJECT CHECKS.

B. THE CHECKS WERE ISSUED UNDER THE IMPULSE OFAN UNCONTROLLABLE FEAR OF A GREATER INJURY OR IN AVOIDANCE OF AGREATER EVIL OR INJURY .

C. THE EVIDENCE ON RECORD PATENTLY SHOW[S] ABSENCE OF VALUABLECONSIDERATION IN THE ISSUANCE OF THE SUBJECT CHECKS.

D. IT IS AN UNDISPUTED FACT THAT THE PAYEE OFTHE CHECKS WAS FULLY AWARE OF THE LACK OF FUNDS IN THE ACCOUNT.

E. THE HONORABLE COURT OF APPEALS, AS WELL AS THE HONORABLE

TRIAL COURT [,] SHOULD NOT HAVE APPLIED CRIMINAL LAWMECHANICALLY, WITHOUT DUE REGARD TO THE PRINCIPLES OF JUSTICEAND EQUITY.

In its Memorandum ,20 the Office of the Solicitor General (OSG), citing jurisprudence, contendsthat a check issued as an evidence of debt, though not intended to be presented for payment, hasthe same effect as an ordinary check; hence, it falls within the ambit of B.P. 22. And when acheck is presented for payment, the drawee bank will generally accept the same, regardless of



whether it was issued in payment of an obligation or merely to guarantee said obligation. Whatthe law punishes is the issuance of a bouncing check, not the purpose for which it was issued northe terms and conditions relating to its issuance. The mere act of issuing a worthless checkis malum prohibitum .21

We find the petition to be without merit and accordingly sustain Ty‘s conviction. Well-settled is the rule that the factual findings and conclusions of the trial court and the Court ofAppeals are entitled to great weight and respect, and will not be disturbed on appeal in theabsence of any clear showing that the trial court overlooked certain facts or circumstances whichwould substantially affect the disposition of the case.22 Jurisdiction of this Court over caseselevated from the Court of Appeals is limited to reviewing or revising errors of law ascribed tothe Court of Appeals whose factual findings are conclusive, and carry even more weight whensaid court affirms the findings of the trial court, absent any showing that the findings are totallydevoid of support in the record or that they are so glaringly erroneous as to constitute seriousabuse of discretion.23

In the instant case, the Court discerns no compelling reason to reverse the factual findingsarrived at by the trial court and affirmed by the Court of Appeals.

Ty does not deny having issued the seven (7) checks subject of this case. She, however, claimsthat the issuance of the checks was under the impulse of an uncontrollable fear of a greater injuryor in avoidance of a greater evil or injury. She would also have the Court believe that there wasno valuable consideration in the issuance of the checks.

However, except for the defense‘s claim of uncontrollable fear of a greater injury or avoidance ofa greater evil or injury, all the grounds raised involve factual issues which are best determined by

the trial court. And, as previously intimated, the trial court had in fact discarded the theory of thedefense and rendered judgment accordingly.

Moreover, these arguments are a mere rehash of arguments unsuccessfully raised before the trialcourt and the Court of Appeals. They likewise put to issue factual questions already passed upontwice below, rather than questions of law appropriate for review under a Rule 45 petition.

The only question of law raised--whether the defense of uncontrollable fear is tenable to warranther exemption from criminal liability--has to be resolved in the negative. For this exemptingcircumstance to be invoked successfully, the following requisites must concur: (1) existence ofan uncontrollable fear; (2) the fear must be real and imminent; and (3) the fear of an injury isgreater than or at least equal to that committed.24

It must appear that the threat that caused the uncontrollable fear is of such gravity andimminence that the ordinary man would have succumbed to it.25 It should be based on a real,imminent or reasonable fear for one‘s life or limb. 26 A mere threat of a future injury is notenough. It should not be speculative, fanciful, or remote.27 A person invoking uncontrollable fearmust show therefore that the compulsion was such that it reduced him to a mere instrument



acting not only without will but against his will as well.28 It must be of such character as to leaveno opportunity to the accused for escape.29

In this case, far from it, the fear, if any, harbored by Ty was not real and imminent. Ty claimsthat she was compelled to issue the checks--a condition the hospital allegedly demanded of her

before her mother could be discharged--for fear that her mother‘s health might deteriorate furtherdue to the inhumane treatment of the hospital or worse, her mother might commit suicide. This isspeculative fear; it is not the uncontrollable fear contemplated by law.

To begin with, there was no showing that the mother‘s illness was so life -threatening such thather continued stay in the hospital suffering all its alleged unethical treatment would induce awell-grounded apprehension of her death. Secondly, it is not the law‘s intent to say that any fearexempts one from criminal liability much less petitioner‘s flimsy fear that her mother mightcommit suicide. In other words, the fear she invokes was not impending or insuperable as todeprive her of all volition and to make her a mere instrument without will, moved exclusively bythe hospital‘s threats or demands.

Ty has also failed to convince the Court that she was left with no choice but to commit a crime.She did not take advantage of the many opportunities available to her to avoid committing one.By her very own words, she admitted that the collateral or security the hospital required prior tothe discharge of her mother may be in the form of postdated checks or jewelry.30 And if indeedshe was coerced to open an account with the bank and issue the checks, she had all theopportunity to leave the scene to avoid involvement.

Moreover, petitioner had sufficient knowledge that the issuance of checks without funds mayresult in a violation of B.P. 22. She even testified that her counsel advised her not to open acurrent account nor issue postdated checks "because the moment I will not have funds it will be a

big problem."31

Besides, apart from petitioner‘s bare assertion, the record is bereft of anyevidence to corroborate and bolster her claim that she was compelled or coerced to cooperatewith and give in to the hospital‘s demands.

Ty likewise suggests in the prefatory statement of her Petition and Memorandum that the justifying circumstance of state of necessity under par. 4, Art. 11 of the Revised Penal Code mayfind application in this case.

We do not agree. The law prescribes the presence of three requisites to exempt the actor fromliability under this paragraph: (1) that the evil sought to be avoided actually exists; (2) that theinjury feared be greater than the one done to avoid it; (3) that there be no other practical and lessharmful means of preventing it.32

In the instant case, the evil sought to be avoided is merely expected or anticipated. If the evilsought to be avoided is merely expected or anticipated or may happen in the future, this defenseis not applicable.33 Ty could have taken advantage of an available option to avoid committing acrime. By her own admission, she had the choice to give jewelry or other forms of securityinstead of postdated checks to secure her obligation.



Moreover, for the defense of state of necessity to be availing, the greater injury feared should nothave been brought about by the negligence or imprudence, more so, the willful inaction of theactor.34 In this case, the issuance of the bounced checks was brought about by Ty‘s own failureto pay her mother‘s hospital bills .

The Court also thinks it rather odd that Ty has chosen the exempting circumstance ofuncontrollable fear and the justifying circumstance of state of necessity to absolve her ofliability. It would not have been half as bizarre had Ty been able to prove that the issuance of the bounced checks was done without her full volition. Under the circumstances, however, it is quiteclear that neither uncontrollable fear nor avoidance of a greater evil or injury prompted theissuance of the bounced checks.

Parenthetically, the findings of fact in the Decision of the trial court in the Civil Case35 fordamages filed by Ty‘s mother against the hospital is wholly irrelevant for purposes of disposingthe case at bench. While the findings therein may establish a claim for damages which, we mayadd, need only be supported by a preponderance of evidence, it does not necessarily engender

reasonable doubt as to free Ty from liability.As to the issue of consideration, it is presumed, upon issuance of the checks, in the absence ofevidence to the contrary, that the same was issued for valuable consideration.36 Section 2437 ofthe Negotiable Instruments Law creates a presumption that every party to an instrument acquiredthe same for a consideration38 or for value.39 In alleging otherwise, Ty has the onus to prove thatthe checks were issued without consideration. She must present convincing evidence tooverthrow the presumption.

A scrutiny of the records reveals that petitioner failed to discharge her burden of proof."Valuable consideration may in general terms, be said to consist either in some right, interest,

profit, or benefit accruing to the party who makes the contract, or some forbearance, detriment,loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the otheraide. Simply defined, valuable consideration means an obligation to give, to do, or not to do infavor of the party who makes the contract, such as the maker or indorser."40

In this case, Ty‘s mother and sister availed of the se rvices and the facilities of the hospital. Forthe care given to her kin, Ty had a legitimate obligation to pay the hospital by virtue of herrelationship with them and by force of her signature on her mother‘s Contract of Admissionacknowledging responsibility for payment, and on the promissory note she executed in favor ofthe hospital.

Anent Ty‘s claim that the obligation to pay the hospital bills was not her personal obligation because she was not the patient, and therefore there was no consideration for the checks, the caseof Bridges v. Vann, et al .41 tells us that "it is no defense to an action on a promissory note for themaker to say that there was no consideration which was beneficial to him personally; it issufficient if the consideration was a benefit conferred upon a third person, or a detriment suffered by the promisee, at the instance of the promissor. It is enough if the obligee foregoes some rightor privilege or suffers some detriment and the release and extinguishment of the originalobligation of George Vann, Sr., for that of appellants meets the requirement. Appellee accepted



one debtor in place of another and gave up a valid, subsisting obligation for the note executed bythe appellants. This, of itself, is sufficient consideration for the new notes."

At any rate, the law punishes the mere act of issuing a bouncing check, not the purpose for whichit was issued nor the terms and conditions relating to its issuance.42 B.P. 22 does not make any

distinction as to whether the checks within its contemplation are issued in payment of anobligation or to merely guarantee the obligation.43The thrust of the law is to prohibit the makingof worthless checks and putting them into circulation.44 As this Court held in Lim v. People ofthe Philippines ,45 "what is primordial is that such issued checks were worthless and the fact of itsworthlessness is known to the appellant at the time of their issuance, a required element underB.P. Blg. 22."

The law itself creates a prima facie presumption of knowledge of insufficiency of funds. Section2 of B.P. 22 provides:

Section 2. Evidence of knowledge of insufficient funds . - The making, drawing and

issuance of a check payment of which is refused by the drawee bank because ofinsufficient funds in or credit with such bank, when presented within ninety (90) daysfrom the date of the check, shall be prima facie evidence of knowledge of suchinsufficiency of funds or credit unless such maker or drawer pays the holder thereof theamount due thereon, or makes arrangements for payment in full by the drawee of suchcheck within five (5) banking days after receiving notice that such check has not been paid by the drawee.

Such knowledge is legally presumed from the dishonor of the checks for insufficiency offunds.46 If not rebutted, it suffices to sustain a conviction.47

Petitioner likewise opines that the payee was aware of the fact that she did not have sufficientfunds with the drawee bank and such knowledge necessarily exonerates her liability.

The knowledge of the payee of the insufficiency or lack of funds of the drawer with the drawee bank is immaterial as deceit is not an essential element of an offense penalized by B.P. 22. Thegravamen of the offense is the issuance of a bad check, hence, malice and intent in the issuancethereof is inconsequential.48

In addition, Ty invokes our ruling in Magno v. Court of Appeals 49 wherein this Court inquiredinto the true nature of transaction between the drawer and the payee and finally acquitted theaccused, to persuade the Court that the circumstances surrounding her case deserve specialattention and do not warrant a strict and mechanical application of the law.

Petitioner‘s reliance on the case is misplaced. The material operative facts therein obtaining aredifferent from those established in the instant petition. In the 1992 case, the bounced checks wereissued to cover a "warranty deposit" in a lease contract, where the lessor-supplier was also thefinancier of the deposit. It was amodus operandi whereby the supplier was able to sell or leasethe goods while privately financing those in desperate need so they may be accommodated. Themaker of the check thus became an unwilling victim of a lease agreement under the guise of a



lease-purchase agreement. The maker did not benefit at all from the deposit, since the checkswere used as collateral for an accommodation and not to cover the receipt of an actual account orcredit for value.

In the case at bar, the checks were issued to cover the receipt of an actual "account or for value."

Substantial evidence, as found by the trial court and Court of Appeals, has established that thechecks were issued in payment of the hospital bills of Ty‘s mother.

Finally, we agree with the Court of Appeals in deleting the penalty of imprisonment, absent any proof that petitioner was not a first-time offender nor that she acted in bad faith. AdministrativeCircular 12-2000,50 adopting the rulings inVaca v. Court of Appeals 51 and Lim v.

People, 52 authorizes the non-imposition of the penalty of imprisonment in B.P. 22 cases subjectto certain conditions. However, the Court resolves to modify the penalty in view ofAdministrative Circular 13-200153 which clarified Administrative 12-2000. It is stated therein:

The clear tenor and intention of Administrative Circular No. 12-2000 is not to remove

imprisonment as an alternative penalty, but to lay down a rule of preference in theapplication of the penalties provided for in B.P. Blg. 22.

Thus, Administrative Circular 12-2000 establishes a rule of preference in the applicationof the penal provisions of B.P. Blg. 22 such that where the circumstances of both theoffense and the offender clearly indicate good faith or a clear mistake of fact without taintof negligence, the imposition of a fine alone should be considered as the moreappropriate penalty. Needless to say, the determination of whether circumstances warrantthe imposition of a fine alone rests solely upon the Judge. Should the judge decide thatimprisonment is the more appropriate penalty, Administrative Circular No. 12-2000ought not be deemed a hindrance.

It is therefore understood that: (1) Administrative Circular 12-2000 does not removeimprisonment as an alternative penalty for violations of B.P. 22; (2) the judges concernedmay, in the exercise of sound discretion, and taking into consideration the peculiarcircumstances of each case, determine whether the imposition of a fine alone would bestserve the interests of justice, or whether forbearing to impose imprisonment woulddepreciate the seriousness of the offense, work violence on the social order, or otherwise be contrary to the imperatives of justice; (3) should only a fine be imposed and theaccused unable to pay the fine, there is no legal obstacle to the application of the RevisedPenal Code provisions on subsidiary imprisonment.54

WHEREFORE, the instant Petition is DENIED and the assailed Decision of the Court ofAppeals, dated 31 July 2001, finding petitioner Vicky C. TyGUILTY of violating BatasPambansa Bilang 22 isAFFIRMED withMODIFICATIONS. Petitioner Vicky C. Tyis ORDERED to pay aFINE equivalent to double the amount of each dishonored check subjectof the seven cases at bar with subsidiary imprisonment in case of insolvency in accordance withArticle 39 of the Revised Penal Code. She is also ordered to pay private complainant, ManilaDoctors‘ Hospital, the amount of Two Hundred Ten Thousand Pesos ( P210,000.00) representingthe total amount of the dishonored checks. Costs against the petitioner.



SO ORDERED.

Puno, Austria-Martinez, Callejo, Sr., and Chico-Nazario * , JJ., concur.

[G.R. No. 155815. July 14, 2004]

KENNETH NGO,petitioner , vs . PEOPLE OF THE PHILIPPINES, respondent .

D E C I S I O N

PANGANIBAN,J .:

To convict the accused, it is necessary to prove beyond reasonable doubt all the elements ofthe crime charged. Matters that do not form part of those elements need not be proved. Indenying this Petition, the Court finds petitioner‘s arguments immaterial and irrelevant to thecharge of violation of Batas Pambansa Blg. 22.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set asidethe March 18, 2002 Decision[2] and the October 1, 2002 Resolution[3] of the Court of Appeals(CA) in CA-GR CR No. 11341. The assailed Decision disposed as follows:

―WHEREFORE, judgment is hereby rendered as follows:

―1. In Criminal Cases Nos. 18200-89 and 18201-89, the decision of the court a quois AFFIRMED with the followingMODIFICATIONS:

―a) In Criminal Case No. 18200-89 - the penalty of imprisonment isDELETED, and inlieu thereof, the [petitioner] is directed to pay a fine in the sum of x x x P150,000.00 withsubsidiary imprisonment in case of insolvency to pay fine and to pay the costs;

―b) In Criminal Case No. 18201-89 - the penalty of imprisonment isDELETED, and inlieu thereof, the [petitioner] is directed to pay a fine in the sum of P150,000.00 with subsidiaryimprisonment in case of insolvency to pay fine and to pay the costs;

―2) In Criminal Case No. 18202-89 - [petitioner] is herebyACQUITTED on reasonabledoubt. As regards the civil liability, the [petitioner] is ordered to pay complainant Paul Gotiansethe amount of P75,000.00 with legal interest from the date of the filing of this case until fully

paid. ‖[4]

The assailed Resolution denied reconsideration.

http://sc.judiciary.gov.ph/jurisprudence/2004/jul2004/155815.htm#_ftn1














The Facts

The antecedents are narrated by the CA as follows:

―(1) Three separate Informations were filed before the Regional Trial Court, Branch 15, DavaoCity against the [petitioner] charging him with Violation of Batas Pambansa Blg. 22 [BP 22],which are identical in contents except as to their respective date[s] of issue and checknumber[s]. The identical allegations of the three (3) separate Informations read as follows:

―That on or about October, 1988 in the City of Davao, Philippines, and within the jurisdiction ofthis Honorable Court, the [petitioner], knowing fully well that he had no sufficient funds in thedrawee bank, wil[l]fully, unlawfully and feloniously issued and/or made out EBC Check No. __________ postdated ______________ in the amount of P75,000.00 in favor of Paul Gotiansein payment of an obligation; but when said check was presented to the drawee bank forencashment, the same was dishonored for the reason ‗Drawn Against Insufficient Funds‘ anddespite notice of dishonor and demands upon said accused to make good the check, the samerefused and failed to make payment, to the damage and prejudice of the herein complainant inthe aforesaid amount of P75,000.00.

Case No. Check No. DATE AMOUNT

18200-89 EBC-22976156 2/12/89 75,000.00

18201-89 EBC-22976157 3/12/89 75,000.00

18202-89 EBC-22976158 4/12/89 75,000.00

―(2) Upon arraignment on September 29, 1989, [petitioner] entered a plea of not guilty to allthe charges.

―(3) Joint trial proceeded where the prosecution presented evidence to show that complainantPaul Gotianse is a businessman and an officer of Northern Hill DevelopmentCorporation. Sometime in October 1988, inDavao City, [Petitioner] Kenneth Ngo, in settlementof the indebtedness he had incurred with Northern Hill Development Corporation, issued eight postdated checks payable to complainant and all drawn against the Equitable BankingCorporation. The first five checks were honored by the drawee bank but the three postdatedchecks were dishonor ed for the reason ‗drawn against insufficient funds.‘ These checks were thefollowing:

CHECK NUMBER AMOUNT DATE

EBC Check No. 22976156 P75,000.00 [2/12/1989]

EBC Check No. 22976157 P75,000.00 [3/12/1989]

EBC Check No. 22976158 P75,000.00 [4/12/1989]



―Following the dishonor, notices of dishonor and demand were sent to [petitioner] bycomplainant [Paul Gotianse]. Despite this, however, no payment or arrangement with thedrawee bank was made by the [petitioner].

―(4) On September 3, 1990, the [petitioner] filed a Motion to dismiss which is actually a

demurrer to evidence without prior leave of Court. When it was denied, the [petitioner] was notallowed to present evidence and the cases were deemed submitted for decision.

―(5) On January 24, 1991, the lower court rendered a decision convicting the [petitioner] on thethree (3) criminal cases.‖ [5]

The dispositive portion of the trial court‘s Decision reads:

―WHEREFORE, the guilt of the [petitioner] having been proven beyond reasonabledoubt, Kenneth Ngo is hereby sentenced as follows:

―1. Crim. Case No. 18,200 - to be imprisoned for eight (8) months, to indemnify PaulGotianse in behalf of Northern Hill Development Seventy-Five Thousand(P75,000.00) Pesos with legal interest to be computed from March 14, 1989 untilfully paid, to pay a fine of Two Thousand (P2,000.00) Pesos and to pay EighteenThousand (P18,000.00) Pesos as attorney‘s fees.

―2. Crim. Case No. 18,201 - to be imprisoned for eight (8) months, to indemnify PaulGotianse in behalf of Northern Hill Development Seventy-Five Thousand(P75,000.00) Pesos with legal interest to be computed from March 14, 1989 untilfully paid, to pay a fine of Two Thousand (P2,000.00) Pesos and to pay EighteenThousand (P18,000.00) Pesos as attorney‘s fees.

―3. Crim. Case No. 18,202 - to be imprisoned for eight months, to indemnify PaulGotianse in behalf of Northern Hill Development Seventy-Five Thousand(P75,000.00) Pesos with legal interest to be computed from April 14, 1989 until fully paid, to pay a fine of Two Thousand (P2,000.00) Pesos and to pay EighteenThousand (P18,000.00) Pesos as attorney‘s fees. ‖

[6]

Ruling of the Court of Appeals

The CA noted the undisputed fact that three (3) checks issued by petitioner had beendishonored for payment.[7] According to the appellate court, instead of presenting evidence, heopted instead to file a Motion to Dismiss, which the trial court treated as a Demurrer to Evidencewithout prior leave of court.[8] Thus, the CA decided the appeal based on the prosecution‘sevidence, which stood unrebutted.[9]

The CA ruled that all the elements of a violation of BP 22 with regard to Criminal Case Nos.18200-89 and 18201-89 had been proven beyond reasonable doubt. Pursuant to SCAdministrative Circular No. 12-2000,[10] the penalty of imprisonment imposed by the lower courtwas deleted. For each criminal case, the appellate court imposed a fine of P150,000, with


























subsidiary imprisonment in case of insolvency. Finding that no written notice of dishonor ordemand letter had been sent to petitioner regarding EBC Check No. 22976158, the CA acquittedhim in Criminal Case No. 18202-89.[11]

Hence, this Petition.[12]

The Issue

In his Statement of the Issues, petitioner contends:

―I. The accused can only be convicted of an offense based on evidence which conformto the allegation contained in the information.

―II. The trial court erred in imposing penalties and civil liabilities in favor of a wrong party. ‖[13]

The Court’s Ruling

The Petition is devoid of merit.

Main Issue:Conformi ty of the Evidence with the Inf ormation

According to petitioner, the Information in Criminal Case Nos. 18200-89 and 18201-89indicated that the checks had been issued in favor of Paul Gotianse, yet the prosecutor‘s evidenceestablished that the actual obligation for which they had been issued was in favor of NorthernHill Development.[14] On this basis, petitioner alleges that the prosecution failed to prove theelements of the offense, since the checks had not been issued for a valid consideration insofar asComplainant Gotianse was concerned.[15]

El ements of the Offense

It is fundamental that every element of the offense must be alleged in the complaint or

information and proved beyond reasonable doubt by the prosecution. Whatever facts andcircumstances must be stated are determined by reference to the definitions and the essentials ofthe specific crimes.[16]

Petitioner was charged with violation of BP 22 under the following provision:

―Section 1. Checks without sufficient funds. -- Any person who makes or draws and issues anycheck to apply on account or for value, knowing at the time of issue that he does not havesufficient funds in or credit with the drawee bank for the payment of such check in full upon its



























presentment, which check is subsequently dishonored by the drawee bank for insufficiency offunds or credit or would have been dishonored for the same reason had not the drawer, withoutany valid reason, ordered the bank to stop payment, shall be punished by imprisonment of notless than thirty days but not more than one (1) year or by a fine of not less than but not more thandouble the amount of the check which fine shall in no case exceed Two Hundred Thousand

Pesos, or both such fine and imprisonment at the discretion of the court. x x x‖[17]

Under this provision, there are two ways of violating BP 22: 1) by making or drawing and

issuing a check to apply ―on account or for value,‖ knowing at the time of issue that the c heckwas not sufficiently funded; and 2) by having sufficient funds in or credit with the drawee bankat the time of issue, but failing to keep sufficient funds or credit with the said bank to cover thefull amount of the check when presented to the drawee bank within a period of ninety (90)days.[18]

Pertinent to the present case, the elements of the offense under the first situation of BP 22are the following:

(1) the making, drawing and issuance of any check to apply on account or for value;(2) the maker, drawer or issuer knows at the time of issue that he does not havesufficient funds in or credit with the drawee bank for the payment of such check infull upon its presentment; and

(3) the check is subsequently dishonored by the drawee bank for insufficiency offunds or credit or would have been dishonored for the same reason had not thedrawer, without any valid cause, ordered the bank to stop payment.[19]

In the instant case, we find no reason to depart from the CA‘s findings, which petitionerdoes not rebut. Present are all these elements constituting a violation of BP 22:

―1) [Petitioner] issued EBC Check Nos. [2]2976156 and 22976157 in partialsettlement of his obligation to Northern Hill Development;

―2) The checks were deposited by the complainant but were subsequentlydishonored by the drawee bank for insufficiency of funds;

―3) [Petitioner] knew that at the time he issued the postdated checks, he had nosufficient funds in or credit with the drawee bank; x x x [and he failed] to redeem thechecks within five (5) days from written demand by the complainant for

payment.‖ [20]

Cause for I ssuance of Check I s I mmateri al

We agree with the submission of the Office of the Solicitor General (OSG) that petitioner‘s argument is immaterial and irrelevant.[21] This Court has consistently declared that the cause orreason for the issuance of a check is inconsequential in determining criminal culpability underBP 22.[22] We explained the reason in Llamado v. Court of Appeals as follows:[23]



























―[T]o determine the reason[s] for which checks are issued, or the terms and conditions for theirissuance, will greatly erode the faith the public reposes in the stability and commercial value ofchecks as currency substitutes, and bring about havoc in trade and in banking communities. ‖

[24]

The gravamen of the offense punished by BP 22 is the act of making and issuing a worthless

check; that is, a check that is dishonored upon its presentation for payment.[25]

The mere act ofissuing a worthless check is malum prohibitum.[26] Lozano v. Martinez,[27] has declared that it isnot the nonpayment of the obligation that is being punished, but the making of worthlesschecks. In People v. Nitafan,[28] this Court has ruled that a check issued as an evidence of debt --though not intended to be presented for payment -- has the same effect as an ordinary check andwould fall within the ambit of BP 22. Que v. People[29] has affirmed the application of BP 22 tocases in which dishonored checks have been issued in the form of deposit or guarantee. Indeed,the law does not make any distinction between checks issued in payment of an obligation andthose made merely to guarantee that obligation.[30]

The claim that the prosecution failed to prove that the check had been issued to apply onaccount or for value in favor of Paul Gotianse[31] is irrelevant. The law does not require that the payee of a check be the same as the obligee of the obligation in consideration for which thecheck has been issued.Pertinent is a criminal law authority‘s explanation of the term to apply onaccount or for value:

―It should be noted that BP Blg. 22 punishes the making or drawing and issuing of any checkthat is subsequently dishonored, even in payment of pre-existing obligation, as indicated inSection 1 thereof by the phrase ‗to apply on account.‘ Section 1 also punishes the making ordrawing and issuing of a check that is subsequently dishonored, in payment of an obligationcontracted at the time of theissuance of the check, as indicated by the words ‗for value.‘ x xx.‖[32]

When the checks were issued by petitioner to Paul Gotianse as payee, they were issued toapply ―on account;‖ that is, to settle the former‘s obligation to the latter‘s principal -- NorthernHill Development. In this regard, the Court also notes that the trial court found that petitionerhad agreed to settle his debt to the company by issuing the checks payable to its agent,Gotianse.[33]Clearly, the prosecution proved the first element of a violation of BP 22.

Propriety of the Award for Civil Li abilit y and Attorney’s Fees

Petitioner further argues that there was no legal basis to hold him civilly liable to NorthernHill Development, because it was not a party to the case.[34] This allegation is erroneous.

The challenged Decision required petitioner to indemnify the agent, not thecompany. Moreover, the liability to pay Gotianse ―in behalf of Northern Hill Development‖ wasmerely in conformity with the evidence adduced at the trial. It should be noted that Gotianse, the payee of the bounced check ,[35] is the injured party. One who is neither a payee nor a holder of a bad check has neither the personality to sue nor a cause of action against the drawer .[36]




















































The indemnity in favor of Gotianse was made pursuant to Section 1, Rule 111 of the Rulesof Court:

―When a criminal action is instituted, the civil action for the recovery of civil liability isimpliedly instituted with the criminal action unless the offended party waives the civil action,

reserves his right to institute it separately, or institutes the civil action prior to the criminalaction.‖ [37]

Under the present revised Rules, the criminal action for violation of BP 22 shall be deemedto include the corresponding civil action.[38] The reservation to file a separate civil action is nolonger needed.[39]

Petitioner also fails to support his opposition to the award of attorney‘s fees. The recoveryof such fees in the concept of actual or compensatory damages is allowed under thecircumstances. Under Article 2208 of the Civil Code, attorney‘s fees and the expenses oflitigation are awarded when the court deems them just and equitable.[40] Considering that thetrial took almost two years to complete,[41] and that the agreed attorney‘s fees of the private

prosecutor engaged to represent complainant[42] is twenty-five percent (25%) of the sum due ineach case, the award of P18,000 as attorney‘s fees for each of the ca ses is just and reasonable.

WHEREFORE, this Petition is DENIED and the assailed Decision and Resolution of theCourt of Appeals AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur .

G.R. No. 136202 January 25, 2007BANK OF THE PHILIPPINE ISLANDS,Petitioner,vs.COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R.TEMPLONUEVO, Respondents

D E C I S I O N

AZCUNA,J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of theDecision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court ofAppeals in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money withdamages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991


















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1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 untilthe said amount is fully paid;

2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney‘s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack

of merit.Third- party defendant‘s [i.e., private respondent Templonuevo‘s] counterclaim is herebylikewise DISMISSED for lack of factual basis.

SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondentSalazar was entitled to the proceeds of the three (3) checks notwithstanding the lack ofendorsement thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading5 actually belonged to

Salazar and would be deposited to her account, with petitioner acquiescing to the arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the NegotiableInstruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22,1278 and 1290 of the Civil Code in favor of BPI.

III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension offacts, that the account from which BPI debited the amount of P267,707.70 belonged to acorporation with a separate and distinct personality.














IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations,surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVOthat checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal

account and that BPI was privy to this agreement.V.

The Court of Appeals committed reversible error in holding, based entirely on speculation,surmises or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court

against BPI and dismissing SALAZAR‘s complaint. VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-partycomplaint of BPI.7

The issues center on the propriety of the deductions made by petitioner from private respondentSalazar‘s account. Stated otherwise, does a collecting bank, over the object ions of its depositor,have the authority to withdraw unilaterally from such depositor‘s account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another

account that she later closed?Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the possession of a person who is neither a payee nor the indorsee thereof, has been lawfullytransferred for value. Hence, the CA should not have presumed that Salazar was atransferee for value within the contemplation of Section 49 of the Negotiable InstrumentsLaw,8 as the latter applies only to a holder defined under Section 191of the same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three

checks was lawful despite her allegations that these checks were deposited pursuant to a prior internal arrangement with Templonuevo and that petitioner was privy to thearrangement.

3. The CA should have applied the Civil Code provisions on legal compensation becausein deducting the subject amount fromSalazar‘s account, petitioner was merely rectifyingthe undue payment it made upon the checks and exercising its prerogative to alter ormodify an erroneous credit entry in the regular course of its business.















4. The debit of the amount from the account of A.A. Salazar Construction andEngineering Services was proper even though the value of the checks had been originallycredited to the personal account of Salazar because A.A. Salazar Construction andEngineering Services, an unincorporated single proprietorship, had no separate anddistinct personality from Salazar.

5. Assuming the deduction from Salazar‘s account was improper, the CA should not havedismissed petitioner‘s third -party complaint against Templonuevo because the latterwould have the legal duty to return to petitioner the proceeds of the checks which he previously received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA.

The CA‘s conclusion that the deductions from the bank account of A.A. Salazar Constructionand Engineering Services were improper stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of petitioner‘s right to set off against theformer‘s bank deposits. This finding, in turn, was drawn from the pleadings of the parties, theevidence adduced during trial and upon the admissions and stipulations of fact made during the pre-trial, most significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amountof P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amountof P55,180.00; and,

(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990for the amount ofP154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to theorder of JRT Construction and Trading, the name and style under which Templonuevodoes business;

(c) That despite the lack of endorsement of the designated payee upon such checks,Salazar was able to deposit the checks in her personal savings account with petitioner andencash the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over aspan of eight months in 1990; and



(e) That Templonuevo only protested the purportedly unauthorized encashment of thechecks after the lapse of one year from the date of the last check .10

Petitioner concedes that when it credited the value of the checks to the account of privaterespondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon

by the designated payee. The CA, however, did not lend credence to this claim and concludedthat petitioner‘s actions were deliberate, in view of its admission that the "mistake" wascommitted three times on three separate occasions, indicating acquiescence to the internalarrangement between Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed.Three times she deposited them to her account and three times the amounts borne by thesechecks were credited to the same. And in those separate occasions, the bank did not return thechecks to her so that she could have them indorsed. Neither did the bank question her as to whyshe was depositing the checks to her account considering that she was not the payee thereof, thusallowing us to come to the conclusion that defendant-appellant BPI was fully aware that the

proceeds of the three checks belong to appellee.For if the bank was not privy to the agreement between Salazar and Templonuevo, it is mostunlikely that appellant BPI (or any bank for that matter) would have accepted the checks fordeposit on three separate times nary any question. Banks are most finicky over accepting checksfor deposit without the corresponding indorsement by their payee. In fact, they hesitate to acceptindorsed checks for deposit if the depositor is not one they know very well.11

The CA likewise sustained Salazar‘s position that she received the checks from Templonuevo pursuant to an internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the threequestioned checks, it baffles us why it was only on August 31, 1991 or more than a year after thethird and last check was deposited that he demanded for the refund of the total amount ofP267,692.50.

A prudent man knowing that payment is due him would have demanded payment by his debtorfrom the moment the same became due and demandable. More so if the sum involved runs inhundreds of thousand of pesos. By and large, every person, at the very moment he learns that hewas deprived of a thing which rightfully belongs to him, would have created a big fuss. Hewould not have waited for a year within which to do so. It is most inconceivable thatTemplonuevo did not do this.12

Generally, only questions of law may be raised in an appeal bycertiorari under Rule 45 of theRules of Court.13Factual findings of the CA are entitled to great weight and respect, especiallywhen the CA affirms the factual findings of the trial court.14 Such questions on whether certainitems of evidence should be accorded probative value or weight, or rejected as feeble orspurious, or whether or not the proofs on one side or the other are clear and convincing andadequate to establish a proposition in issue, are questions of fact. The same holds true forquestions on whether or not the body of proofs presented by a party, weighed and analyzed in






















payees or indorsers of the instrument is necessary to authorize payment to them in the absence ofany other facts from which the authority to receive payment may be inferred.18

The CA and the trial court surmised that the subject checks belonged to private respondentSalazar based on the pre-trial stipulation that Templonuevo incurred a one-year delay in

demanding reimbursement for the proceeds of the same. To the Court‘s mind, however, such period of delay is not of such unreasonable length as to estop Templonuevo from assertingownership over the checks especially considering that it was readily apparent on the face of theinstruments19 that these were crossed checks.

In State Investment House v. IAC ,20 the Court enumerated the effects of crossing a check, thus:(1) that the check may not be encashed but only deposited in the bank; (2) that the check may benegotiated only once - to one who has an account with a bank; and (3) that the act of crossing thecheck serves as a warning to the holder that the check has been issued for a definite purpose sothat such holder must inquire if the check has been received pursuant to that purpose.

Thus, even ifthe delay in the demand for reimbursement is taken in conjunction with Salazar‘s possession of the checks, it cannot be said that the presumption of ownership in Templonuevo‘sfavor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in theirown right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrumentwas given for a sufficient consideration will not inure to the benefit of Salazar because the term"given" does not pertain merely to a transfer of physical possession of the instrument. The phrase"given or indorsed" in the context of a negotiable instrument refers to the manner in which such

instrument may be negotiated. Negotiable instruments are negotiated by "transfer to one personor another in such a manner as to constitute the transferee theholderthereof. If payable to bearerit is negotiated by delivery. If payable to order it is negotiated by the indorsement completed bydelivery."22 The present case involves checks payable to order. Not being apayee or indorsee ofthe checks, private respondent Salazar could not be aholder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrumentwithout indorsement. Precisely because the situation is abnormal, it is but fair to the maker andto prior holders to require possessors to prove without the aid of an initial presumption in theirfavor, that they came into possession by virtue of a legitimate transaction with the lastholder .23 Salazar failed to discharge this burden, and the return of the check proceeds toTemplonuevo was therefore warranted under the circumstances despite the fact thatTemplonuevo may not have clearly demonstrated that he never authorized Salazar to deposit thechecks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back ofthe checks the words: "All prior endorsements and/or lack of endorsements guaranteed," therebymaking the assurance that it had ascertained the genuineness of all prior endorsements. Havingassumed the liability of a general indorser, petitioner‘s liability to the designated payee cannot bedenied.



























Consequently, petitioner, as the collecting bank, had the right to debit Salazar‘s account for thevalue of the checks it previously credited in her favor. It is of no moment that the accountdebited by petitioner was different from the original account to which the proceeds of the checkwere credited because both admittedly belonged to Salazar, the former being the account of thesole proprietorship which had no separate and distinct personality from her, and the latter being

her personal account.The right of set-off was explained in Associated Bank v. Tan :24

A bank generally has a right of set-off over the deposits therein for the payment of anywithdrawals on the part of a depositor. The right of a collecting bank to debit a client's accountfor the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings,and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of creditor anddebtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when allthe requisites mentioned in Article 1279 are present," as follows:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid toTemplonuevo against the deposit of Salazar, the issue of whether it acted judiciously is anentirely different matter .25 As businesses affected with public interest, and because of the natureof their functions, banks are under obligation to treat the accounts of their depositors withmeticulous care, always having in mind the fiduciary nature of their relationship.26 In this regard,

petitioner was clearly remiss in its duty to private respondent Salazar as its depositor.To begin with, the irregularity appeared plainly on the face of the checks. Despite the obviouslack of indorsement thereon, petitioner permitted the encashment of these checks three times onthree separate occasions. This negates petitioner‘s claim that it merely made a mistake increditing the value of the checks to Salazar‘s account and instead bolsters the conclusion of theCA that petitioner recognized Salazar‘s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that















the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it,for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the lawthus holds it to a high standard of conduct.27The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank .28

More importantly, however, solely upon the prompting of Templonuevo, and with fullknowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited theaccount held in the name of the sole proprietorship of Salazar without even serving due noticeupon her. This ran contrary to petitioner‘ s assurances to private respondent Salazar that theaccount would remain untouched, pending the resolution of the controversy between her andTemplonuevo.29 In this connection, the CA cited the letter dated September 5, 1991 of Mr.Manuel Ablan, Senior Manager of petitioner bank‘s Pasig/Ortigas branch, to private respondentSalazar informing her that her account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-

48 will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo.But, in an unexpected move, in less than two weeks (eleven days to be precise) from the timethat letter was written, [petitioner] bank issued a cashier‘s check in the name of Julio R.Templonuevo of the J.R.T. Construction and Trading for the sum ofP267,692.50 (Exhibit "8")and debited said amount from Ms. Arcilla‘s account No. 0201 -0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence, if not afraudulent, wanton and reckless disregard of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawnagainst the account of A.A. Salazar Construction and Engineering Services prior to any notice ofdeduction being served. The CA sustained private respondent Salazar‘s claim of damages in this

regard:The act of the bank in freezing and later debiting the amount of P267,692.50 from the account ofA.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991(Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing privaterespondent Salazar undue embarrassment and inflicting damage to her standing in the businesscommunity. Under the circumstances, she was clearly not given the opportunity to protect herinterest when petitioner unilaterally withdrew the above amount from her account withoutinforming her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by theCA against petitioner. This whole incident would have been avoided had petitioner adhered tothe standard of diligence expected of one engaged in the banking business. A depositor has theright to recover reasonable moral damages even if the bank‘s negligence may not have been


















attended with malice and bad faith, if the former suffered mental anguish, serious anxiety,embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at theexpense of defendant. It is only intended to alleviate the moral suffering she has undergone. Theaward of exemplary damages is justified, on the other hand, when the acts of the bank areattended by malice, bad faith or gross negligence. The award of reasonable attorney‘s fees is

proper where exemplary damages are awarded. It is proper where depositors are compelled tolitigate to protect their interest.32

WHEREFORE, the petition is partiallyGRANTED.The assailed Decision dated April 3, 1998and Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return theamount of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos(P267,707.70) to respondent Annabelle A. Salazar, which portion isREVERSED and SETASIDE. In all other respects, the same areAFFIRMED.

No costs.

SO ORDERED.

ENGR. JOSE E. CAYANAN, Petitioner,

- versus -

NORTH STAR INTERNATIONALTRAVEL, INC.,

Respondent.

G.R. No. 172954

Present:

CORONA,C.J. ,

Chairperson ,

LEONARDO-DE CASTRO,

BERSAMIN,

DEL CASTILLO, and

VILLARAMA, JR., JJ .Promulgated:

October 5, 2011x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION











VILLARAMA, JR.,J .:

Petitioner Engr. Jose E. Cayanan appeals the May 31, 2006 Decision[1] of the Court ofAppeals (CA) in CA-G.R. SP No. 65538 finding him civilly liable for the value of the fivechecks which are the subject of Criminal Case Nos. 166549-53.

The antecedent facts are as follows:

North Star International Travel Incorporated (North Star) is a corporation engaged in thetravel agency business while petitioner is the owner/general manager of JEAC InternationalManagement and Contractor Services, a recruitment agency.

On March 17,[2] 1994, Virginia Balagtas, the General Manager of North Star, inaccommodation and upon the instruction of its client, petitioner herein, sent the amount ofUS$60,000[3] to View Sea Ventures Ltd., in Nigeria from her personal account in CitibankMakati. On March 29, 1994, Virginia again sent US$40,000 to View Sea Ventures bytelegraphic transfer ,[4] with US$15,000 coming from petitioner. Likewise, on various dates, North Star extended credit to petitioner for the airplane tickets of his clients, with the totalamount of such indebtedness under the credit extensions eventually reaching P510,035.47.[5]

To cover payment of the foregoing obligations, petitioner issued the following five

checks to North Star:Check No : 246822

Drawn Against : Republic Planters BankAmount : P695,000.00Dated/Postdated : May 15, 1994Payable to : North Star International Travel, Inc.

Check No : 246823Drawn Against : Republic Planters BankAmount : P278,000.00

Dated/Postdated : May 15, 1994Payable to : North Star International Travel, Inc.

Check No : 246824Drawn Against : Republic Planters BankAmount : P22,703.00Dated/Postdated : May 15, 1994Payable to : North Star International Travel, Inc.

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Check No : 687803Drawn Against : PCIBAmount : P1,500,000.00Dated/Postdated : April 14, 1994

Payable to : North Star International Travel, Inc.Check No : 687804Drawn Against : PCIBAmount : P35,000.00Dated/Postdated : April 14, 1994Payable to : North Star International Travel, Inc.[6]

When presented for payment, the checks in the amount of P1,500,000 and P35,000 weredishonored for insufficiency of funds while the other three checks were dishonored because of a

stop payment order from petitioner .[7] North Star, through its counsel, wrote petitioner on September 14, 1994[8] informing him that the checks he issued had beendishonored. North Star demanded payment, but petitioner failed to settle his obligations. Hence, North Star instituted Criminal Case Nos. 166549-53 charging petitioner with violation of Batas

Pambansa Blg. 22 , or the Bouncing Checks Law, before the Metropolitan Trial Court (MeTC) ofMakati City.

The Informations,[9] which were similarly worded except as to the check numbers, the

dates and amounts of the checks, alleged:That on or about and during the month of March 1994 in the Municipality

of Makati, Metro Manila, Philippines, a place within the jurisdiction of thisHonorable Court, the above-named accused, being the authorized signatory of[JEAC] Int‘l Mgt & Cont. Serv. did then and there willfully, unlawfully andfeloniously make out[,] draw and issue to North Star Int‘l. Travel Inc. herein rep. by Virginia D. Balagtas to apply on account or for value the checks described below:

x x x x

said accused well knowing that at the time of issue thereof, did not have sufficientfunds in or credit with the drawee bank for the payment in full of the face amountof such check upon its presentment, which check when presented for paymentwithin ninety (90) days from the date thereof was subsequently dishonored by thedrawee bank for the reason PAYMENT STOPPED/DAIF and despite receipt ofnotice of such dishonor the accused failed to pay the payee the face amount ofsaid check or to make arrangement for full payment thereof within five (5) banking days after receiving notice.


















Contrary to law.

Upon arraignment, petitioner pleaded not guilty to the charges.

After trial, the MeTC found petitioner guilty beyond reasonable doubt of violation of B.P.22. Thus:

WHEREFORE, finding the accused, ENGR. JOSE E. CAYANANGUILTY beyond reasonable doubt of Violation of Batas Pambansa Blg. 22 he ishereby sentenced to suffer imprisonment of one (1) year for each of the offensecommitted.

Accused is likewise ordered to indemnify the complainant North StarInternational Travel, Inc. represented in this case by Virginia Balagtas, the sumof TWO MILLION FIVE HUNDRED THIRTY THOUSAND ANDSEVEN HUNDRED THREE PESOS (P2,530,703.00) representing the total valueof the checks in [question] plus FOUR HUNDRED EIGHTY[-]FOURTHOUSAND SEVENTY[-]EIGHT PESOS AND FORTY[-]TWO CENTAVOS(P484,078.42) as interest of the value of the checks subject matter of the instantcase, deducting therefrom the amount of TWO HUNDRED TWENTYTHOUSAND PESOS (P220,000.00) paid by the accused as interest on the valueof the checks duly receipted by the complainant and marked as Exhibit ―FF‖ ofthe record.

x x x x

SO ORDERED.[10]

On appeal, the Regional Trial Court (RTC) acquitted petitioner of the criminalcharges. The RTC also held that there is no basis for the imposition of the civil liability on petitioner. The RTC ratiocinated that:

In the instant cases, the checks issued by the accused were presented beyond the period of NINETY (90) DAYS and therefore, there is no violation ofthe provision of Batas Pambansa Blg. 22 and the accused is not considered tohave committed the offense. There being no offense committed, accused is notcriminally liable and there would be no basis for the imposition of the civilliability arising from the offense.[11]

Aggrieved, North Star elevated the case to the CA. On May 31, 2006, the CA reversedthe decision of the RTC insofar as the civil aspect is concerned and held petitioner civilly liablefor the value of the subject checks. The fallo of the CA decision reads:











in fact issued without valuable consideration.[16] Sadly, however, petitioner has not presentedany credible evidence to rebut the presumption, as well as North Star‘s assertion, that the checks

were issued as payment for the US$85,000 petitioner owed.

Notably, petitioner anchors his defense of lack of consideration on the fact that he did not personally receive the US$85,000 from Virginia. However, we note that in his pleadings, henever denied having instructed Virginia to remit the US$85,000 to View SeaVentures. Evidently, Virginia sent the money upon the agreement that petitioner will give to North Star the peso equivalent of the amount remitted plus interest. As testified to byVirginia,Check No. 246822 dated May 15, 1994 in the amount of P695,000.00 is equivalent toUS$25,000;Check No. 246823 dated May 15, 1994 in the amount of P278,000 is equivalent toUS$10,000;Check No. 246824 in the amount of P22,703 represents the one month interest

for P695,000 and P278,000 at the rate of twenty-eight (28%) percent per annum ;[17]

Check No.687803 dated April 14, 1994 in the amount of P1,500,000 is equivalent to US$50,000 andCheck

No. 687804 dated 14 April 1994 in the amount of P35,000 represents the one month interestfor P1,500,000 at the rate of twenty-eight (28%) percent per annum .[18] Petitioner has notsubstantially refuted these averments.

Concomitantly, petitioner‘s assertion that the dollars sent to Nigeria was for the accountof Virginia Balagtas and as her own investment with View Sea Ventures deserves nocredence. Virginia has not been shown to have any business transactions with View Sea

Ventures and from all indications, she only remitted the money upon the request and inaccordance with petitioner‘s instructions. The evidence shows that it was petitioner who had acontract with View Sea Ventures as he was sending contract workers to Nigeria; VirginiaBalagtas‘s participation was merely to send the money through te legraphic transfer in exchangefor the checks issued by petitioner to North Star. Indeed, the transaction between petitioner and North Star is actually in the nature of a loan and the checks were issued as payment of the principal and the interest.

As aptly found by the trial court:It is to be noted that the checks subject matter of the instant case were

issued in the name of North Star International Inc., represented by privatecomplainant Virginia Balagtas in replacement of the amount of dollars remitted by the latter to Vie[w] Sea Ventures in Nigeria. x x x But Virginia Balagtas hasno business transaction with Vie[w] Sea Ventures where accused has beensending his contract workers and the North Star provided the trip tickets for said















workers sent by the accused. North Star International has no participation at all inthe transaction between accused and the Vie[w] Sea Ventures except in providing plane ticket used by the contract workers of the accused upon its understandingwith the latter. The contention of the accused that the dollars were sent byVirginia Balagtas to Nigeria as business investment has not been shown by any

proof to set aside the foregoing negative presumptions, thus negates accusedcontentions regarding the absence of consideration for the issuance of checks. x xx[19]

Petitioner claims that North Star did not give any valuable consideration for the checkssince the US$85,000 was taken from the personal dollar account of Virginia and not thecorporate funds of North Star. The contention, however, deserves scant consideration. Thesubject checks, bearing petitioner‘s signature, speak for themselves. The fact that petitionerhimself specifically named North Star as the payee of the checks is an admission of his liability

to North Star and not to Virginia Balagtas, who as manager merely facilitated the transfer offunds. Indeed, it is highly inconceivable that an experienced businessman like petitioner wouldissue various checks in sizeable amounts to a payee if these are withoutconsideration. Moreover, we note that Virginia Balagtas averred in her Affidavit[20] that NorthStar caused the payment of the US$60,000 and US$25,000 to View Sea Ventures toaccommodate petitioner, which statement petitioner failed to refute. In addition, petitioner didnot question the Statement of Account No. 8639[21] dated August 31, 1994 issued by North Starwhich contained itemized amounts including the US$60,000 and US$25,000 sent throughtelegraphic transfer to View Sea Ventures per his instruction. Thus, the inevitable conclusion isthat when petitioner issued the subject checks to North Star as payee, he did so to settle hisobligation with North Star for the US$85,000. And since the only payment petitioner made to North Star was in the amount of P220,000.00, which was applied to interest due, his liability isnot extinguished. Having failed to fully settle his obligation under the checks, the appellatecourt was correct in holding petitioner liable to pay the value of the five checks he issued infavor of North Star.

WHEREFORE, the present appeal by way of a petition for review on certiorari

is DENIED for lack of merit. The Decision dated May 31, 2006 of the Court of Appeals in CA-G.R. SP No. 65538 isAFFIRMED.

With costs against petitioner.

SO ORDERED.














G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.

REGALADO, J.:

This petition for review oncertiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 236151 affirming with modifications,the earlier decision of the Regional Trial Court of Manila, Branch XLII,2 which dismissed thecomplaint filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the courta quo and adopted by respondentcourt, appears of record:

1. On various dates, defendant, a commercial banking institution, through itsSucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angeldela Cruz who deposited with herein defendant the aggregate amount of

P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement ofIssues, Original Records, p. 207; Defendant's Exhibits 1 to 280);

CTD CTD Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,00026 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 16,000

5 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, theSucat 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 ofLoss, as required by defendant bank's procedure, if he desired replacement of saidlost CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bankthe required Affidavit of Loss (Defendant's Exhibit 281). On the basis of saidaffidavit 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 fromdefendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos(P875,000.00). On the same date, said depositor executed a notarized Deed ofAssignment of Time Deposit (Exhibit 562) which stated, among others, that he(de la Cruz) surrenders to defendant bank "full control of the indicated timedeposits 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 ofwhatever 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 forverification the CTDs declared lost by Angel dela Cruz alleging that the samewere delivered to herein plaintiff "as security for purchases made with CaltexPhilippines, 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 inquestion and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnishthe 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" obligationagainst which plaintiff proposed to apply the time deposits (Defendant's Exhibit564).

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'sExhibit 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 depositsin 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 thatdefendant bank be ordered to pay it the aggregate value of the certificates of timedeposit of P1,120,000.00 plus accrued interest and compounded interest therein at16% per annum , moral and exemplary damages as well as attorney's fees.

After trial, the courta quo rendered its decision dismissing the instantcomplaint.3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of thecomplaint, hence this petition wherein petitioner faults respondent court in ruling (1) that thesubject 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) indisregarding 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 COMPANY 6778 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 thesum of PESOS: FOUR THOUSAND ONLY, SECURITY BANKSUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency,repayable to said depositor 731 days. after date, upon presentationand surrender of this certificate, with interest at the rate of 16% percent per annum .



(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

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

. . . While it may be true that the word "bearer" appears rather boldly in the CTDsissued, it is important to note that after the word "BEARER" stamped on thespace provided supposedly for the name of the depositor, the words "hasdeposited" a certain amount follows. The document further provides that theamount deposited shall be "repayable to said depositor" on the period indicated.Therefore, the text of the instrument(s) themselves manifest with clarity that theyare payable, not to whoever purports to be the "bearer" but only to the specified

person indicated therein, the depositor. In effect, the appellee bank acknowledgesits depositor Angel dela Cruz as the person who made the deposit and furtherengages itself to pay said depositor the amount indicated thereon at the stipulateddate. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question arenegotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable InstrumentsLaw, 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 inmoney;

(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 otherwiseindicated 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 courtthat 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 itwas Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel delaCruz 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 thesecertificates 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 isdetermined from the writing, that is, from the face of the instrument itself. 9 In the construction ofa bill or note, the intention of the parties is to control, if it can be legally ascertained.10 While thewriting may be read in the light of surrounding circumstances in order to more perfectlyunderstand the intent and meaning of the parties, yet as they have constituted the writing to bethe only outward and visible expression of their meaning, no other words are to be added to it orsubstituted in its stead. The duty of the court in such case is to ascertain, not what the parties mayhave 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 theysaid. 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 tothe document, is the depositor? It is the "bearer." The documents do not say that the depositor isAngel 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 bethe 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, itcould 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 thedepositor in each CTD. On the wordings of the documents, therefore, the amounts deposited arerepayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merelydeclared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviouslyother parties not privy to the transaction between them would not be in a position to know thatthe depositor is not the bearer stated in the CTDs. Hence, the situation would require any partydealing with the CTDs to go behind the plain import of what is written thereon to unravel theagreement of the parties thereto through factsaliunde. This need for resort to extrinsic evidenceis what is sought to be avoided by the Negotiable Instruments Law and calls for the applicationof the elementary rule that the interpretation of obscure words or stipulations in a contract shallnot favor the party who caused the obscurity.12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer isin the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to impleadin this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitionerwithout informing respondent bank thereof at any time. Unfortunately for petitioner, although theCTDs 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 asecurity for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs weredelivered as payment for the fuel products or as a security has been dissipated and resolved infavor 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 Cruzto guarantee his purchases of fuel products " (Emphasis ours.)13 This admissionis 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 bedenied or disproved as against the person relying thereon.14 A party may not go back on his ownacts and representations to the prejudice of the other party who relied upon them.15 In the law ofevidence, whenever a party has, by his own declaration, act, or omission, intentionally anddeliberately 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 creditmanager could have easily said so, instead of using the words "to guarantee" in the letteraforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein17 praying, among others, that petitioner, as plaintiff, be required to aver withsufficient definiteness or particularity (a) the due date or dates of payment of the allegedindebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showingthat the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness



to it, plaintiff corporation opposed the motion.18Had it produced the receipt prayed for, it couldhave proved, if such truly was the fact, that the CTDs were delivered as payment and not assecurity. Having opposed the motion, petitioner now labors under the presumption that evidencewillfully 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 quotetherefrom:

The character of the transaction between the parties is to bedetermined by their intention, regardless of what language wasused or what the form of the transfer was. If it was intended tosecure the payment of money, it must be construed as a pledge; butif there was some other intention, it is not a pledge. However, even

though a transfer, if regarded by itself, appears to have beenabsolute, its object and character might still be qualified andexplained by contemporaneous writing declaring it to have been adeposit of the property as collateral security. It has been said that atransfer of property by the debtor to a creditor, even if sufficient onits face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged bythe transfer, and that accordingly the use of the terms ordinarilyimporting conveyance of absolute ownership will not be given thateffect 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 andunambiguous language or other circumstances excluding an intentto 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 personto 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 Inthe present case, however, there was no negotiation in the sense of a transfer of the legal title tothe 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 ofAngel 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 theinstrument 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 fromcontract, 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 provisionson 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 thecreditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description ofthe 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 ofrespondent court quoted at the start of this opinion show that petitioner failed to produce anydocument evidencing any contract of pledge or guarantee agreement between it and Angel de laCruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any righteffective 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 bemade of the date of a pledge contract, but a rule of substantive law prescribing a conditionwithout 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, theCivil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect asagainst third persons, unless it appears in a public instrument, or the instrument isrecorded in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whetheras purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or theextent of its lien nor the execution of any public instrument which could affect or bind privaterespondent. Necessarily, therefore, as between petitioner and respondent bank, the latter hasdefinitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether ornot private respondent observed the requirements of the law in the case of lost negotiableinstruments and the issuance of replacement certificates therefor, on the ground that petitionerfailed 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 issuessubmitted by them to the trial court.29 The issues agreed upon by them for resolution in this caseare:

1. Whether or not the CTDs as worded are negotiable instruments.



2. Whether or not defendant could legally apply the amount covered by the CTDsagainst the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amountcovered 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 litigationexpenses 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 thelower 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 firsttime on appeal.31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a caseare 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 suchas may involve privileged or impeaching matters. The determination of issues at a pre-trialconference bars the consideration of other questions on appeal.32

To accept petitioner's suggestion that respondent bank's supposed negligence may be consideredencompassed by the issues on its right to preterminate and receive the proceeds of the CTDswould 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 thequestioned certificates can be premised on a multitude of other legal reasons and causes ofaction, of which respondent bank's supposed negligence is only one. Hence, petitioner'ssubmission, if accepted, would render a pre-trial delimitation of issues a useless exercise.33

Still, even assumingarguendo 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 CTDsin the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. Thedispossessed owner , no matter for what cause it may be,may applyto the judge or court of competent jurisdiction, asking that the principal, interestor 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 onthe part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction forthe issuance of a duplicate of the lost instrument. Where the provision reads "may," this wordshows that it is not mandatory but discretional.34 The word "may" is usually permissive, notmandatory.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 ofCommerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merelyestablished, 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 infavor 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 petitionercategorically restricts or prohibits the issuance a duplicate or replacementinstrument sans compliance with the procedure outlined therein, and none establishes amandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and theappealed decision is hereby AFFIRMED.

SO ORDERED.

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

AGUILAR VS CITY TRUST FINANCE

D E C I S I O N

CARPIO MORALES, J. :

Sometime in May 1992, Josephine Aguilar (Josephine) canvassed, via telephone, prices of

cars from different car dealers listed in the yellow pages of the Philippine Long DistanceTelephone directory.

On May 23, 1992, World Cars, Inc. (World Cars) sent its representative Joselito Perez(Perez) and Vangie Tayag (Vangie) to the Aguilar residence in New Manila, Quezon City bringing with them calling cards, brochures and price list for different car models, among other



things. The two representatives discussed with Josephine the advantages and disadvantages ofthe different models, their prices and terms of payment.[1]

Josephine having decided to purchase a white 1992 Nissan California at the agreed price

of P370,000.00, payable in 90 days, Perez and Vangie repaired to the Aguilar residence on May30, 1992, bringing with them a white 1992 Nissan California bearing Motor No. GA16-099086and Chassis No. WGLB12-D10269, and the documents bearing on the sale.

As Josephine and her husband Ferdinand Aguilar (the Aguilars) were being made to sign by the two representatives a promissory note, chattel mortgage, disclosures and other documentsthe dates of which were left blank and which showed that they would still be obliged to pay oninstallment in 12 months for the car even if checks in full payment thereof in 90 days were to be

issued, the two replied that it was only for formality, for in case the checks were not cleared, thedocuments would take effect, otherwise they would be cancelled.[2]

The Aguilars did sign the promissory note[3] binding them to be jointly and severally liableto World Cars in the amount of P301,992.00, payable in 12 months, with a monthly amortizationof P25,166.00 and a late payment charge of 5% per month on each unpaid installment from duedate until fully paid.

By Josephine‘s claim, at the time she and her husband signed the promissory note, its date,May 30, 1992, and the due date of the monthly amortization which was agreed to be every3rd day of each month starting July 1992 were not reflected therein.[4]

The Aguilars did execute too a chattel mortgage[5] in favor of World Cars which embodieda deed of assignment[6] in favor of Citytrust Finance Corporation (Citytrust).[7]Again byJosephine‘s claim, the date May 30, 1992 appearing in the chattel mortgage cum deed ofassignment was not yet filled up at the time she and her husband signed it.[8]

After the Aguilars‘ signing of the documents, Perez asked Josephine to make the check payments payable to him, prompting her to call up Perez‘s boss, a certain Lily Paloma, to inquirewhether Perez could collect payment to which Lily replied in the affirmative, the latter advisingher to just secure a receipt.[9]

http://sc.judiciary.gov.ph/jurisprudence/2005/oct2005/159592.htm#_ftn1



































Josephine thus issued four Far East Bank and Trust Company (FEBTC) checks, the detailsof which are indicated below:

Check No. Payable to Amount Dated112703 Joselito Perez P148,000.00 May 30, 1992112704 World Cars P16,000.00 May 30, 1992112705 Joselito Perez P111,000.00 June 30, 1992

112706 Joselito Perez P111,000.00 July 30, 1992

For Check Nos. 112703, 112705, and 112706 which were made payable to Perez in thetotal amount of P370,000.00, Perez issued Josephine World Cars Provisional Receipt No.5965.[13] Check No. 112704 which was made payable to World Cars represented payment of the premium on the car insurance, secured from Dominion Insurance which issued a policy in thename of Josephine.[14]

Josephine was subsequently issued on June 2, 1992 Official Receipt No. 61117975[15] bythe Land Transportation Office covering the payment of the fees for the registration of the car.

In mid-June of 1992, Perez and Vangie went back to the Aguilar residence requesting thatCheck No. 112705 dated June 30, 1992 payable to Perez in the amount ofP111,000.00 becancelled and that two checks in the total amount of P111,000.00 be issued in replacement

thereof, one in the amount of P4,150.00 to be made payable to Sunny Motors, which appears to be a sales outlet of World Cars, for processing fee of the documents, and the other in the amountof P106,850.00 to be again made payable to Perez. Josephine obliged and accordingly issuedCheck No. 112724[16] in the amount of P4,150.00 payable to Sunny Motors, and Check No.112725[17] in the amount of P106,850.00 payable to Perez.

Check Nos. 112703,[18] 112724[19] and 112725[20] were in the meantime cleared.[21]

No official receipt for the checks having been issued to Josephine, she warned Perez that ifshe did not get any by the end of July 1992, she would request for stop payment of the last checkshe issued in his name, Check No. 112706[22] dated July 30, 1992 in the amountof P111,000.00. Perez failed to deliver any receipt to Josephine, drawing her to advise, bytelefax, FEBTC Del Monte, Quezon City Branch a letter [23] dated July 30, 1992 to stop the payment of Check No. 112706.


















































The clearing of Check No. 112706 having been stopped on Josephine‘s advice, Perez

repaired to the Aguilar residence, asking the reason therefor. On being informed by Josephine ofthe reason, Perez explained that receipts were in Bulacan where the main office of World Cars is,and he had no time to go there owing to its distance. Perez then advised Josephine that if she did

not issue another check to replace Check No. 112706, the 12-month installment term of paymentunder the documents she and her husband signed would take effect.[24]

Not wanting to be bound by the 12-month installment term, Josephine issued Check No.112767[25] dated August 4, 1992 in the amount of P111,000.00 payable to Perez who issued herSunny Motor Sales Provisional Receipt No. 5028.[26]

Check No. 112767 was also later cleared.[27]

In September 1992, Josephine received a letter [28] dated August 20, 1992 from Ana MarieCaber (Ana Marie), Account Specialist of Citytrust, advising her that as of August 20, 1992, heroverdue account with it in connection with the purchase of the car had amounted to ― P1,045.39‖

inclusive of past due charges.

Josephine at once informed Ana Marie that she had fully paid the car to which Ana Mariereplied that ―maybe not all of the papers have been processed yet,‖ hence, she advised Josephine

not to worry about it.[29]

In December 1992, Josephine received another letter [30] dated December 9, 1992 fromCitytrust advising her that her account had been, as of December 9, 1992, overdue in the amountof P110,706.60 inclusive of unpaid installments for the months of August, September, October, November and December 1992 plus accumulated penalty charges; and that if she failed toarrange for another payment scheme, her account would be referred to its legal counsel forcollection.

Josephine again called Ana Marie inquiring what was going on and the latter replied that no payment for the car had been received. Josephine also called up World Cars and spoke to itsVice-President, a certain Domondon, who informed her that based on company records, the last payment had not been received.[31]



































The spouses Aguilar thus filed a complaint[32] for ―annulment of chattel mortgage plus

damages‖ against Citytrust and Worl d Cars before the Regional Trial Court (RTC) of QuezonCity.

In its Answer with Counterclaims and Crossclaim against World Cars,[33] Citytrustdisclaimed knowledge of the alleged prior arrangement and the alleged subsequent paymentsmade by the Aguilars to World Cars. And it claimed that it accepted the endorsement andassignment of the promissory note and chattel mortgage in good faith, relying on the terms andconditions thereof; and that assuming that the Aguilars‘ claim were true, World Cars appeared to

have violated the terms and conditions of the Receivables Financing Agreement (RFA) itexecuted with it, the pertinent portions of which read:[34]

1. [World Cars] hereby agrees and covenants to discount with[Citytrust] subject to the terms and conditions hereinafter stipulated,installment papers evidencing actual sales made by [World Cars] of brandnew automobiles, trucks, household appliances and other durable goodsacceptable to [Citytrust]. Wheresoever used herein, theterm “ installmentpaper” shall refer to any documen t or documents evidencing sale ofpersonalty on the installment plan including ―Conditional SaleContracts,Deed of Chattel Mortgages, Trust Receipts, Contracts of Leaseandother evidences of indebtednessor choses in action, signed by the

customersevidencing the unpaid obligations duly negotiated and/or assignedin favor of [Citytrust] by virtue of a Deed of Assignment duly notarized;

2. Discounting of the installment papers by virtues hereof shallbe on without-recourse and offer-and-acceptance basis, and that if[Citytrust] finds the same acceptable, it shall purchase and pay [World Cars]the balance due and outstanding on the respective installment papers sopurchased after deducting the financing and other charges. Discounting and purchase of installment papers shall be at the sole option and discretion of[Citytrust];

x x x5. As further warranties, [World Cars] hereby agrees and shall be

bound by the following:

a. World Cars guarantees to [Citytrust] its successors, and assigns,that it hasfull right and legal authority to make the assignment or discounting; that theinstallment papers so discounted by virtue of this agreement, are subsisting,















At the pre-trial conference, only the counsels for the Aguilars and Citytrustappeared. World Cars was thus declared as in default.

As defined in the Pre-trial Order [37] dated November 11, 1994, the issues of the case were:

1. Whether or not [the Aguilars] have duly paid the purchase price of the car,and if so, whether or not [they] can still be held liable to pay under the promissory note and the chattel mortgage.

2. Whether or not [Citytrust and World Cars] are liable to [the Aguilars] fordamages and if so, how much.

3. Whether or not [the Aguilars] have fully paid the balance installment price ofthe [car] which was purchased from [World Cars].

4. Whether or not [the Aguilars] are entitled to the damages prayed for in thecomplaint.

5. Whether or not [Citytrust] is entitled to the cross-claim prayed for against[World Cars].

6. Whether or not [the Aguilars] are still liable for their unpaid obligations to[Citytrust].

7. Whether or not [World Cars] is liable to pay the unpaid obligations of [theAguilars] if the latter will be able to prove that they already fully paid the price of the subject car.

8. Who among the parties is entitled to damages and attorney‘s fees, and if so,how much?

By Decision[38] dated January 12, 1999, Branch 77 of the Quezon City RTC found Perezto be an agent of World Cars, hence, an extension of its personality as far as the sale of the car tothe Aguilars was concerned.

The trial court further found that Perez was authorized to receive payment for the car,hence, all payments made to him for the purchase of the car were payments made to his principal, World Cars; that the Aguilars had paid a total amount of P386,000.00 including theirfinal payment on July 30, 2002, which date World Cars admitted to be the deadlinetherefor; and that the Aguilars had no intention to be bound by the promissory note which they










signed in favor of World Cars or its assignee nor by the terms of the Chattel Mortgage, theconforme in the undated Letter (Notice of Assignment) of World Cars and the DisclosureStatement of Loan/Credit Transaction having been predicated on the validity of the promissorynote.

Moreover, the trial court held that the fact that on May 30, 1992, the same date of the promissory note, Josephine issued three checks to fully cover the purchase price of the car (thefourth represented payment of insurance premium), the last of which was still to mature on July30, 1992, proves that the Aguilars signed the promissory note without intending to be bound byits terms.

In fine, the trial court held that the Aguilars had paid World Cars the full purchase price

of the car, and Citytrust as the assignee of World Cars had no right to collect from them theamount stated in the Chattel Mortgagecum Deed of Assignment which is simulated and,therefore, void, following Art. 1346 of the Civil Code which provides:

Art. 1346. An absolutely simulated or fictitious contract isvoid. A relative simulation, when it does not prejudice a third person and is notintended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

The trial court thus disposed:

WHEREFORE, premises considered, judgment is herebyrendered:

1. Finding [spouses Aguilar] to have fully paid the purchase priceof the 1992 Nissan California car, which they bought from Worlds Cars, Inc. onMay 30, 1992, through its agent, Joselito Perez;

2. Annulling the Promissory Note (Exhibit―D‖), the ChattelMortgage (Exhibit ―D -1‖), the conforme in the undated Letter -Notice ofAssignment of defendant World Cars, Inc., (Exhibit ―D -2‖), and the DisclosureStatement Loan/Credit Transaction (Exhibit ―D -3‖), for being void as they aresimulated contracts, thereby releasing [spouses Aguilar] from any liability arisingfrom these documents;

3. Ordering [Citytrust and World Cars] to pay, jointly andseverally, to [spouses Aguilar] the following sums: P500,000.00 as moraldamages; P100,000.00 as exemplary damages;P50,000.00 as attorney‘es fees‘and P20,000.00 as litigation expenses;



4. Dismissing the counterclaims and cross-claims of World Cars,

Inc. and Citytrust Finance Corporation; and

5. Directing the [Citytrust and World Cars] to pay the costs of suit.

Citytrust appealed to the Court of Appeals on the following assigned errors:I.

THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OFLAW IN NOT HOLDING THAT [SPOUSES AGUILAR] ARE LIABLE TO[CITYTRUST] FOR THE PAYMENT OF THE PROMISSORY NOTE (PN)(EXH. ―I‖) AND ARE BOUND BY THE TERMS AND CONDITIONS OFSAID PN AND CHATTEL MORTGAGE (EXH. ―2‖).

II.THAT ASSUMING, THAT SPOUSES AGUILAR ARE NOT LIABLE ON THEPROMISSORY NOTE, THE COURT A QUO COMMITTED SERIOUSERRORS OF FACT AND OF LAW IN NOT HOLDING THAT WORLD CARSIS LIABLE TO CITYTRUST AS GENERAL ENDORSER OF THEPROMISSORY NOTE AND FOR VIOLATION OF ITS WARRANTY UNDERTHE RECEIVABLES FINANCING AGREEMENT (RFA).

III.

THE COURT A QUO, COMMITTED SERIOUS ERRORS IN FACT AND INLAW WHEN IT ADJUDGED CITYTRUST JOINTLY AND SEVERALLYLIABLE TO [SPOUSES AGUILAR].[39] (Emphasis supplied)

World Cars appealed too, contending that the trial court erred in:

I.

. . . HOLDING WORLD CARS, INC., LIABLE FOR THE PERSONALACTIONS OR ACTIONS BEYOND THE SCOPE OF AUTHORITY OF ITSSALES AGENT JOSELITO PEREZ.

II.

. . . HOLDING THAT THE SALE IS A CASH SALE AND NOT ANINSTALLMENT SALE AS EVIDENCED BY THE PROMISSORY NOTE







The Aguilars fault the appellate court in:

A.

. . . GIVING LEGAL EFFECT TO THE PROMISSORY NOTE (PN) AND ITSDERIVATIVE INSTRUMENTS WHEN IT RULED THE SAME NULL ANDVOID SINCE IT IS NOT REALLY DESIRED OR INTENDED TO PRODUCELEGAL EFFECT.

B.

. . . RULING [CITYTRUST] A HOLDER IN DUE COURSE CONTRARY TOEVIDENCE ON RECORD.

C.

. . . RULING [SPOUSES AGUILAR] LIABLE ON THE PN CONTRARY TOEVIDENCE ON RECORD.

D.

. . . RULING [CITYTRUST NOT JOINTLY AND SEVERALLY LIABLEWITH WORLD CARSFOR DAMAGES AND ATTORNEY‘S FEESCONTRARY TO EVIDENCE ON RECORD.[42] (Underscoring supplied)

On the other hand, World Cars contend that:

A. THE ASSAILED DECISIONS OF THE HONORABLE COURT OFAPPEALS ARE CONTRARY TO LAW AND PREVAILINGJURISPRUDENCE.

B. CONSIDERING THAT THE ASSAILED DECISIONS OF THEHONORABLE COURT OF APPEALS ARE CONTRARY TO LAW ANDPREVAILING JURISPRUDENCE THE AWARDS OF MORALDAMAGES AGAINST WORLD CARS, INC. ARE ALSO CONTRARY TOLAW.

C. LIKEWISE, THE AWARDS OF EXEMPLARY DAMAGES,ATTORNEY‘S FEES AND APPEARANCE FEES, LITIGATIONEXPENSES AND THE COST OF SUIT AGAINST [WORLD CARS] AREALSO CONTRARY TO LAW.[43] (Underscoring supplied)











Clearly, Perez was the agent of World Cars and was duly authorized to accept payment forthe car. Josephine‘s testimony that before issuing the checks in the name of Perez, she verified

fr om his supervisor and the latter confirmed Perez‘ authority to receive payment remainsunrefuted by World Cars. In fact, World Cars admitted in its Answer with Counterclaim that―[w]hat was actually paid [by the Aguilars] and received by [it] was [Josephine‘s] check in the

amount of P148,000.00 asdownpayment for the said car. ‖[44] Parenthetically, as earlier stated,when Josephine spoke to World Cars‘ Vice President Domondon, the latter informed her thatthe last payment had not been received.[45] This information of Domondon does not jibe with theclaim of World Cars that it received only Josephine‘s first check in the amount of P148,000.00 asdownpayment.

As the above table of checks issued by Josephine shows, the check in the amountof P148,000.00, Check No. 112703 dated May 30, 1992, was payable to Perez.

Since the Aguilars‘ payment to Perez is deemed payment to World Cars, the promissory

note, chattel mortgage and other accessory documents they executed which were totake effectonly in the event the checks would be dishonored were deemed nullified, all the checks having been cleared.

Since the condition for the instruments to become effective was fulfilled, the obligation onthe part of the Aguilars to be bound thereby did not arise and World Cars did not thus acquirerights thereunder following Art. 1181 of the Civil Code which provides:

ARTICLE 1181.In conditional obligations, the acquisition ofrights, as well as the extinguishment or loss of those already acquired,shalldepend upon the happening of the event which constitutes thecondition. (Emphasis supplied)

As no right against the Aguilars was acquired by World Cars under the promissory note andchattel mortgage, it had nothing to assign to Citytrust. Consequently, Citytrust cannot enforce theinstruments against the Aguilars, for an assignee cannot acquire greater rights than those pertaining to the assignor .[46]















At all events, the Aguilars having fully paid the car before they became aware of theassignment of the instruments to Citytrust when they received notice thereof by Citytrust, theywere released of their obligation thereunder. The Civil Code so provides:

ARTICLE 1626. The debtor who, before having knowledge of the assignment, pays his creditor, shall be released from the obligation.

While Citytrust cannot enforce the instruments against the Aguilars, since under the RFA,specifically paragraph 5(a) thereof, World Cars guaranteed as follows:

5. As further warranties, [World Cars] hereby agrees and shall be bound by the following:

a. World Cars guarantees to [Citytrust] its successors, andassigns,that it has full right and legal authority to make the assignment ordiscounting; that the installment papers so discounted by virtue of thisagreement, are subsisting, valid, enforceable and in all respects what theypurport to be; that the papers contain the entire agreement between thecustomers and [World Cars]; x x x that it has absolute and good title to suchcontracts and the personalties covered thereby and the right to sell andtransfer the same in favor of [Citytrust]; x x x (Emphasis and underscoringsupplied),

Citytrust‘s allegations in its Crossclaim against World Cars Inc., to wit: x x x

6. That under the terms and conditions of the RFA, upon violation ofthe dealer’s warranties and undertakings, defendant Citytrust FinanceCorporation is entitled to recourse the discounted/assigned installments papers tothe former;

7. That assuming that plaintiff‘s complaint is correct, defendant WorldCars, Inc., appears to have violated the terms and conditions of the RFA itexecuted with Citytrust Finance Corporation;

Moreover, if it is proven that said plaintiffs have already paid the amounton said promissory note, then defendant World Cars Inc. would appear to havereceived twice the considerations thereof because it likewise received the proceeds of discounting thereof, from defendant Citytrust at the time said notewas endorsed and assigned thus, unjustly enriching itself;

x x x



9. Assuming that plaintiffs‘ claims are proven to be true and thatdefendant World Cars, Inc. violated its warranties and undertakings to thedefendant Citytrust, defendant World Cars, Inc. should likewise be made liable toherein defendant Citytrust for all the unpaid obligations arising from said

promissory note above alleged, plus damages and attorney‘s fees as maybe

proven during the trial.[47]

(Emphasis and underscoring supplied),

are well-taken.

Respecting the award of moral and exemplary damages, attorney‘s fees and other litigation

expenses to the Aguilars which World Cars assails, the same is in order.For by Josephine‘s

testimony,[48] she was ―annoyed, upset and angry‖; and her husband became hypertensive on

account of, and the credit line of their business was affected by World Cars‘ fraudulent breach o f

its agreement with them.[49]

As for the award to Citytrustof attorney‘s fees, appearance fees, litigation expenses and

costs of suit againstWorld Cars, the same is in order too, World Cars‘ violation of the RFA

having compelled Citytrust to incur expenses to protect its interest.[50]

WHEREFORE, the Court of Appeals‘ decision is REVERSED and SET ASIDEandanother rendered:

1. ANNULLINGthe promissory note, chattel mortgage and its accessory contracts;

2. ORDERING World Cars toPAY :

(a) Citytrust(1) whatever unpaid obligation due to it arising from the assignment of the

promissory note;(2) P50,000.00 as attorney‘s fees and P500.00 per hearing; and

(3) P50,000.00 as liquidated damages, cost of suit and other litigationexpenses.

(b) spouses Aguilar(1) P500,000.00 as moral damages;(2) P100,000.00 as exemplary damages;



















(3) P50,000.00 as attorney‘s fees; and (4) P20,000.00 as litigation expenses.

Costs against petitioner, World Cars, Inc.

SO ORDERED.

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