negotiable instruments cases - batch 1

7/31/2019 Negotiable Instruments Cases - Batch 1

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G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,vs.COURT OF APPEALS, FILRITERS GUARANTY ASSURANCECORPORATION and CENTRAL BANK of thePHILIPPINES, respondents.

TORRES, JR.,J.:

Assailed in this Petition for Review on Certiorari is the Decision of therespondent Court of Appeals dated January 29, 1990, 1 affirming thenullity of the transfer of Central Bank Certificate of Indebtedness(CBCI) No. D891, 2 with a face value of P500,000.00, from thePhilippine Underwriters Finance Corporation (Philfinance) to thepetitioner Trader's Royal Bank (TRB), under a RepurchaseAgreement3 dated February 4, 1981, and a Detached

Assignment

4

dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court ofManila, Branch 32, the action was originally filed as a Petitionfor Mandamus 5 under Rule 65 of the Rules of Court, to compel theCentral Bank of the Philippines to register the transfer of the subjectCBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters GuarantyAssurance Corporation (Filriters) executed a

"Detached Assignment" . . ., whereby Filriters, asregistered owner, sold, transferred, assigned anddelivered unto Philippine Underwriters FinanceCorporation (Philfinance) all its rights and title toCentral Bank Certificates of Indebtedness of PESOS:FIVE HUNDRED THOUSAND (P500,000) and having anaggregate value of PESOS: THREE MILLION FIVEHUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A")contains an express authorization executed by thetransferor intended to complete the assignmentthrough the registration of the transfer in the name of

PhilFinance, which authorization is specificallyphrased as follows: '(Filriters) hereby irrevocablyauthorized the said issuer (Central Bank) to transferthe said bond/certificates on the books of its fiscalagent;

5. On February 4, 1981, petitioner entered into aRepurchase Agreement with PhilFinance . . ., whereby,

for and in consideration of the sum of PESOS: FIVEHUNDRED THOUSAND (P500,000.00), PhilFinancesold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value ofP500,000.00 . . ., which CBCI was among thosepreviously acquired by PhilFinance from Filriters asaverred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement(Annex "B"), Philfinance agreed to repurchase CBCISerial No. D891 (Annex "C"), at the stipulated price ofPESOS: FIVE HUNDRED NINETEEN THOUSAND THREE

HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April27, 1981;

7. PhilFinance failed to repurchase the CBCI on theagreed date of maturity, April 27, 1981, when thechecks it issued in favor of petitioner were dishonoredfor insufficient funds;

8. Owing to the default of PhilFinance, it executed aDetached Assignment in favor of the Petitioner toenable the latter to have its title completed and

registered in the books of the respondent. And bymeans of said Detachment, Philfinance transferredand assigned all, its rights and title in the said CBCI(Annex "C") to petitioner and, furthermore, it didthereby "irrevocably authorize the said issuer(respondent herein) to transfer the saidbond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), togetherwith the two (2) aforementioned DetachedAssignments (Annexes "B" and "D"), to the SecuritiesServicing Department of the respondent, and

requested the latter to effect the transfer of the CBCI


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on its books and to issue a new certificate in the nameof petitioner as absolute owner thereof;

10. Respondent failed and refused to register thetransfer as requested, and continues to do sonotwithstanding petitioner's valid and just title overthe same and despite repeated demands in writing,the latest of which is hereto attached as Annex "E"

and made an integral part hereof;

11. The express provisions governing the transfer ofthe CBCI were substantially complied with thepetitioner's request for registration, to wit:

"No transfer thereof shall be validunless made at said office (where theCertificate has been registered) by theregistered owner hereof, in person orby his attorney duly authorized inwriting, and similarly noted hereon, andupon payment of a nominal transfer feewhich may be required, a newCertificate shall be issued to thetransferee of the registered holderthereof."

and, without a doubt, the Detached Assignmentspresented to respondent were sufficientauthorizations in writing executed by the registeredowner, Filriters, and its transferee, PhilFinance, asrequired by the above-quoted provision;

12. Upon such compliance with the aforesaidrequirements, the ministerial duties of registering atransfer of ownership over the CBCI and issuing a newcertificate to the transferee devolves upon therespondent;

Upon these assertions, TRB prayed for the registration by the CentralBank of the subject CBCI in its name.

On December 4, 1984, the Regional Trial Court the case tookcognizance of the defendant Central Bank of the Philippines' Motion

for Admission of Amended Answer with Counter Claim for

Interpleader 6 thereby calling to fore the respondent FilritersGuaranty Assurance Corporation (Filriters), the registered owner ofthe subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investmentagainst liabilities required of respondent as an insurancecompany under the Insurance Code;

13. Without any consideration or benefit whatsoever toFilriters, in violation of law and the trust fund doctrine and tothe prejudice of policyholders and to all who have present orfuture claim against policies issued by Filriters, AlfredoBanaria, then Senior Vice-President-Treasury of Filriters,without any board resolution, knowledge or consent of theboard of directors of Filriters, and without any clearance or

authorization from the Insurance Commissioner, executed adetached assignment purportedly assigning CBCI No. 891 toPhilfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury ofFilriters (both of whom were holding the same positions inPhilfinance), without any consideration or benefit redoundingto Filriters and to the grave prejudice of Filriters, its policyholders and all who have present or future claims against its

policies, executed similar detached assignment formstransferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperativebecause the assignment is without the knowledge andconsent of directors of Filriters, and not duly authorized inwriting by the Board, as requiring by Article V, Section 3 of CBCircular No. 769;


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16. The assignment of the CBCI to Philfinance is a personalact of Alfredo Banaria and not the corporate act of Filritersand such null and void;

a) The assignment was executed without consideration andfor that reason, the assignment is void from the beginning(Article 1409, Civil Code);

b) The assignment was executed without any knowledge andconsent of the board of directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters againstliabilities, which is a requirement under the Insurance Codefor its existence as an insurance company and the pursuit ofits business operations. The assignment of the CBCI is illegalact in the sense ofmalum in se or malum prohibitum, foranyone to make, either as corporate or personal act;

d) The transfer of dimunition of reserve investments ofFilriters is expressly prohibited by law, is immoral and againstpublic policy;

e) The assignment of the CBCI has resulted in the capitalimpairment and in the solvency deficiency of Filriters (andhas in fact helped in placing Filriters under conservatorship),an inevitable result known to the officer who executedassignment.

17. Plaintiff had acted in bad faith and with knowledge of theillegality and invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as acertificate of indebtedness is not payable to bearer but is aregistered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that theCentral Bank shall treat the registered owner as the absoluteownerand that the value of the registered certificates shallbe payable only to the registered owner; a sufficient notice toplaintiff that the assignments do not give them the registeredowner's right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and RegulationsGoverning CBCIs) provides that the registered certificates arepayable only to the registered owner (Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinanceof CBCI No. 891 by Filriters is not a regular transaction madein the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments ofFilriters against liabilities requires by the Insurance Code andits assignment or transfer is expressly prohibited by law.There was no attempt to get any clearance or authorizationfrom the Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not atransaction in the usual or regular course of its business;

c) The CBCI involved substantial amount and its assignmentclearly constitutes disposition of "all or substantially all" ofthe assets of Filriters, which requires the affirmative action ofthe stockholders (Section 40, Corporation [sic] Code. 7

In its Decision 8 dated April 29, 1988, the Regional Trial Court ofManila, Branch XXXIII found the assignment of CBCI No. D891 infavor of Philfinance, and the subsequent assignment of the sameCBCI by Philfinance in favor of Traders Royal Bank null and void andof no force and effect. The dispositive portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favorof the respondent Filriters Guaranty AssuranceCorporation and against the plaintiff Traders Royal

Bank:

(a) Declaring the assignment of CBCI No. 891 in favorof PhilFinance, and the subsequent assignment ofCBCI by PhilFinance in favor of the plaintiff TradersRoyal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of thePhilippines to disregard the said assignment and topay the value of the proceeds of the CBCI No. D891 tothe Filriters Guaranty Assurance Corporation;


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(c) Ordering the plaintiff Traders Royal Bank to payrespondent Filriters Guaranty Assurance Corp. Thesum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED. 9

The petitioner assailed the decision of the trial court in the Court ofAppeals 10, but their appeals likewise failed. The findings of the factof the said court are hereby reproduced:

The records reveal that defendant Filriters is theregistered owner of CBCI No. D891. Under a deed ofassignment dated November 27, 1971, Filriterstransferred CBCI No. D891 to Philippine UnderwritersFinance Corporation (Philfinance). Subsequently,Philfinance transferred CBCI No. D891, which was stillregistered in the name of Filriters, to appellantTraders Royal Bank (TRB). The transfer was madeunder a repurchase agreement dated February 4,1981, granting Philfinance the right to repurchase theinstrument on or before April 27, 1981. WhenPhilfinance failed to buy back the note on maturitydate, it executed a deed of assignment, dated April27, 1981, conveying to appellant TRB all its right andthe title to CBCI No. D891.

Armed with the deed of assignment, TRB then soughtthe transfer and registration of CBCI No. D891 in itsname before the Security and Servicing Department

of the Central Bank (CB). Central Bank, however,refused to effect the transfer and registration in viewof an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civilaction for mandamus against the Central Bank in theRegional Trial Court of Manila. The suit, however, wassubsequently treated by the lower court as a case ofinterpleader when CB prayed in its amended answerthat Filriters be impleaded as a respondent and thecourt adjudge which of them is entitled to theownership of CBCI No. D891. Failing to get a favorable

judgment. TRB now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was anegotiable instrument, and having acquired the said certificate fromPhilfinance as a holder in due course, its possession of the same isthus free fro any defect of title of prior parties and from any defenseavailable to prior parties among themselves, and it may thus,enforce payment of the instrument for the full amount thereofagainst all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not anegotiable instrument, since the instrument clearly stated that it waspayable to Filriters, the registered owner, whose name was inscribedthereon, and that the certificate lacked the words of negotiabilitywhich serve as an expression of consent that the instrument may betransferred by negotiation.

Obviously, the assignment of the certificate from Filriters toPhilfinance was fictitious, having made without consideration, anddid not conform to Central Bank Circular No. 769, series of 1980,better known as the "Rules and Regulations Governing Central BankCertificates of Indebtedness", which provided that any "assignment

of registered certificates shall not be valid unless made . . . by theregistered owner thereof in person or by his representative dulyauthorized in writing."

Petitioner's claimed interest has no basis, since it was derived fromPhilfinance whose interest was inexistent, having acquired thecertificate through simulation. What happened was Philfinancemerely borrowed CBCI No. D891 from Filriters, a sister corporation,to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed thedeed of assignment purportedly for and on behalf ofFilriters, did not have the necessary writtenauthorization from the Board of Directors of Filriters toact for the latter. For lack of such authority, theassignment did not therefore bind Filriters andviolated as the same time Central Bank Circular No.769 which has the force and effect of a law, resultingin the nullity of the transfer (People v. Que Po Lay, 94Phil. 640; 3M Philippines, Inc. vs. Commissioner ofInternal Revenue, 165 SCRA 778).


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In sum, Philfinance acquired no title or rights underCBCI No. D891 which it could assign or transfer toTraders Royal Bank and which the latter can registerwith the Central Bank.

WHEREFORE, the judgment appealed from isAFFIRMED, with costs against plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument thatPhilfinance owns 90% of Filriters equity and the two corporationshave identical corporate officers, thus demanding the application ofthe doctrine or piercing the veil of corporate fiction, as to givevalidity to the transfer of the CBCI from registered owner topetitioner TRB. 14 This renders the payment by TRB to Philfinance ofCBCI, as actual payment to Filriters. Thus, there is no merit to thelower court's ruling that the transfer of the CBCI from Filriters toPhilfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in theabsence of words of negotiability within the meaning of thenegotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) forvalue received, hereby promises to pay bearer, of ifthis Certificate of indebtedness be registered, to

FILRITERS GUARANTY ASSURANCE CORPORATION, theregistered owner hereof, the principal sum of FIVEHUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains tocertificates for the creation and maintenance of a permanentimprovement revolving fund, is similar to a "bond," (82 Minn. 202).Being equivalent to a bond, it is properly understood asacknowledgment of an obligation to pay a fixed sum of money. It is

usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiableinstrument, stating that:

As worded, the instrument provides a promise "to payFilriters Guaranty Assurance Corporation, theregistered owner hereof." Very clearly, the instrumentis payable only to Filriters, the registered owner,whose name is inscribed thereon. It lacks the words of

negotiability which should have served as anexpression of consent that the instrument may betransferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable toFILRITERS GUARANTY ASSURANCE CORPORATION, and to no oneelse, thus, discounting the petitioner's submission that the same is anegotiable instrument, and that it is a holder in due course of thecertificate.

The language of negotiability which characterize a negotiable paperas a credit instrument is its freedom to circulate as a substitute for

money. Hence, freedom of negotiability is the touchtone relating tothe protection of holders in due course, and the freedom ofnegotiability is the foundation for the protection which the lawthrows around a holder in due course (11 Am. Jur. 2d, 32). Thisfreedom in negotiability is totally absent in a certificate indebtednessas it merely to pay a sum of money to a specified person or entity fora period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability

of an instrument is determined from the writing, that is, fromthe face of the instrument itself. In the construction of a billor note, the intention of the parties is to control, if it can belegally ascertained. While the writing may be read in the lightof surrounding circumstance in order to more perfectlyunderstand the intent and meaning of the parties, yet as theyhave constituted the writing to be the only outward andvisible expression of their meaning, no other words are to beadded to it or substituted in its stead. The duty of the court insuch case is to ascertain, not what the parties may havesecretly intended as contradistinguished from what theirwords express, but what is the meaning of the words they

have used. What the parties meant must be determined bywhat they said.


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Thus, the transfer of the instrument from Philfinance to TRB wasmerely an assignment, and is not governed by the negotiableinstruments law. The pertinent question then is, was the transfer ofthe CBCI from Filriters to Philfinance and subsequently fromPhilfinance to TRB, in accord with existing law, so as to entitle TRB tohave the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the

matter:

Clearly shown in the record is the fact that Philfinance's titleover CBCI No. D891 is defective since it acquired theinstrument from Filriters fictitiously. Although the deed ofassignment stated that the transfer was for "value received",there was really no consideration involved. What happenedwas Philfinance merely borrowed CBCI No. D891 fromFilriters, a sister corporation. Thus, for lack of anyconsideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to

Philfinance did not conform to Central Bank Circular No. 769,series of 1980, otherwise known as the "Rules andRegulations Governing Central Bank Certificates ofIndebtedness", under which the note was issued. Published inthe Official Gazette on November 19, 1980, Section 3 thereofprovides that any assignment of registered certificates shallnot be valid unless made . . . by the registered owner thereofin person or by his representative duly authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed ofassignment purportedly for and on behalf of Filriters, did not

have the necessary written authorization from the Board ofDirectors of Filriters to act for the latter. For lack of suchauthority, the assignment did not therefore bind Filriters andviolated at the same time Central Bank Circular No. 769which has the force and effect of a law, resulting in the nullityof the transfer (People vs. Que Po Lay, 94 Phil. 640; 3MPhilippines, Inc. vs. Commissioner of Internal Revenue, 165SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No.D891 which it could assign or transfer to Traders Royal Bankand which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRBmust upheld, as the respondent Filriters and Philfinance, thoughseparate corporate entities on paper, have used their corporatefiction to defraud TRB into purchasing the subject CBCI, whichpurchase now is refused registration by the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the twocompanies have the same corporate officers, if the principleof piercing the veil of corporate entity were to be applied inthis case, then TRB's payment to Philfinance for the CBCIpurchased by it could just as well be considered a payment toFilriters, the registered owner of the CBCI as to bar the latterfrom claiming, as it has, that it never received any paymentfor that CBCI sold and that said CBCI was sold without itsauthority.

xxx xxx xxx

We respectfully submit that, considering that the Court ofAppeals has held that the CBCI was merely borrowed byPhilfinance from Filriters, a sister corporation, to guaranteeits (Philfinance's) financing operations, if it were to beconsistent therewith, on the issued raised by TRB that therewas a piercing a veil of corporate entity, the Court of Appealsshould have ruled that such veil of corporate entity was, infact, pierced, and the payment by TRB to Philfinance shouldbe construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporateentity, as this merely an equitable remedy, and may be awardedonly in cases when the corporate fiction is used to defeat publicconvenience, justify wrong, protect fraud or defend crime or where acorporation is a mere alter ego or business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to seethrough the protective shroud which exempts its stockholders fromliabilities that ordinarily, they could be subject to, or distinguishedone corporation from a seemingly separate one, were it not for theexisting corporate fiction. But to do this, the court must be sure that

the corporate fiction was misused, to such an extent that injustice,


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fraud, or crime was committed upon another, disregarding, thus, his,her, or its rights. It is the protection of the interests of innocent thirdpersons dealing with the corporate entity which the law aims toprotect by this doctrine.

The corporate separateness between Filriters and Philfinanceremains, despite the petitioners insistence on the contrary. For one,other than the allegation that Filriters is 90% owned by Philfinance,

and the identity of one shall be maintained as to the other, there isnothing else which could lead the court under circumstance todisregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction thata corporation is an entity with a juridical personality separate fromits stockholders and from other corporations may bedisregarded, 19 in the absence of such grounds, the general rulemust upheld. The fact that Filfinance owns majority shares in Filritersis not by itself a ground to disregard the independent corporatestatus of Filriters. In Liddel & Co., Inc. vs. Collector of InternalRevenue, 20 the mere ownership by a single stockholder or by

another corporation of all or nearly all of the capital stock of acorporation is not of itself a sufficient reason for disregarding thefiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner wasnot defrauded at all when it acquired the subject certificate ofindebtedness from Philfinance.

On its face the subject certificates states that it is registered in thename of Filriters. This should have put the petitioner on notice, andprompted it to inquire from Filriters as to Philfinance's title over the

same or its authority to assign the certificate. As it is, there is noshowing to the effect that petitioner had any dealings whatsoeverwith Filriters, nor did it make inquiries as to the ownership of thecertificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER.Thus:

TRANSFER. This Certificate shall pass by delivery unless it isregistered in the owner's name at any office of the Bank orany agency duly authorized by the Bank, and suchregistration is noted hereon. After such registration no

transfer thereof shall be valid unless made at said office(where the Certificates has been registered) by the registered

owner hereof, in person, or by his attorney, duly authorized inwriting and similarly noted hereon and upon payment of anominal transfer fee which may be required, a new Certificateshall be issued to the transferee of the registered ownerthereof. The bank or any agency duly authorized by the Bankmay deem and treat the bearer of this Certificate, or if thisCertificate is registered as herein authorized, the person inwhose name the same is registered as the absolute owner of

this Certificate, for the purpose of receiving payment hereof,or on account hereof, and for all other purpose whether ornot this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a writtenauthorization for the transfer or to require Philfinance to submit suchan authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCINo. D891. The fact that a non-owner was disposing of the registeredCBCI owned by another entity was a good reason for petitioner toverify of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, seriesof 1990 21, known as the Rules and Regulations Governing CentralBank Certificates of Indebtedness, Section 3, Article V of whichprovides that:

Sec. 3. Assignment of Registered Certificates. Assignmentof registered certificates shall not be valid unless made at theoffice where the same have been issued and registered or atthe Securities Servicing Department, Central Bank of thePhilippines, and by the registered owner thereof, in person or

by his representative, duly authorized in writing. For thispurpose, the transferee may be designated as therepresentative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance ofCentral Bank Circular 769, and its requirements. An entity whichdeals with corporate agents within circumstances showing that theagents are acting in excess of corporate authority, may not hold thecorporation liable. 22 This is only fair, as everyone must, in theexercise of his rights and in the performance of his duties, act withjustice, give everyone his due, and observe honesty and goodfaith. 23


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The transfer made by Filriters to Philfinance did not conform to thesaid. Central Bank Circular, which for all intents, is considered part ofthe law. As found by the courts a quo, Alfredo O. Banaria, who hadsigned the deed of assignment from Filriters to Philfinance,purportedly for and in favor of Filriters, did not have the necessarywritten authorization from the Board of Directors of Filriters to act forthe latter. As it is, the sale from Filriters to Philfinance was fictitious,and therefore void and inexistent, as there was no consideration for

the same. This is fatal to the petitioner's cause, for then, Philfinancehad no title over the subject certificate to convey the Traders RoyalBank. Nemo potest nisi quod de jure potest no man can doanything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form partof its legal and capital reserves, which are required by law 24 to bemaintained at a mandated level. This was pointed out by EliasGarcia, Manager-in-Charge of respondent Filriters, in his testimonygiven before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness,

in short, CBCI No. D891 in the face value of P5000,000.00subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examinedby the Insurance Commission sometime in early 1981 andthis CBCI No. 891 was among the CBCI's that were found tobe missing.

Q Let me take you back further before 1981. Did you havethe knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required bythe Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to putup legal reserves under Section 213 of the Insurance Code

equivalent to 40 percent of the premiums receipt and further,the Insurance Commission requires this reserve to be

invested preferably in government securities or governmentbinds. This is how this CBCI came to be purchased by thecompany.

It cannot, therefore, be taken out of the said funds, without violatingthe requirements of the law. Thus, the anauthorized use ordistribution of the same by a corporate officer of Filriters cannot bindthe said corporation, not without the approval of its Board of

Directors, and the maintenance of the required reserve fund.

Consequently, the title of Filriters over the subject certificate ofindebtedness must be upheld over the claimed interest of TradersRoyal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealedfrom dated January 29, 1990 is hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,vs.ERLANDO T. RODRIGUEZ and NORMARODRIGUEZ, Respondents.

D E C I S I O N

REYES, R.T.,J.:

WHEN the payee of the check is not intended to be the true recipientof its proceeds, is it payable to order or bearer? What is thefictitious-payee rule and who is liable under it? Is there anyexception?

These questions seek answers in this petition for review on certiorariof the Amended Decision1of the Court of Appeals (CA) whichaffirmed with modification that of the Regional Trial Court (RTC).2
http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt1http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt1http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt2http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt1http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt2


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The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients ofpetitioner Philippine National Bank (PNB), Amelia Avenue Branch,Cebu City. They maintained savings and demand/checking accounts,namely, PNBig Demand Deposits (Checking/Current Account No.

810624-6 under the account name Erlando and/or NormaRodriguez), and PNBig Demand Deposit (Checking/Current AccountNo. 810480-4 under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In linewith their business, they had a discounting3arrangement with thePhilnabank Employees Savings and Loan Association (PEMSLA), anassociation of PNB employees. Naturally, PEMSLA was likewise aclient of PNB Amelia Avenue Branch. The association maintainedcurrent and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguezwould rediscount the postdated checks issued to members wheneverthe association was short of funds. As was customary, the spouseswould replace the postdated checks with their own checks issued inthe name of the members.

It was PEMSLAs policy not to approve applications for loans ofmembers with outstanding debts. To subvert this policy, somePEMSLA officers devised a scheme to obtain additional loans despitetheir outstanding loan accounts. They took out loans in the names ofunknowing members, without the knowledge or consent of the latter.The PEMSLA checks issued for these loans were then given to the

spouses for rediscounting. The officers carried this out by forging theindorsement of the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguezchecks) in the name of the members and delivered the checks to anofficer of PEMSLA. The PEMSLA checks, on the other hand, weredeposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLAto its savings account without any indorsement from the namedpayees. This was an irregular procedure made possible through thefacilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank

teller in the PNB Branch. It appears that this became the usualpractice for the parties.

For the period November 1998 to February 1999, the spouses issuedsixty nine (69) checks, in the total amount of P2,345,804.00. Thesewere payable to forty seven (47) individual payees who were allmembers of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. Toput a stop to this scheme, PNB closed the current account ofPEMSLA. As a result, the PEMSLA checks deposited by the spouseswere returned or dishonored for the reason "Account Closed." Thecorresponding Rodriguez checks, however, were deposited as usualto the PEMSLA savings account. The amounts were duly debited fromthe Rodriguez account. Thus, because the PEMSLA checks given aspayment were returned, spouses Rodriguez incurred losses from therediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguezfiled a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.They sought to recover the value of their checks that were depositedto the PEMSLA savings account amounting to P2,345,804.00. Thespouses contended that because PNB credited the checks to thePEMSLA account even without indorsements, PNB violated itscontractual obligation to them as depositors. PNB paid the wrongpayees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause

of action. PNB argued that the claim for damages should come fromthe payees of the checks, and not from spouses Rodriguez. Sincethere was no demand from the said payees, the obligation should beconsidered as discharged.

In an Order dated January 12, 2000, the RTC denied PNBs motion todismiss.

In its Answer,5 PNB claimed it is not liable for the checks which itpaid to the PEMSLA account without any indorsement from thepayees. The bank contended that spouses Rodriguez, the makers,actually did not intend for the named payees to receive the proceeds

of the checks. Consequently, the payees were considered as
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"fictitious payees" as defined under the Negotiable Instruments Law(NIL). Being checks made to fictitious payees which are bearerinstruments, the checks were negotiable by mere delivery. PNBsAnswer included its cross-claim against its co-defendants PEMSLAand the MCP, praying that in the event that judgment is renderedagainst the bank, the cross-defendants should be ordered toreimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez(plaintiffs). It ruled that PNB (defendant) is liable to return the valueof the checks. All counterclaims and cross-claims were dismissed.The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby rendersjudgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the totalamount of P2,345,804.00 or reinstate or restore the amountof P775,337.00 in the PNBig Demand DepositChecking/Current Account No. 810480-4 of Erlando T.

Rodriguez, and the amount of P1,570,467.00 in the PNBigDemand Deposit, Checking/Current Account No. 810624-6 ofErlando T. Rodriguez and/or Norma Rodriguez, plus legal rateof interest thereon to be computed from the filing of thiscomplaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffsthe following reasonable amount of damages suffered bythem taking into consideration the standing of the plaintiffsbeing sugarcane planters, realtors, residential subdivisionowners, and other businesses:

(a) Consequential damages, unearned income in theamount of P4,000,000.00, as a result of their havingincurred great dificulty (sic) especially in theresidential subdivision business, which was notpushed through and the contractor even threatenedto file a case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amountof P500,000.00;

(d) Attorneys fees in the amount of P150,000.00considering that this case does not involve verycomplicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on theprincipal ground that the disputed checks should be considered aspayable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside theRTC disposition. The CA concluded that the checks were obviouslymeant by the spouses to be really paid to PEMSLA. The court a quodeclared:

We are not swayed by the contention of the plaintiffs-appellees(Spouses Rodriguez) that their cause of action arose from thealleged breach of contract by the defendant-appellant (PNB) when itpaid the value of the checks to PEMSLA despite the checks beingpayable to order. Rather, we are more convinced by the strong andcredible evidence for the defendant-appellant with regard to theplaintiffs-appellees and PEMSLAs business arrangement that thevalue of the rediscounted checks of the plaintiffs-appellees would bedeposited in PEMSLAs account for payment of the loans it hasapproved in exchange for PEMSLAs checks with the full value of thesaid loans. This is the only obvious explanation as to why all thedisputed sixty-nine (69) checks were in the possession of PEMSLAs

errand boy for presentment to the defendant-appellant that led tothis present controversy. It also appears that the teller who acceptedthe said checks was PEMSLAs officer, and that such was a regularpractice by the parties until the defendant-appellant discovered thescam. The logical conclusion, therefore, is that the checks werenever meant to be paid to order, but instead, to PEMSLA. We thusfind no breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLAallegedly issued post-dated checks to its qualified members who hadapplied for loans. However, because of PEMSLAs insufficiency offunds, PEMSLA approached the plaintiffs-appellees for the latter to

issue rediscounted checks in favor of said applicant members. Based


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on the investigation of the defendant-appellant, meanwhile, thisarrangement allowed the plaintiffs-appellees to make a profit byissuing rediscounted checks, while the officers of PEMSLA and othermembers would be able to claim their loans, despite the fact thatthey were disqualified for one reason or another. They were able toachieve this conspiracy by using other members who had loanedlesser amounts of money or had not applied at all. x x x.8(Emphasisadded)

The CA found that the checks were bearer instruments, thus they donot require indorsement for negotiation; and that spouses Rodriguezand PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees"because they were not the intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued,inter alia, that the checks on their faces were unquestionablypayable to order; and that PNB committed a breach of contract whenit paid the value of the checks to PEMSLA without indorsement fromthe payees. They also argued that their cause of action is not only

against PEMSLA but also against PNB to recover the value of thechecks.

On October 11, 2005, the CA reversed itself via an AmendedDecision, the last paragraph and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to theplaintiffs-appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interestat 6% per annum from 14 May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorneys fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is herebyrendered by Us AFFIRMING WITH MODIFICATION the assaileddecision rendered in Civil Case No. 99-10892, as set forth in theimmediately next preceding paragraph hereof, and SETTING ASIDE

Our original decision promulgated in this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to theappellate court, PNB failed to present sufficient proof to defeat theclaim of the spouses Rodriguez that they really intended the checksto be received by the specified payees. Thus, PNB is liable for thevalue of the checks which it paid to PEMSLA without indorsementsfrom the named payees. The award for damages was deemed

appropriate in view of the failure of PNB to treat the Rodriguezaccount with the highest degree of care considering the fiduciarynature of their relationship, which constrained respondents to seeklegal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks arepayable to order or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued thedisputed checks, they did not intend for the named payees toreceive the proceeds. Thus, they are bearer instruments that couldbe validly negotiated by mere delivery. Further, testimonial anddocumentary evidence presented during trial amply proved thatspouses Rodriguez and the officers of PEMSLA conspired with eachother to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an

erroneous judgment attaining finality to the prejudice of innocentparties. A court discovering an erroneous judgment before itbecomes final may, motu proprio or upon motion of the parties,correct its judgment with the singular objective of achieving justicefor the litigants.10

However, a word of caution to lower courts, the CA in Cebu in thisparticular case, is in order. The Court does not sanction carelessdisposition of cases by courts of justice. The highest degree ofdiligence must go into the study of every controversy submitted fordecision by litigants. Every issue and factual detail must be closelyscrutinized and analyzed, and all the applicable laws judiciously
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studied, before the promulgation of every judgment by the court.Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the truerecipient of the proceeds, the check is considered as a bearerinstrument. A check is "a bill of exchange drawn on a bank payable

on demand."11

It is either an order or a bearer instrument. Sections 8and 9 of the NIL states:

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 himor his order. It may be drawn payable to the order of

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be namedor otherwise indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. The instrument is payable tobearer

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer;or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person makingit so payable; or

(d) When the name of the payee does not purport to be thename of any person; or

(e) Where the only or last indorsement is an indorsement inblank.12 (Underscoring supplied)

The distinction between bearer and order instruments lies in theirmanner of negotiation. Under Section 30 of the NIL, an order

instrument requires an indorsement from the payee or holder beforeit may be validly negotiated. A bearer instrument, on the other hand,does not require an indorsement to be validly negotiated. It isnegotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. An instrument is negotiatedwhen it is transferred from one person to another in such manner asto constitute the transferee the holder thereof. If payable to bearer,it is negotiated by delivery; if payable to order, it is negotiated bythe indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument.However, under Section 9(c) of the NIL, a check payable to aspecified payee may nevertheless be considered as a bearerinstrument if it is payable to the order of a fictitious or non-existingperson, and such fact is known to the person making it so payable.Thus, checks issued to "Prinsipe Abante" or "Si Malakas at siMaganda," who are well-known characters in Philippine mythology,are bearer instruments because the named payees are fictitious andnon-existent.

We have yet to discuss a broader meaning of the term "fictitious" asused in the NIL. It is for this reason that We look elsewhere for

guidance. Court rulings in the United States are a logical startingpoint since our law on negotiable instruments was directly lifted fromthe Uniform Negotiable Instruments Law of the United States.13

A review of US jurisprudence yields that an actual, existing, andliving payee may also be "fictitious" if the maker of the check did notintend for the payee to in fact receive the proceeds of the check.This usually occurs when the maker places a name of an existingpayee on the check for convenience or to cover up an illegalactivity.14 Thus, a check made expressly payable to a non-fictitiousand existing person is not necessarily an order instrument. If thepayee is not the intended recipient of the proceeds of the check, the

payee is considered a "fictitious" payee and the check is a bearerinstrument.
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In a fictitious-payee situation, the drawee bank is absolved fromliability and the drawer bears the loss. When faced with a checkpayable to a fictitious payee, it is treated as a bearer instrument thatcan be negotiated by delivery. The underlying theory is that onecannot expect a fictitious payee to negotiate the check by placinghis indorsement thereon. And since the maker knew this limitation,he must have intended for the instrument to be negotiated by meredelivery. Thus, in case of controversy, the drawer of the check willbear the loss. This rule is justified for otherwise, it will be mostconvenient for the maker who desires to escape payment of thecheck to always deny the validity of the indorsement. This despitethe fact that the fictitious payee was purposely named without anyintention that the payee should receive the proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v.Liberty Insurance Bank.16 In the said case, the corporation Mueller &Martin was defrauded by George L. Martin, one of its authorizedsignatories. Martin drew seven checks payable to the GermanSavings Fund Company Building Association (GSFCBA) amounting to$2,972.50 against the account of the corporation without authority

from the latter. Martin was also an officer of the GSFCBA but did nothave signing authority. At the back of the checks, Martin placed therubber stamp of the GSFCBA and signed his own name asindorsement. He then successfully drew the funds from LibertyInsurance Bank for his own personal profit. When the corporationfiled an action against the bank to recover the amount of the checks,the claim was denied.

The US Supreme Court held in Mueller that when the person makingthe check so payable did not intend for the specified payee to haveany part in the transactions, the payee is considered as a fictitiouspayee. The check is then considered as a bearer instrument to be

validly negotiated by mere delivery. Thus, the US Supreme Courtheld that Liberty Insurance Bank, as drawee, was authorized to makepayment to the bearer of the check, regardless of whether priorindorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express TravelRelated Services Company, Inc.18upheld the fictitious-payee rule. Therule protects the depositary bank and assigns the loss to the drawerof the check who was in a better position to prevent the loss in thefirst place. Due care is not even required from the drawee ordepositary bank in accepting and paying the checks. The effect isthat a showing of negligence on the part of the depositary bank will

not defeat the protection that is derived from this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of thedrawee bank, or any transferee of the check for that matter, willwork to strip it of this defense. The exception will cause it to bear theloss. Commercial bad faith is present if the transferee of the checkacts dishonestly, and is a party to the fraudulent scheme. Said theUS Supreme Court in Getty:

Consequently, a transferees lapse of wary vigilance, disregard ofsuspicious circumstances which might have well induced a prudentbanker to investigate and other permutations of negligence are notrelevant considerations under Section 3-405 x x x. Rather, there is a"commercial bad faith" exception to UCC 3-405, applicable when thetransferee "acts dishonestly where it has actual knowledge of factsand circumstances that amount to bad faith, thus itself becoming aparticipant in a fraudulent scheme. x x x Such a test finds support inthe text of the Code, which omits a standard of care requirementfrom UCC 3-405 but imposes on all parties an obligation to act with"honesty in fact." x x x19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extendsprotection even to non-bank transferees of the checks.

In the case under review, the Rodriguez checks were payable tospecified payees. It is unrefuted that the 69 checks were payable tospecific persons. Likewise, it is uncontroverted that the payees wereactual, existing, and living persons who were members of PEMSLAthat had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existingpersons, were "fictitious" in its broader context.

For the fictitious-payee rule to be available as a defense, PNB mustshow that the makers did not intend for the named payees to be partof the transaction involving the checks. At most, the banks thesisshows that the payees did not have knowledge of the existence ofthe checks. This lack of knowledge on the part of the payees,however, was not tantamount to a lack of intention on the part ofrespondents-spouses that the payees would not receive the checksproceeds. Considering that respondents-spouses were transactingwith PEMSLA and not the individual payees, it is understandable thatthey relied on the information given by the officers of PEMSLA thatthe payees would be receiving the checks.
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Verily, the subject checks are presumed order instruments. This isbecause, as found by both lower courts, PNB failed to presentsufficient evidence to defeat the claim of respondents-spouses thatthe named payees were the intended recipients of the checksproceeds. The bank failed to satisfy a requisite condition of afictitious-payee situation that the maker of the check intended forthe payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in itsbroader sense, the fictitious-payee rule does not apply. Thus, thechecks are to be deemed payable to order. Consequently, thedrawee bank bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not disputethe fact that its teller or tellers accepted the 69 checks for deposit tothe PEMSLA account even without any indorsement from the namedpayees. It bears stressing that order instruments can only benegotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to

the customer nor duly indorsed by the payee is apparently grosslynegligent in its operations.21 This Court has recognized the uniquepublic interest possessed by the banking industry and the need forthe people to have full trust and confidence in their banks. 22For thisreason, banks are minded to treat their customers accounts withutmost care, confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify thegenuineness of the signature of the drawer and to pay the checkstrictly in accordance with the drawers instructions, i.e., to thenamed payee in the check. It should charge to the drawers accountsonly the payables authorized by the latter. Otherwise, the draweewill be violating the instructions of the drawer and it shall be liablefor the amount charged to the drawers account.24

In the case at bar, respondents-spouses were the banks depositors.The checks were drawn against respondents-spouses accounts.PNB, as the drawee bank, had the responsibility to ascertain theregularity of the indorsements, and the genuineness of thesignatures on the checks before accepting them for deposit. Lastly,PNB was obligated to pay the checks in strict accordance with theinstructions of the drawers. Petitioner miserably failed to dischargethis burden.

The checks were presented to PNB for deposit by a representative ofPEMSLA absent any type of indorsement, forged or otherwise. Thefacts clearly show that the bank did not pay the checks in strictaccordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks not to the namedpayees or their order, but to PEMSLA, a third party to the transactionbetween the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of itsemployees. The trustworthiness of bank employees is indispensableto maintain the stability of the banking industry. Thus, banks areenjoined to be extra vigilant in the management and supervision oftheir employees. In Bank of the Philippine Islands v. Court ofAppeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By thevery nature of their work the degree of responsibility, care andtrustworthiness expected of their employees and officials is fargreater than those of ordinary clerks and employees. For obviousreasons, the banks are expected to exercise the highest degree of

diligence in the selection and supervision of their employees.26

PNBs tellers and officers, in violation of banking rules of procedure,permitted the invalid deposits of checks to the PEMSLA account.Indeed, when it is the gross negligence of the bank employees thatcaused the loss, the bank should be held liable.27

PNBs argument that there is no loss to compensate since nodemand for payment has been made by the payees must also fail.Damage was caused to respondents-spouses when the PEMSLAchecks they deposited were returned for the reason "AccountClosed." These PEMSLA checks were the corresponding payments tothe Rodriguez checks. Since they could not encash the PEMSLAchecks, respondents-spouses were unable to collect payments forthe amounts they had advanced.

A bank that has been remiss in its duty must suffer theconsequences of its negligence. Being issued to named payees, PNBwas duty-bound by law and by banking rules and procedure torequire that the checks be properly indorsed before accepting themfor deposit and payment. In fine, PNB should be held liable for theamounts of the checks.

One Last Note
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We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants PEMSLA and MPC. The records arebereft of any pleading filed by these two defendants in answer to thecomplaint of respondents-spouses and cross-claim of PNB. The Rulesexpressly provide that failure to file an answer is a ground for adeclaration that defendant is in default.28 Yet, the RTC failed tosanction the failure of both PEMSLA and MPC to file responsivepleadings. Verily, the RTC dismissal of PNBs cross-claim has nobasis. Thus, this judgment shall be without prejudice to whateveraction the bank might take against its co-defendants in the trialcourt.

To PNBs credit, it became involved in the controversial transactionnot of its own volition but due to the actions of some of itsemployees. Considering that moral damages must be understood tobe in concept of grants, not punitive or corrective in nature, Weresolve to reduce the award of moral damages toP50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with theMODIFICATION that the award for moral damages is reduced

to P50,000.00, and that this is without prejudice to whatever civil,criminal, or administrative action PNB might take against PEMSLA,MPC, and the employees involved.

SO ORDERED.

RUBEN T. REYESAssociate Justice

G.R. No. 126670 December 2, 1999

ERNESTO T. PACHECO and VIRGINIA O. PACHECO, petitioners,vs.HON. COURT OF APPEALS and PEOPLE OF THEPHILIPPINES, respondents.

YNARES-SANTIAGO,J.:

Petitioner spouses are engaged in the construction business.Complainant Romualdo Vicencio was a former Judge and his wife,Luz Vicencio, owns a pawnshop in Samar. On May 17, 1989, due tofinancial difficulties arising from the repeated delays in the paymentof their receivables for the construction projects from theDPWH, 1petitioners were constrained to obtain a loan of P10,000.00

from Mrs. Vicencio. The latter acceded. Instead of merely requiring anote of indebtedness, however, her husband Mr. Vicencio requiredpetitioners to issue an undated check as evidence of the loan whichallegedly will not be presented to the bank. Despite being informedby petitioners that their bank account no longer had any funds, Mrs.Vicencio insisted that issue the check, which according to her wasonly a formality. Thus, petitioner Virginia Pacheco issued on May 17,1989 an undated RCBC 2 check with number CT 101756 forP10,000.00. However, she only received the amount of P9,000.00 asthe 10% interest on the loan was already deducted. Mrs. Vicencioalso required Virginia's husband, herein petitioner Ernesto Pacheco,to sign the check on the same understanding that the check is not to

be encashed but merely intended as an evidence of indebtednesswhich cannot be negotiated.

On June 14, 1989, Virginia obtained another loan of P50,000.00 fromMrs. Vicencio. She received only P35,000.00 as the previous loan ofP10,000.00 as well as the 10% interest amounting to P5,000.00 onthe new loan were deducted by the latter. With the payment of theprevious debt, Virginia asked for the return of the first check (RCBCcheck no. 101756) but Mrs. Vicencio told her that her filing clerk wasabsent. Despite several demands for the return of the first check,Mrs. Vicencio told Virginia that they can no longer locate the foldercontaining that check. For the new loan, she also required Virginia to

issue three (3) more checks in various amounts two checks forP20,000.00 each and the third check for P10,000.00. Petitionerswere not amendable to these requirements, but Mrs. Vicencioinsisted that they issue the same assuring them that the checks willnot be presented to the banks but will merely serve as guarantee forthe loan since there was no promissory note required of them. Dueto her dire financial needs, Virginia issued three undated RCBCchecks numbered 101783 and 101784 in the sum of P20,000.00each and 101785 for P10,000.00, and again informed Mrs. Vicenciothat the cheeks cannot be encashed as the same were not funded.Petitioner Ernesto also signed the three checks as required by Mrs.Vicencio on the same conditions as the first check.


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On June 20 and July 21, 1989, petitioner Virginia obtained two moreloans, one for P10,000.00 and another for P15,000.00. Again sheissued two more RCBC checks (No. 101768 for P10,000.00 and No.101774 for P15,000.00) as required by Mrs. Vicencio with the sameassurance that the checks shall not be presented for payment butshall stand only as evidence of indebtedness in lieu of the usualpromissory note.

All the checks were undated at the time petitioners handed them toMrs. Vicencio. The six checks represent a total obligation ofP85,000.00. However, since the loan of P10,000.00 under the firstcheck was already paid when the amount thereof was deducted fromthe proceeds of the second loan, the remaining account was onlyP75,000.00. Of this amount, petitioners were able to settle and payin cash P60,000.00 in July 1989. Petitioners never had anytransaction nor ever dealt with Mrs. Vicencio's husband, thecomplainant herein.

When the remaining balance of P15,000.00 on the loans became dueand demandable, petitioners were not able to pay despite demands

to do so. On August 3, 1992, Mrs. Vicencio together with herhusband and their daughter Lucille, went to petitioners' residence topersuade Virginia to place the date "August 15, 1992" on checksnos. 101756 and 101774, although said checks were respectivelygiven undated to Mrs. Vicencio on May 17, 1989 and July 21, 1989.Check no. 101756 was required by Mrs. Vicencio to be dated asadditional guarantee for the P15,000.00 unpaid balance allegedlyunder check no. 101774. Despite being informed by petitionerVirginia that their account with RCBC had been closed as early asAugust 17, 1989, Mrs. Vicencio and her daughter insisted that sheplace a date on the checks allegedly so that it will become evidenceof their indebtedness. The former reluctantly wrote the date on the

checks for fear that she might not be able to obtain future loansfrom Mrs. Vicencio.

Later, petitioners were surprised to receive on August 29, 1992 ademand letter from Mrs. Vicencio's spouse informing them that thechecks when presented for payment on August 25, 1992 weredishonored due to "Account Closed". Consequently, upon thecomplaint of Mrs., Vicencio's husband with whom petitioners neverhad any transaction, two informations for estafa, defined in Article315 (2) (d) of the Revised Penal Code, were filed against them. Theinformations which were amended on April 1, 1993 alleged thatpetitioners "through fraud and false pretenses and in payment of a

diamond ring (gold necklace)" issued checks which when presented

for payment were dishonored due to account closed. 3 After enteringa plea of not guilty during arraignment, petitioners were tried andsentenced to suffer imprisonment and ordered to indemnify thecomplainant in the total amount of P25,000.00. 4 On appeal, theCourt of Appeals (CA) affirmed the decision of the court aquo. 5 Hence this petition.

Estafa may be committed in several ways. One of these is by

postdating a check or issuing a check in payment of an obligation, asprovided in Article 315, paragraph 2(d) of the RPC, viz:

Art. 315. Swindling (estafa). Any person who shalldefraud another by any of the means mentionedhereinbelow shall be punished by:

xxx xxx xxx

2. By means of any of the following false pretenses orfraudulent acts executed prior to or simultaneouslywith the commission of the fraud:

xxx xxx xxx

(d) By postdating a check, or issuing a check inpayment of an obligation when the offender had nofunds in the bank, or his funds deposited therein werenot sufficient to cover the amount of the check. Thefailure of the drawer of the check to deposit theamount necessary to cover his check within three (3)days from receipt of notice from the bank and/or thepayee or holder that said check has been dishonored

for lack or insufficiency of funds shall be primafacie evidence of deceit constituting false pretense orfraudulent act.

The essential elements in order to sustain a conviction under theabove paragraph are:

1. that the offender postdated or issueda check in payment of an paymentobligation contracted at the time thecheck was issued;


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2. that such postdating or issuing acheck was done when the offender hadno funds in the bank, or his fundsdeposited therein were not sufficient tocover the amount of the check;

3. deceit or damage to the payeethereof. 6

The first and third elements are not present in this case. A check hasthe character of negotiability and at the same time it constitutes anevidence of indebtedness. By mutual agreement of the parties, thenegotiable character of a check may be waived and the instrumentmay be treated simply as proof of an obligation. There cannot bedeceit on the part of the obligor, petitioners herein, because theyagreed with the obligee at the time of the issuance and postdating ofthe checks that the same shall not be encashed or presented to thebanks. As per assurance of the lender, the checks are nothing butevidence of the loan or security thereof in lieu of and for the samepurpose as a promissory note. By their own covenant, therefore, the

checks became mere evidence of indebtedness. It has been ruledthat a drawer who issues a check as security or evidence ofinvestment is not liable for estafa. 7 Mrs. Vicencio could not havebeen deceived nor defrauded by petitioners in order to obtain theloans because she was informed that they no longer have funds intheir RCBC accounts. In 1992, when the Vicencio family askedVirginia to place a date on the check, the latter again informed Mrs.Vicencio that their account with RCBC was already closed as early asAugust 1989. With the assurance, however, that the check will onlystand as a firm evidence of indebtedness, Virginia placed a date onthe check. Under these circumstances, Mrs. Vicencio cannot claimthat she was deceived or defrauded by petitioners in obtaining the

loan. In the absence of the essential element of deceit, 8 no estafawas committed by petitioners.

Both courts below relied so much on the fact that Mrs. Vicencio'shusband is a former Judge who knows the law. He should haveknown, then, that he need not even ask the petitioners to place adate on the check, because as holder of the check, he could haveinserted the date pursuant to Section 13 of the NegotiableInstruments Law (NIL). 9 Moreover, as stated in Section 14 thereof,complainant, as the person in possession of the check, hasprimafacie authority to complete it by filling up the blanks therein.Besides, pursuant to Section 12 of the same law, a negotiable

instrument is not rendered invalid by reason only that it is antedated

or postdated. 10 Thus, the allegation of Mrs. Vicencio that the date tobe placed by Virginia was necessary so as to make the checkevidence of indebtedness is nothing but a ploy. Petitioners openlydisclosed and never hid the fact that they no longer have funds inthe bank as their bank account was already closed. Knowledge bythe complainant that the drawer does not have sufficient funds inthe bank at the time it was issued to him does not give rise to a casefor estafa through bouncingchecks. 11

Moreover, a check must be presented within a reasonable time fromissue. 12 By current banking practice, a check becomes stale aftermore than six (6) months. In fact a check long overdue for more thantwo and one-half years is considered stale. 13 In this case, the checkswere issued more than three years prior to their presentment. In hiscomplaint, complainant alleged that petitioners bought jewelry fromhim and that he would not have parted with his jewelry had notpetitioners issued the checks. The evidence on record, however,does not support the theory of the crime.

There were six checks given by petitioners to Mrs. Vicencio but onlytwo were presented for encashment. If all were issued in payment ofthe alleged jewelry, why were not all the checks presented? Therewas a deliberate choice of these two checks as the total amountreflected therein is equivalent to the amount due under the unpaidobligation. The other checks, on the other hand, could not be usedas the amounts therein do not jibe with the amount of the unpaidbalance. Following complainant's theory that he would not have soldthe jewelries had not petitioners issued "postdated" checks, still noestafa can be imputed to petitioners. It is clear that the checks werenot intended for encashment with the bank, but were delivered asmere security for the payment of the loan and under an agreement

that the checks would be redeemed with cash as they fell due.Hence, the checks were not intended by the parties to be modes ofpayment but only as promissory notes. Since complainant and hiswife were well aware of that fact, they cannot now complain therewas deception on the part of petitioners. Awareness by thecomplainant of the fictitious nature of the pretense cannot give riseto estafa by means of deceit. 14 When the payee was informed bythe by the drawer that the checks are not covered by adequatefunds it does not give rise to bad faith or estafa. 15

Moreover, complainant's allegations that the two subject checkswere issued in 1992 as payment for the jewelry he allegedly sold to

petitioners is belied by the evidence on record. First, complainant is


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not engaged in the sale of jewelry. 16 Neither are petitioners. If thepieces of jewelry were important to complainant considering thatthey were with him for more than twenty-five years already, 17 hewould not have easily parted with them in consideration forunfunded personal checks in favor of persons whose means of livingor source of income were unknown to him. 18Applicable here is thelegal precept that persons are presumed to have taken care of theirbusiness. 19

Second, petitioners' bank account with RCBC was opened on March26, 1987 and was closed on April 17, 1989, during the span of whichthey were issued 10 check booklets with the last booklet issued onApril 6, 1984. This last booklet contains 50 checks consecutivelynumbered from 101751 to 101800. The two subject checks camefrom this booklet. All the checks in this booklet were issued in theyear 1989 including the two subject checks, so that thecomplainants' theory that the jewelry were sold in 1992 cannot bebelieved.

The rule that factual findings of the trial court bind this court is not

absolute but admits of exceptions such as when the conclusion is afinding grounded on speculation, surmise, and conjecture and whenthe findings of the lower court is premised on the absence ofevidence and is contradicted by the evidence on record. 20 Based onthe foregoing discussions, this Court is constrained to depart fromthe general rule. Equally applicable is what Vice-Chancellor Van Fleetonce said: 21

Evidence to be believed must not only proceed fromthe mouth of a credible witness but must be crediblein itself such as the common experience andobservation of mankind can approve as probable

under the circumstances. We have no test of the truthof human testimony, except its conformity to ourknowledge, observation and experience. Whatever isrepugnant to these belongs to the miraculous, and isoutside of judicial cognizance.

Petitioners, however, are not without liability. An accused acquittedof a criminal charge may nevertheless be held civilly liable in thesame case where the facts established by the evidence sowarrant. 22 Based on the records, they still have an outstandingobligation of P15,000.00 in favor of Mrs. Vicencio. There was mentionthat the loan shall earn interests. However, an agreement as topayment of interest must be in writing, otherwise it cannot be

valid, 23 although there was actual payment of interests by virtue ofthe advance deductions from the loan. Once the judgment becomesfinal and executory, the amount due is deemed equivalent to aforbearance of credit during the interim period from the finality ofjudgment until full payment, in which case it shall earn legal interestat the rate of twelve per cent (12%) per annum pursuant to CentralBank (CB) Circular No. 416. 24

WHEREFORE, the assailed Decision is REVERSED and SET ASIDE.Petitioners are ACQUITTED of the charge of estafa but they areORDERED to pay Mrs. Vicencio the amount of P15,000.00 withoutinterest. However, from the time this judgment becomes final andexecutory, the amount due shall earn legal interest of twelvepercent (12%)per annum until full payment.

SO ORDERED.

Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.

G.R. No. 148864 August 21, 2003

SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C.EVANGELISTA, Petitioners,vs.MERCATOR FINANCE CORP., LYDIA P. SALAZAR,LAMEC'S** REALTY AND DEVELOPMENT CORP. and theREGISTER OF DEEDS OF BULACAN, Respondents.

PUNO,J.:

Petitioners, Spouses Evangelista ("Petitioners"), are before this Courton a Petition for Review on Certiorari under Rule 45 of the Revised


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Rules of Court, assailing the decision of the Court of Appealsdismissing their petition.

Petitioners filed a complaint1 for annulment of titles againstrespondents, Mercator Finance Corporation, Lydia P. Salazar, LamecsRealty and Development Corporation, and the Register of Deeds ofBulacan. Petitioners claimed being the registered owners of five (5)parcels of land2 contained in the Real Estate Mortgage3 executed by

them and Embassy Farms, Inc. ("Embassy Farms"). They alleged thatthey executed the Real Estate Mortgage in favor of MercatorFinancing Corporation ("Mercator") only as officers of EmbassyFarms. They did not receive the proceeds of the loan evidenced by apromissory note, as all of it went to Embassy Farms. Thus, theycontended that the mortgage was without any consideration as tothem since they did not personally obtain any loan or creditaccommodations. There being no principal obligation on which themortgage rests, the real estate mortgage is void.4 With the voidmortgage, they assailed the validity of the foreclosure proceedingsconducted by Mercator, the sale to it as the highest bidder in thepublic auction, the issuance of the transfer certificates of title to it,

the subsequent sale of the same parcels of land to respondent LydiaP. Salazar ("Salazar"), and the transfer of the titles to her name, andlastly, the sale and transfer of the properties to respondent LamecsRealty & Development Corporation ("Lamecs").

Mercator admitted that petitioners were the owners of the subjectparcels of land. It, however, contended that "on February 16, 1982,plaintiffs executed a Mortgage in favor of defendant MercatorFinance Corporation for and in consideration of certain loans, and/orother forms of credit accommodations obtained from the Mortgagee(defendant Mercator Finance Corporation) amounting to EIGHTHUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE &

78/100 (P844,625.78) PESOS, Philippine Currency and to secure thepayment of the same and those others that the MORTGAGEE mayextend to the MORTGAGOR (plaintiffs) x x x."5It contended thatsince petitioners and Embassy Farms signed the promissory note6 asco-makers, aside from the Continuing SuretyshipAgreement7 subsequently executed to guarantee the indebtednessof Embassy Farms, and the succeeding promissorynotes8 restructuring the loan, then petitioners are jointly andseverally liable with Embassy Farms. Due to their failure to pay theobligation, the foreclosure and subsequent sale of the mortgagedproperties are valid.

Respondents Salazar and Lamecs asserted that they are innocentpurchasers for value and in good faith, relying on the validity of thetitle of Mercator. Lamecs admitted the prior ownership of petitionersof the subject parcels of land, but alleged that they are the presentregistered owner. Both respondents likewise assailed the longsilence and inaction by petitioners as it was only after a lapse ofalmost ten (10) years from the foreclosure of the property and thesubsequent sales that they made their claim. Thus, Salazar andLamecs averred that petitioners are in estoppel and guilty of laches.9

During pre-trial, the parties agreed on the following issues:

a. Whether or not the Real Estate Mortgage executed by theplaintiffs in favor of defendant Mercator Finance Corp. is null andvoid;

b. Whether or not the extra-judicial foreclosure proceedingsundertaken on subject parcels of land to satisfy the indebtednessof Embassy Farms, Inc. is (sic) null and void;

c. Whether or not the sale made by defendant Mercator FinanceCorp. in favor of Lydia Salazar and that executed by the latter infavor of defendant Lamecs Realty and Development Corp. arenull and void;

d. Whether or not the parties are entitled to damages.10

After pre-trial, Mercator moved for summary judgment on the groundthat except as to the amount of damages, there is no factual issue tobe litigated. Mercator argued that petitioners had admitted in theirpre-trial brief the existence of the promissory note, the continuing

suretyship agreement and the subsequent promissory notesrestructuring the loan, hence, there is no genuine issue regardingtheir liability. The mortgage, foreclosure proceedings and thesubsequent sales are valid and the complaint must be dismissed.11

Petitioners opposed the motion for summary judgment claiming thatbecause their personal liability to Mercator is at issue, there is aneed for a full-blown trial.12

The RTC granted the motion for summary judgment and dismissedthe complaint. It held:
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A reading of the promissory notes show (sic) that the liability of thesignatories thereto are solidary in view of the phrase "jointly andseverally." On the promissory note appears (sic) the signatures ofEduardo B. Evangelista, Epifania C. Evangelista and anothersignature of Eduardo B. Evangelista below the words EmbassyFarms, Inc. It is crystal clear then that the plaintiffs-spouses signedthe promissory note not only as officers of Embassy Farms, Inc. butin their personal capacity as well(.) Plaintiffs(,) by affixing theirsignatures thereon in a dual capacity have bound themselves assolidary debtor(s) with Embassy Farms, Inc. to pay defendantMercator Finance Corporation the amount of indebtedness. That theprincipal contract of loan is void for lack of consideration, in the lightof the foregoing is untenable.13

Petitioners motion for reconsideration was denied for lack ofmerit.14 Thus, petitioners went up to the Court of Appeals, but againwere unsuccessful. The appellate court held:

The appellants insistence that the loans secured by the mortgagethey executed were not personally theirs but those of Embassy

Farms, Inc. is clearly self-serving and misplaced. The fact that theysigned the subject promissory notes in the(ir) personal capacitiesand as officers of the said debtor corporation is manifest on the veryface of the said documents of indebtedness (pp. 118, 128-131, Orig.Rec.). Even assuming arguendo that they did not, the appellants losesight of the fact that third persons who are not parties to a loan maysecure the latter by pledging or mortgaging their own property(Lustan vs. Court of Appeals, 266 SCRA 663, 675). x x x. Inconstituting a mortgage over their own property in order to securethe purported corporate debt of Embassy Farms, Inc., the appellantsundeniably assumed the personality of persons interested in thefulfillment of the principal obligation who, to save the subject

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