G.R. No. L-7185 August 31, 1955

REHABILITATION FINANCE CORPORATION, petitioner, vs.COURT OF APPEALS and REALTY INVESTMENTS, INC., respondents.REYES, A., J.:

On June 17, 1948, Delfin Dominguez signed a contract with Realty Investments, Inc., to purchase a registered lot belonging to the latter, making a down payment of P39.98 and promising to pay the balance of the stipulated price in 119 monthly installments. Some three months thereafter, to finance the improvement of a house Dominguez had built on the lot of Rehabilitation Finance Corporation—hereafter called the RFC—agreed to loan him P10,000 on the security of a mortgage upon said house and lot, and, at his instance, wrote Realty Investments a letter, dated September 17, 1948, requesting that the necessary documents for the transfer of title of the vendee be executed so that the same could be registered together with mortgage, this with the assurance that as soon as title to the lot had been issued in the name of Dominguez and the mortgage in favor of the RFC registered as first lien on the lot and the building thereon, the RFC would pay Realty Investments "the balance of the purchase price of the lot in the amount of P3,086.98." Complying with RFC's request and relying on its assurance of payment, Realty Investments, on the 20th of that same month, deeded over the lot to Dominguez "free of all liens and incumbrances" and thereafter the mortgage deed, which Dominguez had executed in favor of RFC three days before, was recorded in the Registry of Deeds for the City of Manila as first lien on the lot and the building thereon.

It would appear that once the mortgage was registered, the RFC let Dominguez have P6,500 out of the proceeds of his loan, but that the remainder of the loan was never released because Dominguez defaulted in the payment of the amortizations due on the amount he had already received, and as a consequence the RFC foreclosed the mortgage, bought the mortgaged property in the foreclosure sale, and obtained title thereto upon failure of the mortgagor to exercise his right of redemption.

Required to make good its promise to pay Realty Investments the balance of the purchase price of the lot, the RFC refused, and so Realty Investments commenced the present action in the Court of First Instance of Manila for the recovery of the said balance from either Delfin Dominguez or the RFC.

The trial court allowed recovery from Dominguez, but absolved the RFC from the complaint. But on appeal, the Court of Appeals reversed that verdict, declared the judgment against Dominguez void for having been rendered after his exclusion from the case, and sentenced the RFC to pay plaintiff the amount claimed together with interests and costs. From this judgment the RFC has appealed to this Court.

We find no merit in the appeal. While the amount sought to be recovered by plaintiff was originally owing from Dominguez, being the balance of the purchase price of the lot he had agreed to buy, the obligation of paying it to plaintiff has already been assumed by the RFC with no other condition than that title to the lot be first conveyed

to Dominguez and RFC's mortgage lien thereon registered, and that condition has already been fulfilled.

It is, however, contended for the RFC that its obligation to pay "has been modified, if not extinguished" by plaintiff's letter of September 20, 1948, which reads as follows:

September 20, 1948

The R. F. C.Manila

SIRS:

In connection with your guarantee to pay us the balance of P3,086.98 of the account of Mr. Delfin Dominguez for the purchase of lot No. 15, block 7 of our Riverside Subdivision, which lot has been conveyed to him on the strength of your guaranty to us the said balance, we want to inform you that, at the request of Mr. Dominguez, we are agreeable to have that amount paid us at the second release of proceeds of his loan, which he informs us will be on or about October 15, 1948.

Yours truly,

REALTY INVESTMENTS, INC.C. M. HONSKINS & CO., INC. Managing Agents

By: (Sgd.) A. B. Aquino President

Passing upon the above contention, the Court of Appeals says: "As narrated in the statement of the case, both Dominguez and the appellee kept appellant ignorant on the terms and conditions of their agreement concerning the loan of P10,000 and of the manner that sum was to be released, and in such circumstances plaintiff's letter of September 20, 1948, cannot be construed in the manner contended by appellee and sustained by the court, for plaintiff merely said in substance and effect that it was agreeable to have the balance of P3,086.98 of the account of Delfin Dominguez paid to it 'at the second release of proceeds of his loan, which he (Dominguez) informs us will be on or about October 15, 1948.' Defendant-appellee should know that it would be absurd for the plaintiff to waive appellee's guaranty contained in its letter of September 17, 1948, wherein Governor E. Ealdama bound the Rehabilitation Finance Corporation to pay the unpaid balance of the purchase price of the lot in question after title thereof was transferred in the name of Dominguez free from any incumbrance. If the Rehabilitation Finance Corporation was not to make any further release of funds on the loan, or if such release was to be subject to future developments, it was the duty of the Rehabilitation Finance Corporation to answer the latter's letter of September 20, 1948, and to inform appellant of the terms and conditions of the loan, but the officers of the appellee failed to do this. For this reason, appellee's contention in this respect is most unfair and cannot be upheld by the courts of justice. It was the Rehabilitation Finance Corporation that induced plaintiff to issue title to the lot free from all encumbrances to Dominguez on its guaranty, and it cannot

now without any fault of the plaintiff keep the lot in question and Dominguez' building without paying anything to the plaintiff. Under the circumstance of the case, appellant was not under any obligation of assuming Dominguez' right of redemption of the property foreclosed just to save said lot, payment for which was guaranteed by the Rehabilitation Finance Corporation."

We are in accord with the above pronouncement. Plaintiff was induced to part with his title to a piece of real property upon RFC's assurance that it would itself pay the balance of the purchase price due from the purchaser after its mortgage lien thereon had been registered. Lulled by that assurance, plaintiff thereafter looked to the RFC, instead of the purchase, for payment. It is true that plaintiff later expressed willingness to have the payment made at a later date, when—so it was informed by the buyer—"the second release of proceeds of his loan" would take place. But it is evident that this period of grace was granted by plaintiff in the belief that the information furnished by the buyer was true, and, as found by the Court of Appeals (and this finding is conclusive upon this Court), RFC never made plaintiff know that said information was not correct. In those circumstances, we do not think it fair to construe plaintiff's letter to be anything more than a mere assent to a deferment of payment, and such assent should not be taken as willingness on its part to have the payment made only if and when there was to be second release of proceeds of the loan. It would be unreasonable to suppose that the creditor, already assured of payment by the RFC itself, would want to create uncertainty by making such payment dependent upon a contingency.

In view of the foregoing, the decision appealed from is affirmed, with costs against the RFC.

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. GUTIERREZ, JR., J.:

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

The antecedent facts culled from the petition are as follows:

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

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

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

With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

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

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

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

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

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

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

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

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

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

The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as

and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.

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

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest thereafter at the rate of 12% per annum;

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

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

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

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

I

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

II

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

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

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even admitting that in a contract of

sale unless a contrary intention appears, there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

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

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

A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing and 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 to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and regular upon its face before the same was overdue and without notice, that it had been previously dishonored and that the note is in good faith and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).

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

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

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

Hence, this petition was filed on the following grounds:

I.

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

II

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

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.

IV.

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

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

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

V.

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

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

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

On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended that the petition was filed out of time; that the promissory note is a negotiable instrument and respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence.

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

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

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was clearly a victim of a warranty not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.

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

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for which they were purchased.

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

Articles 1191 and 1567 of the Civil Code provide that:

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

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

xxx xxx xxx

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

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

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

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis supplied)

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

The pertinent portion of the note is as follows:

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

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

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

xxx xxx xxx

When instrument is payable to order.

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

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order" or"to the order of, "the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied)

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

This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the records show that even the respondent itself admitted to being a mere assignee of the promissory note in question, to wit:

ATTY. PALACA:

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

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

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

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want to make a distinction, one is an assignment of mortgage right and the other one is indorsement of the promissory note. What counsel for defendants wants is that you stipulate that it is contained in one single transaction?

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 a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the 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 of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, 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 most inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also 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 any fact, which would justify its act of taking the promissory note as not amounting to bad faith.

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

xxx xxx xxx

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

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 the instrument of deffect in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of 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 the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)

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

In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, 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. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will , the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain mode of transacting 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 finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . . .

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

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type

from its inception, it cannot be regarded as a holder in due course of the note given in the transaction.

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

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

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

SO ORDERED.

[ G.R. No. 101251, November 05, 1992 ]

ELISEO A. SINON, PETITIONER, VS. THE CIVIL SERVICE COMMISSION, DEPARTMENT OF AGRICULTURE-REORGANIZATION APPEALS BOARD AND JUANA BANAN, RESPONDENTS. CAMPOS, JR., J.:

This petition for certiorari seeks to annul the following Resolutions of the public respondents Civil Service Commission (the "CSC")* and Department of Agriculture Reorganization Appeals Board (the "DARAB"),** to wit:

1. Resolution No. 97 dated August 23, 1989, issued by respondent DARAB which revoked petitioner's permanent appointment as Municipal Agriculture Officer (MAO) and appointed, in his stead, private respondent Juana Banan (Rollo 17);

2. Resolution dated February 8, 1991 issued by the respondent CSC affirming the aforementioned Resolution of respondent DARAB (Rollo 22);

3. Resolution dated July 11, 1991 issued by the respondent CSC which denied petitioner's motion for the reconsideration of the respondent Commission's Resolution dated February 8, 1991.[1]

The antecedent facts are as follows:

Prior to the reorganization of the then Ministry of Agriculture and Food (the "MAF"), the private respondent Juana Banan was the incumbent Municipal Agricultural Officer (MAO) of the aforesaid Ministry in Region II, Cagayan, while the petitioner Eliseo Sinon occupied the position of Fisheries Extension Specialist (FES) II in the Bureau of Fisheries and Aquatic Resources (BFAR) in the same region.

However, the reorganization of the MAF into the Department of Agriculture (the "DA") with the issuance of Executive Order No. 116 dated 30 January 1987, called for the evaluation of the following employees for the twenty nine positions of MAO in Region II, Cagayan. The list as prepared by the Placement Committee included the herein petitioner Sinon but excluded the respondent Banan:

1. Binoya, Vicente 76.20%

2. Cabana, Isidro S. 75.01%3.Sebastian, Alice 74.18%4.Zingapan, Benjamin 70.73%5. Guzman, Wilhelmina de la P. 70.50%6. Gervacio, Agnes 69.86%

7. Somera, Hilario S. 68.13%8. Tolentino, Julian R. 67.64%

9. Guillermo, Pedro 67.22%

10. Tambio, Rodolfo 67.00%11. Aquino, Martina 66.94%12. Bassig, Pio P. 66.84%13. Rumpon, Danilo P. 65.61%14.Zareno, Bernardo 65.57%15. Madrid, Angel S. 65.57%16.Callangan, Napoleon 65.45%17.Fiesta,

Felicisimo 65.29%18.Alvarez, Benefranco .99%19.Baggayan, Samuel 64.42%20. Umbay, Pedro T. 64.01%21. De la Cruz, Florencio M. 62.07%22. Leonador, Ernesto T. 61.88%23.Miguel, Jose 61.86%24. Berlan, Herminia C. 61.76%25.Soliman, Clemente 61.52%26.Llopis, Lino 61.47%27. Baliuag, Felicidad C. 61.39%28.Aresta, Leticia 60.67%29. Sinon, Eliseo A. 60.66%

[2](Underscoring supplied).Thus, respondent Banan filed an appeal with the DARAB for re-evaluation of the qualifications of all those included in the aforementioned list made by the Placement Committee.

On August 23, 1989, the DARAB released Resolution No. 97 in which the ranking for 29 MAO prepared by the Placement Committee was re-evaluated as follows:

1. Binoya, Vicente 76.20%2. Cabana, Isidro 75.01%3.Sebastian, Alice 72.18%4.Zingapan, Benjamin 70.73%5. Guzman, Wilhemina de la P. 70.50%6.Gervacio, Agnes 70.04%7. Somera, Hilario S. 68.13%8. Tolentino, Julian Jr. 67.64%9.Guillermo, Pedro 67.22%10.Tambio, Rodolfo 67.00%11. Aquino, Martina D. 66.94%12. Bassig, Pio P. 66.84%13. Rumpon, Danilo P. 65.61%14.Madrid, Angel 65.57%15.Callangan, Napoleon 65.45%16.Fiesta, Felicisimo 65.29%17.Alvarez, Benefranco 64.99%18. Baggayan, Samuel O. 64.42%19. Umbay, Pedro T. 64.01%20. De la Cruz, Florencio M. 62.07%21. Leonador, Ernesto T. 61.88%22. Miguel, Jose L. 61.86%23. Berlan, Herminia C. 61.76%24.Soliman, Clemente 61.52%25.Zareno, Bernardo 61.50%26. Llopis, Lino 61.47%

27. Baliuag, Felicidad 61.39%28. Rosario, Jaime C. 60.18%29. Banan, Juana 59.32%

[3](Underscoring supplied).

In this re-evaluation, petitioner Sinon was displaced by the respondent Banan and this same resolution was duly approved by the Secretary of the Department of Agriculture, Carlos G. Dominguez, who also affixed his signature on the same date.

However, on August 30, 1988, Sinon received an appointment as MAO for Region II in Cagayan as approved by Regional Director Gumersindo D. Lasam on the basis of the first evaluation made by the Placement Committee.

Thus, Sinon filed an appeal docketed as Civil Service Case No. 573 on November 22, 1989 to the CSC. This appeal was granted mainly for two reasons: first, the respondent DARAB failed to file its Comment within the period required; and second, the evaluation of the qualification of the employees is a question of fact which the appointing authority or the Placement Committee assisting him is in a better position to determine. Hence, the Resolution dated 28 February 1989 of the DARAB was set aside.[4]

On March 19, 1990, Banan filed a Motion for Reconsideration in which she pitted her qualifications against Sinon for the last slot in the 29 available MAO positions. At the

same time, she pointed out that to allow the findings of the Placement Committee to supercede the DARAB resolution which the Secretary of Agriculture had approved would be tantamount to giving precedence to the Placement Committee over the head of the agency.

Finally, on February 8, 1991, CSC, after reviewing the Comment filed by the DARAB which had not been considered earlier in the Civil Service Case No. 573, the CSC granted respondent Banan's Motion for Reconsideration and gave due course to her appointment by the DARAB.

On March 21, 1991, Sinon filed Motion for Reconsideration of the February 8, 1991 Resolution which however was denied by the CSC in its assailed Resolution dated July 11, 1991.

According to the respondent CSC:

Mr. Sinon strongly argued that the findings of the Placement Committee on the qualifications of the parties should be accorded deference and greater weight over that of the RAB. Under the Placement Committee's evaluation, Mr. Sinon garnered 60.66 while Ms. Juana Banan earned 57.32 after assessing the contending parties qualification in education, relevant experience, eligibility and other factors. Following the request of several parties for reevaluation, the RAB in their decision gave Mr. Sinon 57.66 while Ms. Banan obtained 59.32. Seemingly the findings of the two bodies are in conflict. Mr. Sinon argues that the findings of the Placement Committee should prevail since it is specially mandated by RA 6656.

We disagree. The Placement Committee's function is recommendatory in nature. The agency's Reorganization Appeals Board was specially created by the Circular of the Office of the President dated October 2, 1987 and conferred with authority to review appeals and complaints of officials and employees affected by the reorganization. The decision of the agency RAB has the imprimatur of the Secretary of that agency and is therefore controlling in matters of appointment. Under this principle, the decision of the DARAB in this case enjoys precedence over the Placement Committee.[5]Hence, this petition was filed with a prayer for a writ of preliminary injunction, and/or restraining order to enjoin the execution of the assailed resolutions.

Without giving due course to the petition for a writ of preliminary injunction, the Court required the parties to file their respective Comments.[6]

On 12 November 1992, the Court gave due course to the petition and required the parties to submit their respective Memoranda.[7]

The main issue for Our consideration is this: whether or not the CSC committed grave abuse of discretion in reviewing and re-evaluating the rating or qualification of the petitioner Sinon.

The arguments of the petitioner can be summed up as follows:

1). In issuing the Resolution of 8 February 1991, the CSC in effect revoked the appointment that the petitioner received as early as 30 August 1989 and which was deemed permanent by virtue of the approval of the Regional Director of the Department of Agriculture;

2). In giving petitioner a rating of only 57.66%,[8] from his previous rating of 60.66% and at the same time according a rating of 59.32% to private respondent from a rating of only 57.32%, the CSC departed from its power which is limited only to that of "review", and hence encroached upon the power of appointment exclusively lodged in the appointing authority;

3). In giving due course to the appointment of respondent Banan in its Resolution of 8 February 1991, CSC was directing the appointment of a substitute of their own choice when the power to appoint was exclusively lodged in the appointing authority.We rule as follows.

By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. The abuse of discretion must be patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion or hostility.[9]

Contrary to the allegations of the petitioner, We do not find any evidence of grave abuse of discretion on the part of the CSC when it issued Resolution dated 8 February 1991 which in effect approved the appointment of respondent Banan over petitioner Sinon.

With the reorganization of the MAF into the DA with Executive Order No. 116, it became imperative to "protect the security of tenure of Civil Service Officers and employees in the implementation of government reorganization". Thus, Congress passed Republic Act No. 6656.[10]

It was under the same law of R.A. 6656 that the Placement Committee was created:

Section 6. In order that the best qualified and most deserving persons shall be appointed in any reorganization, there shall be created a Placement Committee in each department or agency to assist the appointing authority in the judicious selection and placement of personnel. The Committee Shall consist of two (2) members appointed by the head of the department or agency, a representative of the appointing authority, and two (2) members duly elected by the employees holding positions in the first and second levels of the career service: Provided, that if there is a registered employee association with a majority of the employees as members, that employee association shall also have a representative in the Committee: Provided,

further, that immediately upon the approval of the staffing pattern of the department or agency concerned, such staffing pattern shall be made known to all officers and employees of the agency who shall be invited to apply for any of the positions authorized therein. Such application shall be considered by the committee in the placement and selection of personnel. (Underscoring ours).

To "assist" means to lend an aid to,[11] or to contribute effort in the complete accomplishment of an ultimate purpose intended to be effected by those engaged.[12]

In contrast, to "recommend"[13] is to present one's advice or choice as having one's approval or to represent or urge as advisable or expedient. It involves the idea that another has the final decision.

Clearly, the Placement Committee was charged with the duty of exercising the same discretionary functions as the appointing authority in the judicious selection and placement of personnel when the law empowered it to "assist" the appointing authority.

The same law also allows any officer or employee aggrieved by the appointments to file an appeal with the appointing authority who shall make a decision within thirty (30) days from the filing thereof. If the same employee is still not satisfied with the decision of the appointing authority, he may further appeal within ten (10) days from the receipt thereof to the CSC.[14]

In the case at bar, the Circular dated October 2, 1987 of the Office of the President created the agency Reorganization Appeals Board to address the problem of employees affected by the reorganizations.

The foregoing legal measures spell out the remedies of aggrieved parties which make it impossible to give the status of finality to any appointment until all protests or oppositions are duly heard.

Thus, while it is true that the appointment paper received by petitioner Sinon on 30 August 1989 for the position of MAO had not conferred any permanent status and was still subject to the following conditions attached to any appointment in the civil service:

"Provided that there is no pending administrative case against the appointee, no pending protest against the appointment, nor any decision by competent authority that will adversely affect the approval of the appointment."[15]

Hence, for as long as the re-evaluation of the qualifications filed by Banan was pending, the petitioner cannot claim that he had been issued with a "complete" appointment. Neither is there any point in asserting that his appointment had "cured" whatever change was subsequently recommended by the DARAB.[16]

The fact that the DARAB is capable of re-evaluating the findings of the Placement Committee only to find that Sinon is not qualified should not be taken as a grave abuse of discretion.

We cannot subscribe to petitioner Sinon's insistence that the public respondent CSC had disregarded the findings of the Placement Committee. The truth is, these findings were re-evaluated and the report after such re-evaluation was submitted to and approved by the Secretary of Agriculture. The CSC affirmed the findings of the DARAB.

Because of all the foregoing circumstances, the Jurisprudence cited by the petitioner Sinon appears to be incorrect.[17]

Neither do we find in the Resolution of 8 February 1991, any statement by the CSC directing the appointment of the respondent Banan. Hence, there was no directive from the CSC that may be misinterpreted as a usurpation of any appointing power.[18]

Besides, in affirming the appointment of Banan as recommended by the DARAB and approved by the Secretary of Agriculture, the CSC is only being consistent with the law. Section 4 of R.A. 6656 mandates that officers and employees holding permanent appointments shall be given preference for appointment to the new positions in the approved staffing pattern comparable to their former positions. Also, the term incumbent officer and the privileges generally accorded to them would more aptly refer to Banan and not to petitioner Sinon whose appointment was never confirmed completely.[19] There is no dispute that the position of MAO in the old staffing pattern is most comparable to the MAO in the new staffing pattern.

Finally, the Solicitor General in behalf of the CSC correctly noted that the petitioner Sinon had conveniently omitted the then Secretary of Agriculture who had affixed his approval on the findings of the DARAB. Petitioner Sinon knew fully well that as head of the agency, the Secretary of Agriculture was the appointing authority.

It must be recalled that the whole purpose of reorganization is that it is a "process of restructuring the bureaucracy's organizational and functional set-up, to make it more viable in terms of the economy, efficiency, effectiveness and make it more responsive to the needs of its public clientele, as authorized by law."[20] For as long as the CSC confines itself within the limits set out by law and does not encroach upon the prerogatives endowed to other authorities, this Court must sustain the Commission.WHEREFORE, the petition is DENIED with costs against the petitioner.

[ G.R. No. 86695, September 03, 1992 ]

MARIA ELENA MALAGA, DOING BUSINESS UNDER THE NAME B.E. CONSTRUCTION; JOSIELEEN NAJARRO, DOING BUSINESS UNDER THE NAME BEST BUILT CONSTRUCTION; JOSE N. OCCEÑA, DOING BUSINESS UNDER

THE NAME THE FIRM OF JOSE N. OCCEÑA; AND THE ILOILO BUILDERS CORPORATION, PETITIONERS, VS. MANUEL R. PENACHOS, JR., ALFREDO MATANGGA, ENRICO TICAR AND TERESITA VILLANUEVA, IN THEIR RESPECTIVE CAPACITIES AS CHAIRMAN AND MEMBERS OF THE PRE-QUALIFICATION BIDS AND AWARDS COMMITTEE (PBAC) - BENIGNO PANISTANTE, IN HIS CAPACITY AS PRESIDENT OF ILOILO STATE COLLEGE OF FISHERIES, AS WELL AS IN THEIR RESPECTIVE PERSONAL CAPACITIES; AND HON. LODRIGIO L. LEBAQUIN, RESPONDENTS. CRUZ, J.:

This controversy involves the extent and applicability of P.D. 1818, which prohibits any court from issuing injunctions in cases involving infrastructure projects of the government.

The facts are not disputed.

The Iloilo State College of Fisheries (henceforth ISCOF) through its Pre-qualification, Bids and Awards Committee (henceforth PBAC) caused the publication in the November 25, 26, 28, 1988 issues of the Western Visayas Daily an Invitation to Bid for the construction of a Micro Laboratory Building at ISCOF. The notice announced that the last day for the submission of pre-qualification requirements (PRE C-1)* was December 2, 1988, and that the bids would be received and opened on December 12, 1988, at 3 o'clock in the afternoon.[1]

Petitioners Maria Elena Malaga and Josieleen Najarro, respectively doing business under the name of B.E. Construction and Best Built Construction, submitted their pre-qualification documents at two o'clock in the afternoon of December 2, 1988. Petitioner Jose Occeña submitted his own PRE-C1 on December 5, 1988. All three of them were not allowed to participate in the bidding because their documents were considered late, having been submitted after the cut-off time of ten o'clock in the morning of December 2, 1988.

On December 12, 1988, the petitioners filed a complaint with the Regional Trial Court of Iloilo against the chairman and members of PBAC in their official and personal capacities. The plaintiffs claimed that although they had submitted their PRE-C1 on time, the PBAC refused without just cause to accept them. As a result, they were not included in the list of pre-qualified bidders, could not secure the needed plans and other documents, and were unable to participate in the scheduled bidding.

In their prayer, they sought the resetting of the December 12, 1988 bidding and the acceptance of their PRE-C1 documents. They also asked that if the bidding had already been conducted, the defendants be directed not to award the project pending resolution of their complaint.

On the same date, Judge Lodrigio L. Lebaquin issued a restraining order prohibiting PBAC from conducting the bidding and awarding the project.[2]

On December 16, 1988, the defendants filed a motion to lift the restraining order on the ground that the court was prohibited from issuing restraining orders, preliminary injunctions and preliminary mandatory injunctions by P.D. 1818.

The decree reads pertinently as follows:

Section 1. No Court in the Philippines shall have jurisdiction to issue any restraining order, preliminary injunction, or preliminary mandatory injunction in any case, dispute, or controversy involving an infrastructure project, or a mining, fishery, forest or other natural resource development project of the government, or any public utility operated by the government, including among others public utilities for the transport of the goods or commodities, stevedoring and arrastre contracts, to prohibit any person or persons, entity or government official from proceeding with, or continuing the execution or implementation of any such project, or the operation of such public utility, or pursuing any lawful activity necessary for such execution, implementation or operation.

The movants also contended that the question of the propriety of a preliminary injunction had become moot and academic because the restraining order was received late, at 2 o'clock in the afternoon of December 12, 1988, after the bidding had been conducted and closed at eleven thirty in the morning of that date.

In their opposition to the motion, the plaintiffs argued against the applicability of P.D. 1818, pointing out that while ISCOF was a state college, it had its own charter and separate existence and was not part of the national government or of any local political subdivision. Even if P.D.1818 were applicable, the prohibition presumed a valid and legal government project, not one tainted with anomalies like the project at bar.

They also cited Filipinas Marble Corp. vs. IAC,[3] where the Court allowed the issuance of a writ of preliminary injunction despite a similar prohibition found in P.D. 385. The Court therein stated that:

The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government-lending institutions who take over the management of a borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds (p. 188, underscoring supplied).

On January 2, 1989, the trial court lifted the restraining order and denied the petition for preliminary injunction. It declared that the building sought to be constructed at the ISCOF was an infrastructure project of the government falling within the coverage of P.D. 1818. Even if it were not, the petition for the issuance of a writ of preliminary injunction would still fail because the sheriff's return showed that PBAC was served a

copy of the restraining order after the bidding sought to be restrained had already been held. Furthermore, the members of the PBAC could not be restrained from awarding the project because the authority to do so was lodged in the President of the ISCOF, who was not a party to the case.[4]

In the petition now before us, it is reiterated that P.D. 1818 does not cover the ISCOF because of its separate and distinct corporate personality. It is also stressed again that the prohibition under P.D. 1818 could not apply to the present controversy because the project was vitiated with irregularities, to wit:

1. The invitation to bid as published fixed the deadline of submission of pre-qualification document on December 2, 1988 without indicating any time, yet after 10:00 o'clock of the given date, the PBAC already refused to accept petitioners' documents.

2. The time and date of bidding was published as December 12, 1988 at 3:00 p.m. yet it was held at 10:00 o'clock in the morning.

3. Private respondents, for the purpose of inviting bidders to participate, issued a mimeographed "Invitation to Bid" form, which by law (P.D. 1594 and Implementing Rules, Exh. B-1) is to contain the particulars of the project subject of bidding for the purposes of

(i) enabling bidders to make an intelligent and accurate bids;

(ii) for PBAC to have a uniform basis for evaluating the bids;

(iii) to prevent collusion between a bidder and the PBAC, by opening to all the particulars of a project.

Additionally, the Invitation to Bid prepared by the respondents and the Itemized Bill of Quantities therein were left blank.[5] And although the project in question was a "Construction," the private respondents used an Invitation to Bid form for "Materials."[6]

The petitioners also point out that the validity of the writ of preliminary injunction had not yet become moot and academic because even if the bids had been opened before the restraining order was issued, the project itself had not yet been awarded. The ISCOF president was not an indispensable party because the signing of the award was merely a ministerial function which he could perform only upon the recommendation of the Award Committee. At any rate, the complaint had already been duly amended to include him as a party defendant.

In their Comment, the private respondents maintain that since the members of the board of trustees of the ISCOF are all government officials under Section 7 of P.D. 1523 and since the operations and maintenance of the ISCOF are provided for in the

General Appropriations Law, it should be considered a government institution whose infrastructure project is covered by P.D. 1818.

Regarding the schedule for pre-qualification, the private respondents insist that PBAC posted on the ISCOF bulletin board an announcement that the deadline for the submission of pre-qualification documents was at 10 o'clock of December 2, 1988, and the opening of bids would be held at 1 o'clock in the afternoon of December 12, 1988. As of ten o'clock in the morning of December 2, 1988, B.E. Construction and Best Built Construction had filed only their letters of intent. At two o'clock in the afternoon, B.E. and Best Built file through their common representative, Nenette Garuello, their pre-qualification documents which were admitted but stamped "submitted late." The petitioners were informed of their disqualification on the same date, and the disqualification became final on December 6, 1988. Having failed to take immediate action to compel PBAC to pre-qualify them despite their notice of disqualification, they cannot now come to this Court to question the bidding proper in which they had not participated.

In the petitioners' Reply, they raise as an additional irregularity the violation of the rule that where the estimated project cost is from P1M to P5M, the issuance of plans, specifications and proposal book forms should be made thirty days before the date of bidding.[7] They point out that these forms were issued only on December 2, 1988, and not at the latest on November 12, 1988, the beginning of the 30-day period prior to the scheduled bidding.

In their Rejoinder, the private respondents aver that the documents of B.E. and Best Built were received although filed late and were reviewed by the Award Committee, which discovered that the contractors had expired licenses. B.E.'s temporary certificate of Renewal of Contractor's License was valid only until September 30, 1988, while Best Built's license was valid only up to June 30, 1988.

The Court has considered the arguments of the parties in light of their testimonial and documentary evidence and the applicable laws and jurisprudence. It finds for the petitioners.

The 1987 Administrative Code defines a government instrumentality as follows:

Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions, and government-owned or controlled corporations. (Sec. 2 (5) Introductory Provisions).

The same Code describes a chartered institution thus:

Chartered institution - refers to any agency organized or operating under a special charter, and vested by law with functions relating to specific constitutional policies or objectives. This term includes the state universities and colleges, and the monetary authority of the state. (Sec. 2 (12) Introductory Provisions).

It is clear from the above definitions that ISCOF is a chartered institution and is therefore covered by P.D. 1818.

There are also indications in its charter that ISCOF is a government instrumentality. First, it was created in pursuance of the integrated fisheries development policy of the State, a priority program of the government to effect the socio-economic life of the nation. Second, the Treasurer of the Republic of the Philippines shall also be the ex-officio Treasurer of the state college with its accounts and expenses to be audited by the Commission on Audit or its duly authorized representative. Third, heads of bureaus and offices of the National Government are authorized to loan or transfer to it, upon request of the president of the state college, such apparatus, equipment, or supplies and even the services of such employees as can be spared without serious detriment to public service. Lastly, an additional amount of P1.5M had been appropriated out of the funds of the National Treasury and it was also decreed in its charter that the funds and maintenance of the state college would henceforth be included in the General Appropriations Law.[8]

Nevertheless, it does not automatically follow that ISCOF is covered by the prohibition in the said decree.

In the case of Datiles and Co. vs. Sucaldito,[9] this Court interpreted a similar prohibition contained in P.D. 605, the law after which P.D. 1818 was patterned. It was there declared that the prohibition pertained to the issuance of injunctions or restraining orders by courts against administrative acts in controversies involving facts or the exercise of discretion in technical cases. The Court observed that to allow the courts to judge these matters would disturb the smooth functioning of the administrative machinery. Justice Teodoro Padilla made it clear, however, that on issues definitely outside of this dimension and involving questions of law, courts could not be prevented by P.D. No. 605 from exercising their power to restrain or prohibit administrative acts.

We see no reason why the above ruling should not apply to P.D. 1818.

There are at least two irregularities committed by PBAC that justified injunction of the bidding and the award of the project.

First, PBAC set deadlines for the filing of the PRE-C1 and the opening of bids and then changed these deadlines without prior notice to prospective participants.

Under the Rules Implementing P.D. 1594, prescribing policies and guidelines for government infrastructure contracts, PBAC shall provide prospective bidders with the

Notice to Pre-qualification and other relevant information regarding the proposed work. Prospective contractors shall be required to file their ARC-Contractors Confidential Application for Registration & Classifications & the PRE-C2 Confidential Pre-qualification Statement for the Project (prior to the amendment of the rules, this was referred to as Pre-C1) not later than the deadline set in the published Invitation to Bid, after which date no PRE-C2 shall be submitted and received. Invitations to Bid shall be advertised for at least three times within a reasonable period but in no case less than two weeks in at least two newspapers of general circulations.[10]

PBAC advertised the pre-qualification deadline as December 2, 1988, without stating the hour thereof, and announced that the opening of bids would be at 3 o'clock in the afternoon of December 12, 1988. This schedule was changed and a notice of such change was merely posted at the ISCOF bulletin board. The notice advanced the cut-off time for the submission of pre-qualification documents to 10 o'clock in the morning of December 2, 1988, and the opening of bids to 1 o'clock in the afternoon of December 12, 1988.

The new schedule caused the pre-disqualification of the petitioners as recorded in the minutes of the PBAC meeting held on December 6, 1988. While it may be true that there were fourteen contractors who were pre-qualified despite the change in schedule, this fact did not cure the defect of the irregular notice. Notably, the petitioners were disqualified because they failed to meet the new deadline and not because of their expired licenses.**

We have held that where the law requires a previous advertisement before government contracts can be awarded, non-compliance with the requirement will, as a general rule, render the same void and of no effect.[11] The fact that an invitation for bids has been communicated to a number of possible bidders is not necessarily sufficient to establish compliance with the requirements of the law if it is shown that other possible bidders have not been similarly notified.[12]

Second, PBAC was required to issue to pre-qualified applicants the plans, specifications and proposal book forms for the project to be bid thirty days before the date of bidding if the estimated project cost was between P1M and P5M. PBAC has not denied that these forms were issued only on December 2, 1988, or only ten days before the bidding scheduled for December 12, 1988. At the very latest, PBAC should have issued them on November 12, 1988, or 30 days before the scheduled bidding.

It is apparent that the present controversy did not arise from the discretionary acts of the administrative body nor does it involve merely technical matters. What is involved here is non-compliance with the procedural rules on bidding which required strict observance. The purpose of the rules implementing P.D. 1594 is to secure competitive bidding and to prevent favoritism, collusion and fraud in the award of these contracts to the detriment of the public. This purpose was defeated by the irregularities committed by PBAC.

It has been held that the three principles in public bidding are the offer to the public, an opportunity for competition and a basis for exact comparison of bids. A regulation of the matter which excludes any of these factors destroys the distinctive character of the system and thwarts the purpose of its adoption.[13]

In the case at bar, it was the lack of proper notice regarding the pre-qualification requirement and the bidding that caused the elimination of petitioners B.E. and Best Built. It was not because of their expired licenses, as private respondents now claim. Moreover, the plans and specifications which are the contractors' guide to an intelligent bid, were not issued on time, thus defeating the guaranty that contractors be placed on equal footing when they submit their bids. The purpose of competitive bidding is negated if some contractors are informed ahead of their rivals of the plans and specifications that are to be the subject of their bids.

P.D. 1818 was not intended to shield from judicial scrutiny irregularites committed by administrative agencies such as the anomalies above described. Hence, the challenged restraining order was not improperly issued by the respondent judge and the writ of preliminary injunction should not have been denied. We note from Annex Q of the private respondent's memorandum, however, that the subject project has already been "100% completed as to the Engineering Standard." This fait accompli has made the petition for a writ of preliminary injunction moot and academic.

We come now to the liabilities of the private respondents.

It has been held in a long line of cases that a contract granted without the competitive bidding required by law is void, and the party to whom it is awarded cannot benefit from it.[14] It has not been shown that the irregularities committed by PBAC were induced by or participated in by any of the contractors. Hence, liability shall attach only to the private respondents for the prejudice sustained by the petitioners as a result of the anomalies described above.

As there is no evidence of the actual loss suffered by the petitioners, compensatory damage may not be awarded to them. Moral damages do not appear to be due either. Even so, the Court cannot close its eyes to the evident bad faith that characterized the conduct of the private respondents, including the irregularities in the announcement of the bidding and their efforts to persuade the ISCOF president to award the project after two days from receipt of the restraining order and before they moved to lift such order. For such questionable acts, they are liable in nominal damages at least in accordance with Article 2221 of the Civil Code, which states:

Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant may be vindicated or, recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

These damages are to be assessed against the private respondents in the amount of P10,000.00 each, to be paid separately for each of petitioners B.E. Construction and

Best Built Construction. The other petitioner, Occeña Builders, is not entitled to relief because it admittedly submitted its pre-qualification documents on December 5, 1988, or three days after the deadline.

WHEREFORE, judgment is hereby rendered: a) upholding the restraining order dated December 12, 1988, as not covered by the prohibition in P.D. 1818; b) ordering the chairman and the members of the PBAC board of trustees, namely, Manuel R. Penachos, Jr., Alfredo Matangga, Enrico Ticar, and Teresita Villanueva, to each pay separately to petitioners Maria Elena Malaga and Josieleen Najarro nominal damages of P10,000.00 each; and c) removing the said chairman and members from the PBAC board of trustees, or whoever among them is still incumbent therein, for their malfeasance in office. Costs against PBAC.

Let a copy of this decision be sent to the Office of the Ombudsman.

SO ORDERED.

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.MALCOLM, J.:

The question of first impression raised in this case concerns the validity in this jurisdiction of a provision in a promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear and confess judgment thereon for the principal amount, with interest, costs, and attorney's fees, and waives all errors, rights to inquisition, and appeal, and all property exceptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc., executed and delivered to the Philippine National Bank, a written instrument reading as follows:

RENEWAL.

P61,000.00

MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand only pesos at Philippine National Bank, Manila, P.I.

Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case this note be not paid at maturity, to appear in my name and confess judgment for the above sum with interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale. Value received. No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO, Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand. The Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000, the amount of the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated with the Philippine National Bank, entered his appearance in representation of the defendant, and filed a motion confessing judgment. The defendant, however, in a sworn declaration, objected strongly to the unsolicited representation of attorney Recto. Later, attorney Antonio Gonzalez appeared for the defendant and filed a demurrer, and when this was overruled, presented an answer. The trial judge rendered judgment on the motion of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant's three assignments of error, raise squarely the question which was suggested in the beginning of this opinion. In view of the

importance of the subject to the business community, the advice of prominent attorneys-at-law with banking connections, was solicited. These members of the bar responded promptly to the request of the court, and their memoranda have proved highly useful in the solution of the question. It is to the credit of the bar that although the sanction of judgement notes in the Philippines might prove of immediate value to clients, every one of the attorneys has looked upon the matter in a big way, with the result that out of their independent investigations has come a practically unanimous protest against the recognition in this jurisdiction of judgment notes.1

Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a confession of judgment commonly called a judgment note. On the contrary, the provisions of the Code of Civil Procedure, in relation to constitutional safeguards relating to the right to take a man's property only after a day in court and after due process of law, contemplate that all defendants shall have an opportunity to be heard. Further, the provisions of the Code of Civil Procedure pertaining to counter claims argue against judgment notes, especially as the Code provides that in case the defendant or his assignee omits to set up a counterclaim, he cannot afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law, namely, that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (Civil Code, art. 1356), constitutes another indication of fundamental legal purposes.

The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly recognizes judgment notes, and that they are enforcible under the regular procedure. The Negotiable Instruments Law, in section 5, provides that "The negotiable character of an instrument otherwise negotiable is not affected by a provision which ". . . (b) Authorizes a confession of judgment if the instrument be not paid at maturity." We do not believe, however, that this provision of law can be taken to sanction judgments by confession, because it is a portion of a uniform law which merely provides that, in jurisdiction where judgment notes are recognized, such clauses shall not affect the negotiable character of the instrument. Moreover, the same section of the Negotiable Instruments. Law concludes with these words: "But nothing in this section shall validate any provision or stipulation otherwise illegal."

The court is thus put in the position of having to determine the validity in the absence of statute of a provision in a note authorizing an attorney to appear and confess judgment against the maker. This situation, in reality, has its advantages for it permits us to reach that solution which is best grounded in the solid principles of the law, and which will best advance the public interest.

The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgement became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession

relicta verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by confession, while still other jurisdictions have refused to sanction them. In some States, statutes have been passed which have either expressly authorized confession of judgment on warrant of attorney, without antecedent process, or have forbidden judgments of this character. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on October 4, 1990, the defendant executed and delivered to the plaintiff an obligation in which the defendant authorized any attorney-at-law to appear for him in an action on the note at any time after the note became due in any court of record in the State of Missouri, or elsewhere, to waive the issuing and service of process, and to confess judgement in favor of the First National Bank of Kansas City for the amount that might then be due thereon, with interest at the rate therein mentioned and the costs of suit, together with an attorney's fee of 10 per cent and also to waive and release all errors in said proceedings and judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff filed a petition in the Circuit Court to which was attached the above-mentioned instrument. An attorney named Denham appeared pursuant to the authority given by the note sued on, entered the appearance of the defendant, and consented that judgement be rendered in favor of the plaintiff as prayed in the petition. After the Circuit Court had entered a judgement, the defendants, through counsel, appeared specially and filed a motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:

But going beyond the mere technical question in our preceding paragraph discussed, we come to a question urged which goes to the very root of this case, and whilst new and novel in this state, we do not feel that the case should be disposed of without discussing and passing upon that question.

x x x x x x x x x

And if this instrument be considered as security for a debt, as it was by the common law, it has never so found recognition in this state. The policy of our law has been against such hidden securities for debt. Our Recorder's Act is such that instruments intended as security for debt should find a place in the public records, and if not, they have often been viewed with suspicion, and their bona fides often questioned.

Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would follow the footsteps of such a diversion in the way of security for debt. Such instruments procured by duress could shortly be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate court is granted to all persons against whom an adverse judgment is rendered, and this statutory right is by the instrument stricken down. True it is that such right is not claimed in this case, but it is a part of the bond and we hardly know why this pound of flesh has not been demanded. Courts guard with jealous eye any contract innovations upon their jurisdiction. The instrument before us, considered in the light of a contract, actually reduces the courts to mere clerks to enter and record the judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a party to a written instrument of this character has the right to show a failure of consideration, but this right is brushed to the wind by this instrument and the jurisdiction of the court to hear that controversy is by the whose object is to oust the jurisdiction of the courts are contrary to public policy and will not be enforced. Thus it is held that any stipulation between parties to a contract distinguishing between the different courts of the country is contrary to public policy. The principle has also been applied to a stipulation in a contract that a party who breaks it may not be sued, to an agreement designating a person to be sued for its breach who is nowise liable and prohibiting action against any but him, to a provision in a lease that the landlord shall have the right to take immediate judgment against the tenant in case of a default on his part, without giving the notice and demand for possession and filing the complaint required by statute, to a by-law of a benefit association that the decisions of its officers on claim shall be final and conclusive, and to many other agreements of a similar tendency. In some courts, any agreement as to the time for suing different from time allowed by the statute of limitations within which suit shall be brought or the right to sue be barred is held void.

x x x x x x x x x

We shall not pursue this question further. This contract, in so far as it goes beyond the usual provisions of a note, is void as against the public policy of the state, as such public policy is found expressed in our laws and decisions. Such agreements are iniquitous to the uttermost and should be promptly condemned by the courts, until such time as they may receive express statutory recognition, as they have in some states.

x x x x x x x x x

From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver of presentment and protest, homestead and exemption rights real and personal, and other rights, and also the following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of

Record to appear for us and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of suit and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the judgment note above described, speaking through Mr. Justice Miller, in part said:

As both sides agree the question presented is one of first impression in this State. We have no statutes, as has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to render, we must have recourse to the rules and principles of the common law, in force here, and to our statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly fifty years of judicial history this question, strong evidence, we think, that such notes, if at all, have never been in very general use in this commonwealth. And in most states where they are current the use of them has grown up under statutes authorizing them, and regulating the practice of employing them in commercial transactions.

x x x x x x x x x

It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here as in other cases. We do not think so. Strong reasons exist, as we have shown, for denying its application, when holders of contracts of this character seek the aid of the courts and of their execution process to enforce them, defendant having had no day in court or opportunity to be heard. We need not say in this case that a debtor may not, by proper power of attorney duly executed, authorize another to appear in court, and by proper endorsement upon the writ waive service of process, and confess judgement. But we do not wish to be understood as approving or intending to countenance the practice employing in this state commercial paper of the character here involved. Such paper has heretofore had little if any currency here. If the practice is adopted into this state it ought to be, we think, by act of the Legislature, with all proper safeguards thrown around it, to prevent fraud and imposition. The policy of our law is, that no man shall suffer judgment at the hands of our courts without proper process and a day to be heard. To give currency to such paper by judicial pronouncement would be to open the door to fraud and imposition, and to subject the people to wrongs and injuries not heretofore contemplated. This we are unwilling to do.

A case typical of those authorities which lend support to judgment notes is First National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are condemned as being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas.,

889, are examples of such holding.) By just what course of reasoning it can be said by the courts that such judgments are against public policy we are unable to understand. It was a practice from time immemorial at common law, and the common law comes down to us sanctioned as justified by the reason and experience of English-speaking peoples. If conditions have arisen in this country which make the application of the common law undesirable, it is for the Legislature to so announce, and to prohibit the taking of judgments can be declared as against the public policy of the state. We are aware that the argument against them is that they enable the unconscionable creditor to take advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On the other hand, it may be said in their favor that it frequently enables a debtor to obtain money which he could by no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at times. In some of the states there judgments have been condemned by statute and of course in that case are not allowed.

Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a promissory note confers a valid power, and authorizes a confession of judgment in any court of competent jurisdiction in an action to be brought upon said note; that our cognovit statute does not cover the same field as that occupied by the common-law practice of taking judgments upon warrant of attorney, and does not impliedly or otherwise abrogate such practice; and that the practice of taking judgments upon warrants of attorney as it was pursued in this case is not against any public policy of the state, as declared by its laws.

With reference to the conclusiveness of the decisions here mentioned, it may be said that they are based on the practice of the English-American common law, and that the doctrines of the common law are binding upon Philippine courts only in so far as they are founded on sound principles applicable to local conditions.

Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to settle and secure debts. They are a quick remedy and serve to save the court's time. They also save the time and money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this character may be considered as special agreements, with power to enter up judgments on them, binding the parties to the result as they themselves viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the considerations just mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for fraud, because under these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such a form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgement notes, instead of resulting to the advantage of commercial life in the

Philippines might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case, the judgement is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law. We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction.

The judgment appealed from is set aside, and the case is remanded to the lower court for further proceedings in accordance with this decision. Without special finding as to costs in this instance, it is so ordered.

G.R. No. 74451 May 25, 1988

EQUITABLE BANKING CORPORATION, petitioner, vs.THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL CO., respondents. MELENCIO-HERRERA, J.:

In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse judgment against it rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, 2 be annulled and set aside.

The facts pertinent to this Petition, as summarized by the Trial Court and adopted by reference by Respondent Appellate Court, emanated from the case entitled "Edward J. Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil Case No. 25112), and read:

From the evidence submitted by the parties, the Court finds that sometime in 1975 defendant Liberato Casals went to plaintiff Edward J. Nell Company and told its senior sales engineer, Amado Claustro that he was interested in buying one of the plaintiff's garrett skidders. Plaintiff was a dealer of machineries, equipment and supplies. Defendant Casals represented himself as the majority stockholder, president and general manager of Casville Enterprises, Inc., a firm engaged in the large scale production, procurement and processing of logs and lumber products, which had a plywood plant in Sta. Ana, Metro Manila.

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs executive vice-president, Apolonio Javier, for negotiation in connection with the manner of payment. When Javier asked for cash payment for the skidders, defendant Casals informed him that his corporation, defendant Casville Enterprises, Inc., had a credit line with defendant Equitable Banking Corporation. Apparently, impressed with this assertion, Javier agreed to have the skidders paid by way of a domestic letter of credit which defendant Casals promised to open in plaintiffs favor, in lieu of cash payment. Accordingly, on December 22, 1975, defendant Casville, through its president, defendant Casals, ordered from plaintiff two units of garrett skidders ...

The purchase order for the garrett skidders bearing No. 0051 and dated December 22, 1975 (Exhibit "A") contained the following terms and conditions:

Two (2) units GARRETT Skidders Model 30A complete as basically described in the 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 as arranged.

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 be

opened within ninety (90) days after date of shipment. at first installment will be due one hundred eighty (180) days after date of shipment. Interest-14% per annum (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 and cables, to Cagayan de Oro, on or before Saturday, April 24,1976, on board a Lorenzo 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 under the 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 the shipping cost in the amount of P10,640.00 because of the verbal assurance of defendant Casville that it would be covered by the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of P300,000.00 postdated August 4, 1976, which was followed by another check of same date. Plaintiff considered these checks either as partial payment for the skidder that was already delivered to Cagayan de Oro or as reimbursement for the marginal 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, the defendants said that they would need the sum of P300,000.00 to stand as collateral or marginal deposit in favor of Equitable Banking Corporation and an additional amount of P100,000.00, also in favor of Equitable Banking Corporation, 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 by the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by defendant Casville Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate the transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable to the order of Equitable Banking Corporation and with the 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 trust receipt for opening L/C of Garrett

Skidders in favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher (Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening of L/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, Santos did 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 of credit to cover its purchase from plaintiff of two Garrett skidders, under the following terms and conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to secure the Trust Receipts; e) We shall chattel mortgage the equipments purchased even after payment of the first L/C as additional security for 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 stating that it was ready to open the letters of credit upon defendant's compliance of the following terms and conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms 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 requirements imposed by the defendant bank pointing out that the "cash marginal required under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada property or a total of P427,300.00" and that the check covering said amount should be made payable "to the Order of EQUITABLE BANKING CORPORATION for the account of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed postdated checks were intended as replacement of the checks that were previously issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to 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 of the Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds 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 out the status of the credit line being sought by defendant Casville. Santos assured Umali that the letters of credit would be opened as soon as the requirements imposed 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 CASVILLE ENTERPRISES, 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 in a 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 to defendant bank through defendant Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals because it believed that no one, including defendant 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 one following up the application for the letters of credit.

Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals immediately deposited it with the defendant bank and the bank teller accepted the same for deposit in defendant Casville's checking account. After depositing said check, defendant Casville, acting through defendant Casals, then withdrew all the amount deposited.

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three 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 latter foreclosed the mortgage executed by defendant Casville on the Estrada property which was sold in a public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit knowing that it took time to process the same. However, when the three checks issued to it by defendant Casville were dishonored, plaintiff became apprehensive 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 letters of credit were opened by the defendant bank in its favor and then discovered that defendant Casville had in the meanwhile withdrawn the entire amount of P427,300.00, without paying its obligation to the bank plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of defendants the amount 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 appearing in most of the hearings, but they also assigned to plaintiff the garrett skidder which 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 Corporation are ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the amount of plaintiff's check which defendant bank erroneously credited to the account of defendant Casville and which defendants Casal and Casville misappropriated, with 12% interest thereon from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees 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 of the second check issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE 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 the Casville 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 the Trial Court:

The Court finds that the check in question was payable only to the defendant bank and to no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "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 make Casville Enterprises, Inc. the Payee of the instrument for the words merely indicated for whose account or in connection with what account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not negotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE 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/C OF CASVILLE ENTERPRISES INC." should have placed the teller on guard and he 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 making a wrong decision, credited the entire amount in the name of defendant Casville although the latter was not the payee named in the check. Such mistake was crucial 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 directive was for the appellant bank to apply the value of the check as payment for the letter of credit which Casville Enterprises, Inc. had previously applied for in favor of 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 letter of 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 OF CASVILLE 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, for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed against NELL who caused the ambiguity and could have 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 shall not favor the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the 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 made only by the Bank teller in accordance with customary bank practice, and not by NELL as the drawer 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 the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order 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 accompanying the check which read:

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

and the memorandum:

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

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August 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 aware of 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 Bank for 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 the seller of goods, the price of which is to be covered by a letter of credit, to advance the marginal deposit for the same.

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

In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville Enterprises 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 Banking Corporation, 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 of a breach of trust, the one who made it possible by his act of confidence must bear the loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October 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 of Rizal, Branch XI.is modified in that petitioner Equitable Banking Corporation is absolved from any and all liabilities to the private respondent, Edward J. Nell Company, and the Amended Complaint against petitioner bank is hereby ordered dismissed. No costs.

SO ORDERED.

G.R. No. 97753 August 10, 1992

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

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

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

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

CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000

5 Mar. 82 74797 to 94800 4 16,000

5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000

9 Mar. 82 90023 to 90050 28 112,000

9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

——— ————

Total 280 P1,120,000

===== ========

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

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

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

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

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

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

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

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

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

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

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

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

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

The instant petition is bereft of merit.

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

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101

Metro Manila, PhilippinesSUCAT OFFICEP 4,000.00CERTIFICATE OF DEPOSIT

Rate 16%Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

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

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

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

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a

certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

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

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

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

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

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

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

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

xxx xxx xxx

Atty. Calida:

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

witness:

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

Atty. Calida:

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

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

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

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

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

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

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

resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

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

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

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of

competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED.

SO ORDERED.

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 the REGISTER OF DEEDS OF BULACAN, Respondents.PUNO, J.:

Petitioners, Spouses Evangelista ("Petitioners"), are before this Court on a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, assailing the decision of the Court of Appeals dismissing their petition.

Petitioners filed a complaint1 for annulment of titles against respondents, Mercator Finance Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of Bulacan. 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 that they executed the Real Estate Mortgage in favor of Mercator Financing Corporation ("Mercator") only as officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any consideration as to them since they did not personally obtain any loan or credit accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is void.4 With the void mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale to it as the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the subsequent sale of the same parcels of land to respondent Lydia P. Salazar ("Salazar"), and the transfer of the titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty & Development Corporation ("Lamecs").

Mercator admitted that petitioners were the owners of the subject parcels of land. It, however, contended that "on February 16, 1982, plaintiffs executed a Mortgage in favor of defendant Mercator Finance Corporation ‘for and in consideration of certain loans, and/or other forms of credit accommodations obtained from the Mortgagee (defendant Mercator Finance Corporation) amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100 (P844,625.78) PESOS, Philippine Currency and to secure the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’"5 It contended that since petitioners and Embassy Farms signed the promissory note6 as co-makers, aside from the Continuing Suretyship Agreement7 subsequently executed to guarantee the indebtedness of Embassy Farms, and the succeeding promissory notes8 restructuring the loan, then petitioners are jointly and severally liable with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of the mortgaged properties are valid.

Respondents Salazar and Lamecs asserted that they are innocent purchasers for value and in good faith, relying on the validity of the title of Mercator. Lamecs admitted the prior ownership of petitioners of the subject parcels of land, but alleged that they are the present registered owner. Both respondents likewise assailed the long silence and inaction by petitioners as it was only after a lapse of almost ten (10) years from the foreclosure of the property and the subsequent sales that they made their claim. Thus, Salazar and Lamecs 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 the plaintiffs in favor of defendant Mercator Finance Corp. is null and void;

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

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

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

After pre-trial, Mercator moved for summary judgment on the ground that except as to the amount of damages, there is no factual issue to be litigated. Mercator argued that petitioners had admitted in their pre-trial brief the existence of the promissory note, the continuing suretyship agreement and the subsequent promissory notes restructuring the loan, hence, there is no genuine issue regarding their liability. The mortgage, foreclosure proceedings and the subsequent sales are valid and the complaint must be dismissed.11

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

The RTC granted the motion for summary judgment and dismissed the complaint. It held:

A reading of the promissory notes show (sic) that the liability of the signatories thereto are solidary in view of the phrase "jointly and severally." On the promissory note appears (sic) the signatures of Eduardo B. Evangelista, Epifania C. Evangelista and another signature of Eduardo B. Evangelista below the words Embassy Farms, Inc. It is crystal clear then that the plaintiffs-spouses signed the promissory note not only as officers of Embassy Farms, Inc. but in their personal capacity as well(.) Plaintiffs(,) by affixing their signatures thereon in a dual capacity have bound themselves as solidary debtor(s) with Embassy Farms, Inc. to pay defendant Mercator Finance Corporation the amount of indebtedness. That the principal contract of loan is void for lack of consideration, in the light of the foregoing is untenable.13

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

The appellants’ insistence that the loans secured by the mortgage they executed were not personally theirs but those of Embassy Farms, Inc. is clearly self-serving and misplaced. The fact that they signed the subject promissory notes in the(ir)

personal capacities and as officers of the said debtor corporation is manifest on the very face of the said documents of indebtedness (pp. 118, 128-131, Orig. Rec.). Even assuming arguendo that they did not, the appellants lose sight of the fact that third persons who are not parties to a loan may secure the latter by pledging or mortgaging their own property (Lustan vs. Court of Appeals, 266 SCRA 663, 675). x x x. In constituting a mortgage over their own property in order to secure the purported corporate debt of Embassy Farms, Inc., the appellants undeniably assumed the personality of persons interested in the fulfillment of the principal obligation who, to save the subject realities from foreclosure and with a view towards being subrogated to the rights of the creditor, were free to discharge the same by payment (Articles 1302 [3] and 1303, Civil Code of the Philippines).15 (emphases in the original)

The appellate court also observed that "if the appellants really felt aggrieved by the foreclosure of the subject mortgage and the subsequent sales of the realties to other parties, why then did they commence the suit only on August 12, 1997 (when the certificate of sale was issued on January 12, 1987, and the certificates of title in the name of Mercator on September 27, 1988)?" Petitioners’ "procrastination for about nine (9) years is difficult to understand. On so flimsy a ground as lack of consideration, (w)e may even venture to say that the complaint was not worth the time of the courts."16

A motion for reconsideration by petitioners was likewise denied for lack of merit.17 Thus, this petition where they allege that:

The court a quo erred and acted with grave abuse of discretion amounting to lack or excess of jurisdiction in affirming in toto the May 4, 1998 order of the trial court granting respondent’s motion for summary judgment despite the existence of genuine issues as to material facts and its non-entitlement to a judgment as a matter of law, thereby deciding the case in a way probably not in accord with applicable decisions of this Honorable Court.18

we affirm.

Summary judgment "is a procedural technique aimed at weeding out sham claims or defenses at an early stage of the litigation."19 The crucial question in a motion for summary judgment is whether the issues raised in the pleadings are genuine or fictitious, as shown by affidavits, depositions or admissions accompanying the motion. A genuine issue means "an issue of fact which calls for the presentation of evidence, as distinguished from an issue which is fictitious or contrived so as not to constitute a genuine issue for trial."20 To forestall summary judgment, it is essential for the non-moving party to confirm the existence of genuine issues where he has substantial, plausible and fairly arguable defense, i.e., issues of fact calling for the presentation of evidence upon which a reasonable finding of fact could return a verdict for the non-moving party. The proper inquiry would therefore be whether the affirmative defenses offered by petitioners constitute genuine issue of fact requiring a full-blown trial.21

In the case at bar, there are no genuine issues raised by petitioners. Petitioners do not deny that they obtained a loan from Mercator. They merely claim that they got the loan as officers of Embassy Farms without intending to personally bind themselves or their property. However, a simple perusal of the promissory note and the continuing suretyship agreement shows otherwise. These documentary evidence prove that petitioners are solidary obligors with Embassy Farms.

The promissory note22 states:

For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in installments as follows:

September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87

November 16, 1982 - P154,267.87

December 16, 1982 - P154,267.87

January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

x x x x x x x x x

The note was signed at the bottom by petitioners Eduardo B. Evangelista and Epifania C. Evangelista, and Embassy Farms, Inc. with the signature of Eduardo B. Evangelista below it.

The Continuing Suretyship Agreement23 also proves the solidary obligation of petitioners, viz:

(Embassy Farms, Inc.)

Principal

(Eduardo B. Evangelista)

Surety

(Epifania C. Evangelista)

Surety

(Mercator Finance Corporation)

Creditor

To: MERCATOR FINANCE COPORATION

(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA (hereinafter called Surety), jointly and severally unconditionally guarantees (sic) to MERCATOR FINANCE COPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of EMBASSY FARMS, INC. (hereinafter called Principal) to the Creditor.

x x x x x x x x x

(3) The obligations hereunder are joint and several and independent of the obligations of the Principal. A separate action or actions may be brought and prosecuted against the Surety whether or not the action is also brought and prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

x x x x x x x x x

The agreement was signed by petitioners on February 16, 1982. The promissory notes24 subsequently executed by petitioners and Embassy Farms, restructuring their loan, likewise prove that petitioners are solidarily liable with Embassy Farms.

Petitioners further allege that there is an ambiguity in the wording of the promissory note and claim that since it was Mercator who provided the form, then the ambiguity should be resolved against it.

Courts can interpret a contract only if there is doubt in its letter.25 But, an examination of the promissory note shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity, Section 17 of the Negotiable Instruments Law states, viz:

SECTION 17.Construction where instrument is ambiguous. – Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction 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.

Petitioners also insist that the promissory note does not convey their true intent in executing the document.1âwphi1 The defense is unavailing. Even if petitioners intended to sign the note merely as officers of Embassy Farms, still this does not

erase the fact that they subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal.26 Petitioners cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the rule that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. A surety is bound by the same consideration that makes the contract effective between the principal parties thereto.27 Having executed the suretyship agreement, there can be no dispute on the personal liability of petitioners.

Lastly, the parol evidence rule does not apply in this case.28 We held in Tarnate v. Court of Appeals,29 that where the parties admitted the existence of the loans and the mortgage deeds and the fact of default on the due repayments but raised the contention that they were misled by respondent bank to believe that the loans were long-term accommodations, then the parties could not be allowed to introduce evidence of conditions allegedly agreed upon by them other than those stipulated in the loan documents because when they reduced their agreement in writing, it is presumed that they have made the writing the only repository and memorial of truth, and whatever is not found in the writing must be understood to have been waived and abandoned.

IN VIEW WHEREOF, the petition is dismissed. Treble costs against the petitioners.

SO ORDERED.

G.R. No. 16454 September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee, vs.THE PHILIPPINE NATIONAL BANK, defendant-appellant. STREET, J.:

At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman, was the president of a domestic corporation engaged chiefly in the

exportation of hemp from the Philippine Islands and known as the Philippine Fiber and Produce Company, of which company the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February 5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount was accordingly placed to his credit on the books of the company, and so remained until in October of the same year when an unsuccessful effort was made to transmit the whole, or a greater part thereof, to the plaintiff in New York City.

In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company, presented himself in the exchange department of the Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce Company. He was informed that the total cost of said transfer, including exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered a check for that amount on the Philippine National Bank; and the same was accepted by the officer selling the exchange in payment of the transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. This memorandum receipt is in the following language:

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,

Manila, P.I. Stamp P18

Foreign Amount Rate

$45,000. 3/8 % P90,337.50

Payable through Philippine National Bank, New York.To G. A. Kauffman, New York. Total P90,355.50. Account of Philippine Fiber and Produce Company.Sold to Messrs. Philippine Fiber and Produce Company, Manila.

(Sgd.) Y LERMA,

Manager, Foreign Department.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.

Upon receiving this telegraphic message, the bank's representative in New York sent a cable message in reply suggesting the advisability of withholding this money from Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The Philippine National Bank acquiesced in this and on October 11 dispatched to its New York agency another message to withhold the Kauffman payment as suggested.

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising him that $45,000 had been placed to his credit in the New York agency of the Philippine National Bank; and in response to this advice Kauffman presented himself at the office of the Philippine National Bank in New York City on October 15, 1918, and demanded the money. By this time, however, the message from the Philippine National Bank of October 11, directing the withholding of payment had been received in New York, and payment was therefore refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of Manila to recover said sum, with interest and costs; and judgment having been there entered favorably to the plaintiff, the defendant appealed.

Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-mentioned, the Philippines Fiber and Produce Company did not have on deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which was delivered in payment of the telegraphic order; but the company did have credit to that extent, or more, for overdraft in current account, and the check in question was charged as an overdraft against the Philippine Fiber and Produce Company and has remained on the books of the bank as an interest-bearing item in the account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to show failure of consideration with respect to the amount paid for said telegraphic order. It is true that in the defendant's answer it is suggested that the failure of the bank to pay over the amount of this remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit was secured at the bank by warehouse receipts on Philippine products; and it is alleged that after the exchange in question was sold the bank found that it did not have sufficient to warrant payment of the remittance. In view, however, of the failure of the bank to substantiate these allegations, or to offer any other proof showing failure of consideration, it must be assumed that the obligation of the bank was supported by adequate consideration.

In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the transmission of this credit, no right of action can be vested in him for the breach thereof. "In this situation," — we here quote the words of the appellant's brief, — "if there exists a cause of action against the defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction nor had entered into any

contract with the plaintiff, but in favor of the Philippine Fiber and Produce Company, the party which contracted in its own name with the defendant."

The question thus placed before us is one purely of law; and at the very threshold of the discussion it can be stated that the provisions of the Negotiable Instruments Law can come into operation there must be a document in existence of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order, it is true, transmitted by the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there was no delivery in the sense intended in section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank.

Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the plaintiff can maintain an action against the bank for the nonperformance of said undertaking. In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the maintenance of an action by him?

The only express provision of law that has been cited as bearing directly on this question is the second paragraph of article 1257 of the Civil Code; and unless the present action can be maintained under the provision, the plaintiff admittedly has no case. This provision states an exception to the more general rule expressed in the first paragraph of the same article to the effect that contracts are productive of effects only between the parties who execute them; and in harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.)

The paragraph introducing the exception which we are now to consider is in these words:

Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it would be idle for us here to

go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions upon the conditions governing the right of the person for whose benefit a contract is made to maintain an action for the breach thereof in the following words:

So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract.

If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be difficult to conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he exchange.

In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary described in the cable. All these transaction are matters of purchase and sale create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of the right of the beneficiary to maintain an action against the bank selling the transfer.

Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be computed as prescribed in section 510 of the Code of Civil Procedure.

G.R. No. 111190 June 27, 1995

LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as garnishee, petitioner, vs.HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. SESBREÑO, respondents.BELLOSILLO, J.:

RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the defendants to pay

P11,000.00 to the plaintiff, private respondent herein. The decision having become final and executory, on motion of the latter, the trial court ordered its execution. This order was questioned by the defendants before the Court of Appeals. However, on 15 January 1992 a writ of execution was issued.

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

On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court, finding no more legal obstacle to act on the motion for examination of the garnishees, directed petitioner on 4 November 1992 to submit his report showing the amount of the garnished salaries of Mabanto, Jr., within fifteen (15) days from receipt 2 taking into consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.

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

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

On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply with its order of 4 November 1992. 3 It opined that the checks of Mabanto, Jr., had already been released through petitioner by the Department of Justice duly signed by the officer concerned. Upon service of the writ of garnishment, petitioner as custodian of the checks was under obligation to hold them for the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the case and the trial court thereby acquired jurisdiction to bind him to its orders and processes with a view to the complete satisfaction of the judgment. Additionally, there was no sufficient reason for petitioner to hold the checks because they were no longer government funds and presumably delivered to the payee, conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.

With regard to the contempt charge, the trial court was not morally convinced of petitioner's guilt. For, while his explanation suffered from procedural infirmities nevertheless he took pains in enlightening the court by sending a written explanation

dated 22 July 1992 requesting for the lifting of the notice of garnishment on the ground that the notice should have been sent to the Finance Officer of the Department of Justice. Petitioner insists that he had no authority to segregate a portion of the salary of Mabanto, Jr. The explanation however was not submitted to the trial court for action since the stenographic reporter failed to attach it to the record. 4

On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, writ of execution and notice of garnishment was justified. His only duty was to turn over the garnished checks to the trial court which issued the order of execution. 5

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

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

Petitioner has well argued his case.

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

As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in the form of checks from the Department of Justice through petitioner as City Fiscal 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 until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. 7

According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly signed by the officer concerned through petitioner and upon service of the writ of garnishment by the sheriff petitioner was under obligation to hold them for the judgment creditor. It recognized the role of petitioner as custodian of the checks. At the same time however it 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: "And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed." Yet, the presumption is not conclusive because the last portion of the provision says "until the contrary is proved." However this phrase was deleted by the trial court for no apparent reason. Proof to the contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the character of public funds. In Tiro v. Hontanosas 8 we ruled that —

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

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

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

In denying petitioner's motion for reconsideration, the trial court expressed the additional ratiocination that it was not the duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, the writ of execution, and the notice of garnishment was justified, citing our ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in that case was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is valid." But that is invoking only the general rule. We 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 the face of the writ or actual knowledge by the garnishee of lack of entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was applicable to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to inquire into the validity of the notice of garnishment as he had actual knowledge of the non-entitlement of private respondent to the checks in question. Consequently, we find no difficulty concluding that the trial court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto, Jr., in the possession of petitioner.

WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET

ASIDE. The notice of garnishment served on petitioner dated 3 February 1992 is ordered DISCHARGED.

SO ORDERED.

G.R. No. 85419 March 9, 1993

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

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian Huat,

Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of action:

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

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

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

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

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

The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the

fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.

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

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

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part:

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

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

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

In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative

respondents. This was clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5

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

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

However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action against her

co-respondents, if the allegations in the complaint are found to be true.

With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of delivery. It therefore has no cause of action against the respondents, in the alternative or otherwise.

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

SO ORDERED.

G.R. No. 192413 June 13, 2012

Rizal Commercial Banking Corporation, Petitioner, vs.Hi-Tri Development Corporation and Luz R. Bakunawa, Respondents.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 November 2009 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 ordered them 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 P 1,019,514.29, maintained by RCBC in its Ermita Business Center branch.

We quote the narration of facts of the CA4 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 by TCT 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. These lots were sequestered by the Presidential Commission on Good Government [(PCGG)].

Sometime in 1990, a certain Teresita Millan ("Millan"), through her representative, Jerry Montemayor, offered to buy said lots for "P 6,724,085.71", with the promise that she will take care of clearing whatever preliminary obstacles there may[]be to effect a "completion of the sale". The Spouses Bakunawa gave to Millan the Owner’s Copies of said TCTs and in turn, Millan made a down[]payment of "P 1,019,514.29" for the intended purchase. However, for one reason 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 her down[]payment of P 1,019,514.29. However, Millan refused to accept back the P 1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, through their company, the Hi-Tri Development Corporation ("Hi-Tri") took out on October 28, 1991, a Manager’s Check from RCBC-Ermita in the amount of P 1,019,514.29, payable to Millan’s company Rosmil Realty and Development Corporation ("Rosmil") c/o Teresita Millan and used this as one of their basis for a complaint against Millan and Montemayor which they filed with the Regional Trial 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 Montemayor may 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 correspondingly ordered to receive the amount of One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine Centavos (P 1,019,514.29);

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

4. That the defendants be ordered to pay plaintiffs attorney’s fees in the amount of P 50,000.00.

Being part and parcel of said complaint, and consistent with their prayer in Civil Case No. Q-91-10719 that "Teresita Mil[l]an be correspondingly ordered to receive the amount of One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine [Centavos] ("P 1,019,514.29")["], the Spouses Bakunawa, upon advice of their counsel, retained custody of RCBC Manager’s Check No. ER 034469 and refrained from canceling or negotiating it.

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

On January 31, 2003, during the pendency of the abovementioned case and without the knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBC reported the "P 1,019,514.29-credit existing in favor of Rosmil" to the Bureau of Treasury as among its "unclaimed balances" as of January 31, 2003. Allegedly, a copy of the Sworn Statement executed by Florentino N. Mendoza, Manager and Head of RCBC’s Asset Management, Disbursement & Sundry Department ("AMDSD") was posted within the premises of RCBC-Ermita.

On December 14, 2006, x x x Republic, through the [Office of the Solicitor General (OSG)], filed with the RTC the action below for Escheat [(Civil Case No. 06-244)].

On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and Millan. Instead of only the amount of "P 1,019,514.29", [Spouses Bakunawa] agreed to pay Rosmil and Millan the amount of "P 3,000,000.00", [which is] inclusive [of] the amount of ["]P 1,019,514.29". But during negotiations and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri] inquired from RCBC-Ermita the availability of the P 1,019,514.29 under RCBC Manager’s Check No. ER 034469. [Hi-Tri and Spouses Bakunawa] were however dismayed when they were informed that the amount was already subject of the escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz:

"We understand that the deposit corresponding to the amount of Php 1,019,514.29 stated in the Manager’s Check is currently the subject of escheat proceedings pending before Branch 150 of the Makati Regional Trial Court.

Please note that it was our impression that the deposit would be taken from [Hi-Tri’s] RCBC bank account once an order to debit is issued upon the payee’s presentation

of the Manager’s Check. Since the payee rejected the negotiated Manager’s Check, presentation of the Manager’s Check was never made.

Consequently, the deposit that was supposed to be allocated for the payment of the Manager’s Check was supposed to remain part of the Corporation[’s] RCBC bank account, which, thereafter, continued to be actively maintained and operated. For this reason, We hereby demand your confirmation that the amount of Php 1,019,514.29 continues to form part of the funds in the Corporation’s RCBC bank account, since pay-out of said amount was never ordered. We wish to point out that if there was any attempt on the part of RCBC to consider the amount indicated in the Manager’s Check separate from the Corporation’s bank account, RCBC would have issued a statement to that effect, and repeatedly reminded the Corporation that the deposit would be considered dormant absent any fund movement. Since the Corporation never received any statements of account from RCBC to that effect, and more importantly, never received any single letter from RCBC noting the absence of fund movement and advising the Corporation that the deposit would be treated as dormant."

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

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

"The Bank’s Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of Manager’s Check No. ER034469 in the escheat proceedings docketed as Civil Case No. 06-244, as well as the status thereof, between 28 January 2008 and 1 February 2008.

x x x x x x x x x

Contrary to what Hi-Tri hopes for, the funds covered by the Manager’s Check No. ER034469 does not form part of the Bank’s own account. By simple operation of law, the funds covered by the manager’s check in issue became a deposit/credit susceptible for inclusion in the escheat case initiated by the OSG and/or Bureau of Treasury.

x x x x x x x x x

Granting arguendo that the Bank was duty-bound to make good the check, 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 P 1,019,514.29 held by RCBC as allocated funds 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 intervene was filed out of time.

The CA Ruling

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 RCBC failed to prove that the latter had communicated with the 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 jurisdictional requirement 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.

Issue

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 assails7 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 credit 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 the Solicitor General shall be informed of such unclaimed balances, he shall commence an action or actions in the name of the People of the Republic of the Philippines in the Court of First Instance of the province or city where the bank, building and loan association or trust corporation is located, in which shall be joined as parties the bank, building and loan association or trust corporation and all such creditors or depositors. All or any of such creditors or depositors or banks, building and loan association or trust corporations may be included in one action. Service of process in such action or actions shall be made by delivery of a copy of the complaint and summons to the president, cashier, or managing officer of each defendant bank, building and loan association or trust corporation and by publication of a copy of such summons in a newspaper of general circulation, either in English, in Filipino, or in a local dialect, published in the locality where the bank, building and loan association or trust corporation is situated, if there be any, and in case there is none, 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 be determined that such unclaimed balances in any defendant bank, building and loan association or trust corporation are unclaimed as hereinbefore stated, then the court shall render judgment in favor of the Government of the Republic of the Philippines, declaring that said unclaimed balances have escheated to the Government of the Republic of the Philippines and commanding said 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 the Republic of the Philippines to be used as the National Assembly may direct.

At the time of issuing summons in the action above provided for, the clerk of court shall also issue a notice signed by him, giving the title and number of said action, and referring to the complaint therein, and directed to all persons, other than those named as defendants therein, claiming any interest in any unclaimed balance mentioned in said complaint, and requiring them to appear within sixty days after the publication or first publication, if there are several, of such summons, and show cause, if they have any, why the unclaimed balances involved in said action should not be deposited with the Treasurer of the Philippines as in this Act provided and notifying them that if they do not appear and show cause, the Government of the Republic of the Philippines will apply to the court for the relief demanded in the complaint. A copy of said notice shall be attached to, and published with the copy of, said summons required to be published as above, and at the end of the copy 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 and notice. Any person interested may appear in said action and become a party thereto. Upon the publication or the completion of the publication, if there are several, of the summons and notice, and the service of the summons on the defendant banks, building and loan associations or trust corporations, the court shall have full and complete jurisdiction in the Republic of the Philippines over the said unclaimed balances and over the persons having or claiming any interest in the said unclaimed balances, or any of them, and shall have full and complete jurisdiction to hear and determine the issues herein, and render the appropriate judgment thereon. (Emphasis supplied.)

Hence, insofar as banks 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 to depositors or other claimants of the 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 actions in 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 the res.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 determine whether 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 of January of every odd year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer of the Philippines a statement, under oath, of their respective managing officers, of all credits and deposits held by them in favor of persons known to be dead, or who have not made further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical 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 whether the 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 place in the premises of the bank, building and loan association, or trust corporation concerned for at least sixty days from the date of filing thereof: Provided, That immediately before filing the above sworn statement, the bank, building and loan association, and trust corporation shall communicate with the person in whose favor the unclaimed balance stands at his last known place of residence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General 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 deposit could 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 escheated to 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 asserts22 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 funds represented by the Manager’s Check were deemed transferred to the credit 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 allege23 that they have a legal interest in the 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 called manager’s or cashier’s checks. These are bills of 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 a negotiable instrument is incomplete and revocable until delivery of the instrument 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 the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the 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 him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery 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 instrument instead of cancelling it. As the Manager’s Check neither went to 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 inapplicable, 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.1âwphi1

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. It 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 is DENIED. The 26 November 2009 Decision and 27 May 2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 17230 March 17, 1922

JOSE VELASCO, plaintiff-appelle, vs.TAN LIUAN & CO., TAN LIUAN, UY TENGPIAO, and AW YONG CHIOW SOO, defendants. AW YONG CHIOW SOO, appellant.

STATEMENT

The defendant Tan Liuan and Co. executed to the defendant Aw Yong Chiow Soo four certain promissory notes: The first, for P12,000, dated February 18th, the second, for P16,000, dated February 23d, the third, for P38,000, dated March 17th, and the fourth, for P21,000, dated March 27th, all in the year 1919, and each payable six months after its respective date.

March 17, 1919, the defendant Aw Yong Chiow Soo drew a bill of exchange or sight draft, for P33,500 Yen on Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, in favor of the Philippine National Bank, which at first it refused to cash. The plaintiff was then induced to, and did, endorse it, and the bank cashed the draft, no part of which plaintiff received, and it is claimed that all of the money was paid to Tan Liauan and Co. In the ordinary course of business, the draft was dishonored when presented, and later the plaintiff was requested to, and did, personally execute to the Philippine National Bank his promissory note, for the amount of the draft, interest and expenses.

August 18, 1991, Tan Liuan made the following written statement:

In consideration for the indorsement by Jose Velasco at my request of a draft drawn by Aw Yong Chiow Soo on Messrs. Jing Kee and Co., 2 Kaisandori 5-Chone, Kobe, Japan, for the payment of which he became liable upon his indorsement for the sum of 33,500 Yen, I promise to pay to Jose Velasco, or oder, within ten days after he shall have been obligated to pay the amount of said draft, or any part thereof, the full amount with all costs, expenses and attorney's fees which he shall pay on account of his indorsement of said draft, with interest on the amount paid by him at 10 per cent per annum thereon from the time of payment.

On the same day, the plaintiff made the following written statement:

Aw Yong Chiow Soo having this day transferred to me his claim of credit against the firm of Tan Liuan and Co. as collateral security in consideration of my having indorsed his draft made by him on Messrs. Jing Kee and Co. for the sum of 33,500 Yen and presented to the Philippine National Bank by which it was cashed, now if the drawer of said draft or the said Aw Yong Chiow Soo shall pay the said draft so that I am relieved from all responsibility in connection therewith and the expenses incurred on account thereof, then I will reassign the said claim against Tan Liuan and Co. to him, and if I am obliged to pay said draft, any amount which I may receive on account of said claim assigned to me over and above the amount paid by me, including all expenses and attorney's fees, shall be delivered to the said Aw Yong Chiow Soo.

August 22, 1919, the defendant Aw Yong Chiow Soo made the following written statement:

For value received and to me in hand paid, I hereby assign, transfer and deliver to Jose Velasco the whole amount of my credit against Tan Liuan and Co., amounting to eighty-seven thousand pesos (P87,000), evidenced by four (4) promissory notes, which are described as follows:

1. Promissory note dated Manila, February 18, 1919, for the sum of P12,000; for six (6) months;

2. Promissory note dated Manila, February 23, 1919, for the sum of P16,000; for six (6) months;

3. Promissory note dated Manila, March 17, 1919, for the sum of P38,000; for six (6) months;

4. Promissory note dated Manila, March 27, 1919, for the sum of P21,000; for six (6) months;

the above-mentioned promissory notes being attached hereto and made a part hereof, and fully autnorize the said Jose Velasco to collect and receive the said amount from Tan Liuan and Co., or from the legal representative of, or liquidator of said Tan Liuan and Co.

Concurrent therewith, the defendant unqualifiedly indorsed the four promissory notes to the plaintiff, who, on February 19, 1920, commenced this action against the defendants.

The complaints alleges the execution of the notes by the defendant Tan Liuan and Co. to the defendant Aw Yong Chiow Soo. That the defendant Aw Yong Chiow Soo indorsed the notes to the plaintiff; that at their maturity they were duly presented to Tan Liuan and Co.; and that payment was refused, of which refusal the defendant Aw Yong Chiow Soo was duly notified.

For answer, Aw Yong Chiow Soo makes a general denial, and, as a further and separate defense, alleges the drawing of the sight draft, and that it was an accommodation only, and that, conforming to the agreement, it was duly indorsed by the plaintiff, and Aw Yong Chiow So delivered the money to the defendant Tan Liuan. The defendant then alleges the making of the written statement by Tan Liuan of August 18, 1919, above quoted. On that date, Aw Yong Chiow Soo was a creditor of the defendant Tan Liuan and Co., evidenced by the promissory notes above described, and that Tan Liuan and Co. was insolvent. That by reason thereof, one of the promissory notes was executed to guarantee Aw Yong Chiow Soo against any liability in case that Tan Liuan or the plaintiff would not pay the sight draft, and because the bank had requested the plaintiff to pay the draft, this defendant and the

plaintiff agreed that this defendant should transfer to him all of its interest in the four promissory notes, under an agreement that, in case Jing Kee and Co. should pay the draft, the plaintiff would transfer the note to this defendant, but in the event that the plaintiff was required to pay the draft, the he would endeavor to collect the notes in full, and from the proceeds would first reimburse himself and then pay any remainder to the defendant. It is also alleged that the palintiff has not paid the draft or made any effort to collect it from Tan Liuan. That this defendant is not liable to the plaintiff on any contract, and does not owe him anything, but that, under the agreement, the plaintiff should return to this defendant any amount which he should collect over the amount of his personal claim. That, by reason of the contract between the plaintiff and the defendant, Tan Liuan, this defendant has been released and discharged of all liability, and that the action is premature.

Upon such issues, the case was tried, and the lower court rendered judgment against the defendants Tan Liuan and Co. and Tan Liuan and Uy Tengpiao, for the full amount of the notes, from which the plaintiff should only receive a sufficient amount to fully compensate him as an indorser of the draft; to wit, P46,135.70, and that, if collected, the remainder, if any, should be paid to Aw Yong Chiow Soo against whom judgment was rendered for the amount of P46,135.70 should be defendant Tan Liuan and Co. fail to pay the judgment. From this, the defendant Aw Yong Chiow Soo only appealed, claiming that the lower court erred in rendering judgment against it upon the four promissory notes, or that it was liable for the payment of either of them, or that it should pay the plaintiff P46,135.70, or that he should have any judgment against this defendant.

JOHNS, J.:

It will be noted that two of the promissory notes are dated in February; that the third is dated March 17th, and the last March 27th, all in 1919. That each promissory note is payable six months after date, and is executed by Tan Liuan and Co. in favor of Aw Yong Chiow Soo.

The sight draft is dated March 17, 1919, payable thirty days after date, and is drawn by Aw Yong Chiow Soo upon Jing Kee and Co. in favor of the Philippine National Bank.

The written statement of Tan Liuan is dated August 18, 1919, and that three of the promissory notes were then due and payable.

Although it is claimed taht Tan Liuan and Co. received the proceeds from the draft, its name does not appear in or upon the draft, and it is very apparent that the written statement of Tan Liuan and Co., of August 18th, was signed, for the purpose of showing the true relations of that firm to the transaction, and that within ten days after the plaintiff had assumed and paid the amount of the draft, with costs and expenses, Tan Liuan and Co. would pay the plaintiff the full amount which plaintiff had obligated himself to pay. In other words, Tan Liuan and Co., by that writing, assumes all liability

for the amount of the draft and promises to pay the plaintiff and release him from all liability. In legal effect, plaintiff's written statement of August 18th, is an acknowledgment of the reciept from Aw Yong Chiow Soo of the four promissory notes as collateral security for his indorsement of the draft, and that, in the event the plaintiff is released from his liability, he will then reassign the notes to the defendant, Aw Yong Chiow Soo, and that, if he is required to pay the draft, any amount which he may receive on account of the promissory notes over and above the amount which he is required to pay, he will then pay any remainder to the defendant Aw Yong Chiow Soo. The indorsement of Aw Yong Chiow Soo of the notes to the plaintiff was unqualified, and the law fixes the liability of an unqualified indorser, and oral testimony is not admisible to vary or contradict the terms of a written instrument.

Section 30 of Act No. 2031, of the Philippine Legislature, known as "The Negotiable Instruments Law," says:

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

SEC. 31. Indorsement; how made.— The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.

SEC. 33. Kinds of indorsement.— An indorsement may be either special or in blank; and it may also be either restrictive or qualified, or conditional.

SEC. 38. Qualified indorsement.— A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.

SEC. 45. Time of indorsement; presumption.— Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue.

SEC. 63. When person deemed indorser.— A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity.

SEC. 66. Liability of general indorser.— Every indorser who indorses without qualification, warrants to all subsequent holders in due course —

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and

(b) That the instrument is at the time of his indorsement valid and subsisting.

And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

SEC. 114.When notice need not be given to drawer. — Notice of dishonor is not required to be given to the drawer in either of the following cases:

x x x x x x x x x

(d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument.

Aw Yong Chiow Soo, being an unqualified indorser, the law fixes its liability.

If it was not its purpose or intent to assume and agree to pay the notes, it should have indorsed them "without recourse," or in such a manner as to discliam any personal liability. When a person makes an unqualified indorsement of a promissory note, the Negotiable Instruments Law specifies and defines his liability, and parol testimony is not admissible to explain or defeat such liability. Here, the bill of exchange was drawn by the defendant, Aw Yong Chiow Soo, and it was the bill of exchange which was indorsed by the plaintiff, and the testimony is conclusive taht plaintiff's indorsement was required by the bank as one of the conditions upon which it would cash the draft. Three of the notes had matured at the time they were indorsed and the written instruments signed. Although the draft was drawn by Aw Yong Chiow Soo, it was dishonored, and the plaintiff was required by the bank to execute his note for its amount. At the time of the execution of the notes, Aw Yong Chiow Soo was a creditor of Tan Liuan and Co. for the amount of the notes.

The action here is not based upon the draft. It is founded upon the promissory notes. The plaintiff did not receive any part of the proceeds of the draft, but has been required by the bank to make his promissory note for the amount of the draft. As collateral and to indemnify and protect plaintiff from any liability, Aw Yong Chiow Soo indorsed the promissory notes, which it held against Tan Liuan and Co. to the plaintiff and did not in any manner qualify its indorsement, and the Negotiable Instruments Act says that —

Every indorser who indorses without qualification, warrants to all subsequent holders in due course, etc., engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Section 80 of the Act says:

Presentment for payment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.

And subdivision (d), of section 114, says:

Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument.

The draft was drawn on March 18, 1919, payable thirty days after sight, and it was dishonored. Three of the notes were past due at the time the written agreements were made, and the testimony is conclusive that Tan Liuan and Co. was insolvent, and that Aw Yong Chiow Soo knew it, and that none of the notes would be paid if presented, and the evidence shows that, before they were indorsed, the first two had been duly presented and dishonored. In other words, at the time the unqualified indorsement was made, two of the notes had been protested, and Aw Yong Chiow Soo knew that Tan Liuan and Co. was insolvent, and had no reason to expect that the notes would be paid if presented. There is no claim or pretense that its claim was prejudiced or that it lost any legal right, because the last two notes were not protested, the first of which was past due when it was indorsed.

The purpose and intent of the August written statements was to explain the transactions between the parties, to whom the proceeds from the draft were paid, and that the notes were indorsed by Aw Yong Chiow Soo to palintiff, as collateral, to protect and hold him harmless in his indorsement of the draft, an to specify that Aw Yong Chiow Soo should have any proceeds from the notes after the draft had been fully paid therefrom and the plaintiff released from his liability as an indorser. The statements do not make any reference to the legal liability of Aw Yong Chiow Soo as an indorser of the notes, do not and were never contended to fully discharge and release that firm from its liability as an indorser.

With all due respect to the able and ingenious brief for the appellant, there is no merit in the defense, and the judgment of the lower court is affirmed, with costs in favor of the plaintiff. So ordered.

G.R. No. L-37467 December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant, vs.BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defendants-appellees.

HULL, J.:

Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in business in the Philippine Islands, and maintains its main office in these Islands in the City of Manila.

The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general power of attorney with authority of substitution. The principal employee in the Manila office was one Joseph L. Wilson, to whom had been given a general power of attorney but without power of substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of attorney to Newland Baldwin and at the same time revoked the power of Wilson relative to the dealings with the Bank of the Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.

About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a telegraphic transfer to the China Banking Corporation of Manila of $100,00. The money was transferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of P201,000, which was then the current rate of exchange. On this contract was forged the name of Newland Baldwin and typed on the body of the contract was a note:lawphil.net

Please send us certified check in our favor when transfer is received.

A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling Company or order was receipted for by Dolores. On the same date, September 28, 1927, the manger's check was deposited with the Bank of the Philippine Islands by the following endorsement:

For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.

By (Sgd.) NEWLAND BALDWIN

For Agent

The endorsement to which the name of Newland Baldwin was affixed was spurious.

The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of P201,000 and passed the cashier's check in the ordinary course of business through the clearing house, where it was paid by the China Banking

Corporation.

On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named in the letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money, and shortly afterwards returned with the check for the sum of P200,000, purporting to be signed by Newland Baldwin as agent.

Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine Islands but never in so large an amount, and according to the record, never under the sole supervision of Dolores as the representative of plaintiff.

Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he left the bank and shortly afterwards returned with another check for P1, purporting to be signed by Newland Baldwin. Whereupon the money was turned over to Dolores, who took it to plaintiff's office, where he turned the money over to Wilson and received as his share, P10,000.

Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff with the amount withdrawn by the two forged checks of P200,000 and P1, suit was brought against the Bank of the Philippine Islands, and finally on the suggestion of the defendant bank, an amended complaint was filed by plaintiff against both the Bank of the Philippine Islands and the China Banking Corporation.

At the trial the China Banking Corporation contended that they had drawn a check to the credit of the plaintiff company, that the check had been endorsed for deposit, and that as the prior endorsement had in law been guaranteed by the Bank of the Philippine Islands, when they presented the cashier's check to it for payment, the China Banking Corporation was absolved even if the endorsement of Newland Baldwin on the check was a forgery.

The Bank of the Philippine Islands presented many special defenses, but in the main their contentions were that they had been guilty of no negligence, that they had dealt with the accredited representatives of the company in the due course of business, and that the loss was due to the dishonesty of plaintiff's employees and the negligence of plaintiff's general agent.

In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there was employed a woman stenographer and cashier. The agent did not keep in his personal possession either the code-book or the blank checks of either the Bank of the Philippine Islands or the China Banking Corporation. Baldwin was authorized to draw checks on either of the depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking Corporation.

After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the Bank of the Philippine Islands being the result of a forged endorsement, the relation of depositor and banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith in the ordinary course of its business, was not guilty of negligence, and therefore under article 1902 of the Civil Code which should control the case, plaintiff could not recover; and that as the cause of loss was the criminal actions of Wilson and Dolores, employees of plaintiff, and as Newland Baldwin, the agent, had not exercised adequate supervision over plaintiff's Manila office, therefore plaintiff was guilty of negligence, which ground would likewise defeat recovery.

From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes nine assignments of error which we do not deem it necessary to discuss in detail.

There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the checks so signed over to Wilson.

The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond reasonable doubt, nor is it believed that Baldwin signed checks in blank and turned them over to Wilson.

As to the China Banking Corporation, it will be seen that it drew its check payable to the order of plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a check must know to whom it pays. In connection with the cashier's check, this duty was therefore upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to inspect and verify all endorsements of the check, even if some of them were also those of depositors in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it gave the latter bank credit for its own cashier's check. Even if we would treat the China Banking Corporation's cashier's check the same as the check of a depositor and attempt to apply the doctrines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we would at the same time have to hold that the Bank of the Philippine Islands was indebted to the China Banking Corporation in the same amount. As, however, the money was in fact paid to plaintiff corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China Banking Corporation from responsibility is affirmed.

Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now consider the effect of the deposit of P201,000. It must be noted that this was not a presenting of the check for cash payment but for deposit only. It is a matter of general knowledge that most endorsements for deposit only, are informal. Most are by means of a rubber stamp. The bank would have been justified in accepting the

check for deposit even with only a typed endorsement. It accepted the check and duly credited plaintiff's account with the amount on the face of the check. Plaintiff was not harmed by the transaction as the only result was the removal of that sum of money from a bank from which Wilson could have drawn it out in his own name to a bank where Wilson would not have authority to draw checks and where funds could only be drawn out by the check of Baldwin.

Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:

". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one thousand (P201,000) pesos, together with interest thereon at the agreed rate of 3 ½ per cent per annum on daily balances of our credit in account current with your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal rate of 6 per cent from and after the date of this demand inasmuch as we desire to withdraw and make use of the money." Such language might well be treated as a ratification of the deposit.

The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is absolutely contrary to what the bank did. It did not take it up as a separate account but it transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose. In this case the action was neither gratuitous nor was it a bailment.

On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Islands was an intermeddling bank. In the many cases cited by plaintiff where the bank that cashed the forged endorsement was held as an intermeddler, in none was the claimant a regular depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000 was that of depositor and banker, creditor and debtor.

We now come to consider the legal effect of payment by the bank to Dolores of the sum of P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated, the fact that these signatures were forged is beyond question. It is an elementary principle both of banking and of the Negotiable Instruments Law that —

A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. (7 C.J., 683.)

There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted this large sum of money.

The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never questioned at the time its employees should have used care. In fact, even today the bank represents that it has a relief that they are genuine signatures.

The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they are not a charge against plaintiff nor are the checks of any value to the defendant.

It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the two forged checks.

The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a judgment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928, until payment, together with costs in both instances. So ordered.

G.R. No. L-38816 November 3, 1933INSULAR DRUG CO., INC., plaintiff-appellee, vs.THE PHILIPPINE NATIONAL BANK, ET AL., defendants. THE PHILIPPINE NATIONAL BANK, appellant.MALCOLM, J.:

This is an appeal taken by Philippine National Bank from a judgment of the Court of First Instance of Manila requiring bank to pay to the Insular Drug Co., Inc., the sum of P18,285.92 with legal interest and costs.

The record consists of the testimony of Alfred Von Arend, President and Manager of the Insular Drug Co., Inc., and of exhibits obtained from the Philippine National Bank showing transactions of U.E. Foerster with the bank. The Philippine National Bank was content to submit the case without presenting evidence in its behalf. The meagre record and the statement of facts agreed upon by the attorneys for the contending parties disclose the following facts: The Insular Drug Co., Inc., is a Philippine corporation with offices in the City of Manila. U.E. Foerster was formerly a salesman of drug company for the Islands of Panay and Negros. Foerster also acted as a collector for the company. He was instructed to take the checks which came to his hands for the drug company to the Iloilo branch of the Chartered Bank of India, Australia and China and deposit the amounts to the credit of the drug company. Instead, Foerster deposited checks, including those of Juan Llorente, Dolores Salcedo, Estanislao Salcedo, and a fourth party, with the Iloilo branch of the Philippine National Bank. The checks were in that bank placed in the personal account of Foerster. Some of the checks were drawn against the Bank of Philippine National Bank. After the indorsement on the checks was written "Received payment prior indorsement guaranteed by Philippine National bank, Iloilo Branch, Angel Padilla, Manager." The indorsement on the checks took various forms, some being "Insular Drug Company, Inc., By: (Sgd.) U. Foerster, Agent. (Sgd.) U. Foerster" other being "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Agent (Sgd.) Carmen E. de Foerster"; others "Insular Drug Co., Inc., By: (Sgd.) Carmen E. de Foerster, Carmen E. de Froster"; others "(Sgd.) Carmen E. de Foerster, (Sgd.) Carmen E. de Foerster"; one (Sgd.) U. Foerster. (Sgd.) U. Foerster"; others; "Insular Drug Co., Inc., Carmen E. de Foerster, By: (Sgd.) V. Bacaldo," etc. In this connection it should be explained that Carmen E. de Foerster was his stenographer. As a consequence of the indorsements on checks the amounts therein stated were subsequently withdrawn by U. E., Foerster and Carmen E. de Foerster.

Eventually the Manila office of the drug company investigated the transactions of Foerster. Upon the discovery of anomalies, Foerster committed suicide. But there is no evidence showing that the bank knew that Foerster was misappropriating the funds of his principal. The Insular Drug Company claims that it never received the face value of 132 checks here in the question covering a total of P18,285.92.

There is no Philippine authority which directly fits the proven facts. The case of Fulton Iron Works Co., vs. China Banking Corporation ([1930], 55 Phil., 208), mentioned by both parties rest on a different states of facts. However, there are elementary principles governing the relationship between a bank and its customers

which are controlling. In first place, the bank argues that the drug company was never defrauded at all. While the evidence on the extent of the loss suffered by the drug company is not nearly as clear as it should be, it is a sufficient answer to state that no such special defense was relied upon by the bank in the trial court. The drug company saw fit to stand on the proposition that checks drawn in its favor were improperly and illegally cashed by the bank for Foerster and placed in his personal account, thus making it possible for Foerster to defraud the drug company, and the bank did not try to go back of this proposition. The next point relied upon by the bank, to the effect that Foerster had implied authority to indorse all checks made out in the name of the Insular Drug Co., Inc., has even less force. Not only did the bank permit Foerster to indorse checks and then place them to his personal account, but it went farther and permitted Foerster's wife and clerk to indorse the checks. The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agent does so at his peril, and must same by the consequences if the agent who indorses the same is without authority. (Arcade Realty Co. vs. Bank of Commerce [1919], 180 Cal., 318; Standard Steam Specialty Co., vs. Corn Exchange Bank [1917], 220 N.Y., 278; People vs. Bank of North America [1879], 75 N.Y., 547; Graham vs. United States Savings Institution [1870], 46 Mo., 186.) Further speaking to the errors specified by the bank, it is sufficient to state that no trust fund was involved; that the fact that bank acted in good faith does not relieve it from responsibility; that no proof was adduced, admitting that Foerster had right to indorse the checks, indicative of right of his wife and clerk to do the same , and that the checks drawn on the Bank of the Philippine Islands can not be differentiated from those drawn on the Philippine National Bank because of the indorsement by the latter. In brief, this is a case where 132 checks made out in the name of the Insular Drug Co., Inc., were brought to the branch office of the Philippine National Bank in Iloilo by Foerster, a salesman of the drug company, Foerster's wife, and Foerster's clerk. The bank could tell by the checks themselves that the money belonged to the Insular Drug Co., Inc., and not to Foerster or his wife or his clerk. When the bank credited those checks to the personal account of Foerster and permitted Foerster and his wife to make withdrawals without there being made authority from the drug company to do so, the bank made itself responsible to the drug company for the amounts represented by the checks. The bank could relieve itself from responsibility by pleading and proving that after the money was withdrawn from the bank it passed to the drug company which thus suffered no loss, but the bank has not done so. Much more could be said about this case, but it suffices to state in conclusion that bank will have to stand the loss occasioned by the negligence of its agents.

Overruling the errors assigned, judgment of the trial court will be affirmed, the costs of this instance to be paid by appellant.

G.R. No. L-2861 February 26, 1951

ENRIQUE P. MONTINOLA, plaintiff-appellant, vs.THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.MONTEMAYOR, J.:

In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila against the Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the court rendered a decision dismissing the complaint with costs against plaintiff-appellant. Montinola has appealed from that decision directly to this Court inasmuch as the amount in controversy exceeds P50,000.

There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer he was ex officio agent of the Philippine National Bank branch in the province. Mariano V. Ramos worked under him as assistant agent in the bank branch aforementioned. In April of that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet been occupied by the Japanese invading forces, was the emergency currency which had been issued since January, 1942 by the Mindanao Emergency Currency Board by authority of the late President Quezon.

About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M. V. Ramos was inducted into the United States Armed Forces in the Far East (USAFFE) as disbursing officer of an army division. As such disbursing officer, M. V. Ramos on April 30, 1942, went to the neighboring Province Lanao to procure a cash advance in the amount of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in emergency notes and a check for P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis Oriental to encash the check for P500,000 which he had received from the Provincial Treasurer of Lanao. Laya did not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check No. 1382 for P100,000 drawn on the Philippine National Bank. According to Laya he had previously deposited P500,000 emergency notes in the Philippine National Bank branch in Cebu and he expected to have the check issued by him cashed in Cebu against said deposit.

Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him, the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942, the USAFFE forces to which he was attached surrendered. Ramos was made a prisoner of war until February 12, 1943, after which, he was released and he resumed his status as a civilian.

About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly indorsed this check No. 1382 to Enrique P. Montinola. The circumstances and conditions under which the negotiation or transfer was made are in controversy.

According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to buy foodstuffs and medicine, offered to sell him the check; to be sure that it was genuine and negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President Carmona of the Philippine National Bank in Manila about said check; that after examining it President Carmona told him that it was negotiable but that he should not let the Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in kind, namely, four bottles of sulphatia sole, each bottle containing 1,000 tablets, and each tablet valued at P100; that upon payment of the full price, M. V. Ramos duly indorsed the check to him. This indorsement which now appears on the back of the document is described in detail by trial court as follows:

The endorsement now appearing at the back of the check (see Exhibit A-1) may be described as follows: The woods, "pay to the order of" — in rubber stamp and in violet color are placed about one inch from the top. This is followed by the words "Enrique P. Montinola" in typewriting which is approximately 5/8 an inch below the stamped words "pay to the order of". Below "Enrique P. Montinola", in typewriting are words and figures also in typewriting, "517 Isabel Street" and about ¹/8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads "M. V. Ramos" also in green ink but made in handwriting."

To the above description we may add that the name of M. V. Ramos is hand printed in green ink, under the signature. According to Montinola, he asked Ramos to hand print it because Ramos' signature was not clear.

Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote in longhand the following:

Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos.

Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In this he was

corroborated by Atty. Simeon Ramos Jr. who told the court that the agreement between Ramos and Montinola was that the latter, for the sale to him of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes; that when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document evidencing said payment of P20,000; that when the second check for P25,000 was issued by Montinola, he (Simeon) prepared another document with two copies, one for Montinola and the other for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the understanding that the balance of P45,000 would be paid in a few days.

The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check, Exhibit A, does not now appear at the back of said check. What appears thereon is the indosement testified to by Montinola and described by the trial court as reproduced above. Before going into a discussion of the merits of the version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a further description of it as we shall later.

When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he filed a supposed photostic copy. However, at the trial, he presented the check itself and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated, bottled, torn and partly burned, and its condition can best be appreciated by seeing it. Roughly, it may be stated that looking at the face of the check (Exhibit A) we see that the left third portion of the paper has been cut off perpendicularly and severed from the remaining 2/3 portion; a triangular portion of the upper right hand corner of said remaining 2/3 portion has been similarly cut off and severed, and to keep and attach this triangular portion and the rectangular ¹/3 portion to the rest of the document, the entire check is pasted on both sides with cellophane; the edges of the severed portions as well as of the remaining major portion, where cut bear traces of burning and searing; there is a big blot with indelible ink about the right middle portion, which seems to have penetrated to the back of the check (Exhibit A-1), which back bears a larger smear right under the blot, but not black and sharp as the blot itself; finally, all this tearing, burning, blotting and smearing and pasting of the check renders it difficult if not impossible to read some of the words and figures on the check.

In explanation of the mutilation of the check Montinola told the court that several months after indorsing and delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the non-delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document.

As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check, we agree with trial court that the original writing of Ramos on the back of the check was to the effect that he was assigning only P30,000 of the value of the document and that he was instructing the bank to deposit to his

credit the balance. This writing was in some mysterious way obliterated, and in its place was placed the present indorsement appearing thereon. Said present indorsement occupies a good portion of the back of the check. It has already been described in detail. As to how said present indorsement came to be written, the circumstances surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing originally appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the trial court presided over by Judge Conrado V. Sanchez, in its well-prepared decision, says on these points:

The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000 only. The balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-according to the latter-does not now appear at the back of the check. A different indorsement, as aforesaid, now appears.

Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as consideration for the check? The following observations are in point:

(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of the words "Enrique P. Montinola" and the line in the form of cane handle crossing the word "street" in the words and figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him, and that as far as he could remember this writing did not appear on the instrument and he had no knowledge as to how it happened to be there. Obviously Cortado had no recollection as to how such marks ever were stamped at the back of the check.

(b) Again Cortado, speaking of the endorsement as it now appears at the back of the check (Exh. A-1) stated that Ramos typewrote these words outside of the premises of Montinola, that is, a nearby house. Montinola, on the other hand, testified that Ramos typewrote the words "Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the rubber stamp used at the back of the check and which produced the words "pay to the order of", Cortado stated that when he (Cortado), Atadero, Montinola and Ramos returned in group to the house of Montinola, the rubber stamp was already in the house of Montinola, and it was on the table of the upper floor of the house, together with the stamp pad used to stamp the same. Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber stamp as well as the ink pad, and stamped it in his house.

The unusually big space occupied by the indorsement on the back of the check and the discrepancies in the versions of Montinola and his witness Cortado just noted, create doubts as to whether or not really Ramos made the indorsement as it now appears at the back of Exhibit A. One thing difficult to understand is why Ramos should go into the laborious task of placing the rubber stamp "Pay to the order of" and afterwards move to the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign his name too far below the main indorsement.

(c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he acquired the full value of the check and paid the full consideration therefor is the present condition of said check. It is now so unclean and discolored; it is pasted in cellophane, bottled with ink on both sides torn three parts, and with portions thereof burned-all done by plaintiff, the alleged owner thereof.

The acts done by the very plaintiff on a document so important and valuable to him, and which according to him involves his life savings, approximate intentional cancellation. The only reason advanced by plaintiff as to why tore check, burned the torn edges and bottled out the registration at the back, is found in the following: That Ramos came to his house, armed with a revolver, threatened his life and demanded from him the return of the check; that when he informed Ramos that he did not have it in the house, but in some deposit outside thereof and that Ramos promised to return the next day; that the same night he tore the check into three parts, burned the sides with a parrafin candle to show traces of burning; and that upon the return of Ramos the next day he showed the two parts of the check, the triangle on the right upper part and the torn piece on the left part, and upon seeing the condition thereof Ramos did not bother to get the check back. He also said that he placed the blots in indelible ink to prevent Ramos — if he would be forced to surrender the middle part of the check — from seeing that it was registered in the General Auditing Office.

Conceding at the moment these facts to be true, the question is: Why should Montinola be afraid of Ramos? Montinola claims that Ramos went there about April, 1945, that is, during liberation. If he believed he was standing by his rights, he could have very well sought police protection or transferred to some place where Ramos could not bother him. And then, really Ramos did not have anything more to do with this check for the reason that Montinola had obtained in full the amount thereof, there could not be any reason why Ramos should have threatened Montinola as stated by the latter. Under the circumstances, the most logical conclusion is that Ramos wanted the check at all costs because Montinola did not acquire the check to such an extent that it borders on intentional cancellation thereof (see Sections 119-123 Negotiable Instruments Law) there is room to believe that Montinola did not have so much investments in that check as to adopted an "what do I care?" attitude.

And there is the circumstance of the alleged loss of the check. At the time of the filing of the complaint the check was allegedly lost, so much so that a photostatic copy thereof was merely attached to the complaint (see paragraph 7 of the complaint). Yet, during the trial the original check Exhibit A was produced in court.

But a comparison between the photostatic copy and the original check reveals discrepancies between the two. The condition of the check as it was produced is such that it was partially burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is worse is that Montinola's excuse as to how it was lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his life savings, and that before the alleged loss, he took extreme pains and precautions to save the check from the possible ravages of the war, had it

photographed, registered said check with the General Auditing Office and he knew that Ramos, since liberation, was hot after the possession of that check.

(d) It seems that Montinola was not so sure as to what he had testified to in reference to the consideration he paid for the check. In court he testified that he paid P450,000 in cash from June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to complete the alleged consideration of P850,000. When Montinola testified this way in court, obviously he overlooked a letter he wrote to the provincial treasurer of Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told Provincial Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for goods in kind, medicine, etc., received by him for the use of the guerrillas." In said letter Exhibit 3, Montinola did not mention the cash that he paid for the check.

From the foregoing the court concludes that plaintiff Montinola came into the possession of the check in question about the end of December 1944 by reason of the fact that M. V. Ramos sold to him P30,000 of the face value thereof in consideration of the sum of P90,000 Japanese money, of which only one-half or P45,000 (in Japanese money) was actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of Appellee, pp. 14-20.)

At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo D. Laya was ex officio agent of the Philippine National Bank branch in that province. On the face of the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya, purportedly showing that he issued the check as agent of the Philippine National Bank. It this is true, then the bank is not only drawee but also a drawer of the check, and Montinola evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid payment.

Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who equally assured the court that when he received the check and then delivered it to Montinola, those words did not appear under the signature of Ubaldo D. Laya. We again quote with approval the pertinent portion of the trial court's decision:

The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added after Laya had issued the check. In a straightforward manner and without vacillation Laya positively testified that the check Exhibit A was issued by him in his capacity as Provincial Treasurer of Misamis Oriental and that the words "Agent, Phil. National Bank" which now appear on the check Exhibit A were not typewritten below his signature when he signed the said check and delivered the same to Ramos. Laya assured the court that there could not be any mistake as to this. For, according to

Laya, when he issued check in his capacity as agent of the Misamis Oriental agency of the Philippine National Bank the said check must be countersigned by the cashier of the said agency — not by the provincial auditor. He also testified that the said check was issued by him in his capacity as provincial treasurer of Misamis Oriental and that is why the same was countersigned by Provincial Auditor Flores. The Provincial Auditor at that time had no connection in any capacity with the Misamis Oriental agency of the Philippine National Bank. Plaintiff Montinola on the other hand testified that when he received the check Exhibit A it already bore the words "Agent, Phil. National Bank" below the signature of Laya and the printed words "Provincial Treasurer".

After considering the testimony of the one and the other, the court finds that the preponderance of the evidence supports Laya's testimony. In the first place, his testimony was corroborated by the payee M. V. Ramos. But what renders more probable the testimony of Laya and Ramos is the fact that the money for which the check was issued was expressly for the use of the USAFFE of which Ramos was then disbursing officer, so much so that upon the delivery of the P400,000 in emergency notes and the P100,000 check to Ramos, Laya credited his depository accounts as provincial treasurer with the corresponding credit entry. In the normal course of events the check could not have been issued by the bank, and this is borne by the fact that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. And then, too there is the circumstance that this check was issued by the provincial treasurer of Lanao to Ramos who requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The check, Exhibit A is not what we may term in business parlance, "certified check" or "cashier's check."

Besides, at the time the check was issued, Laya already knew that Cebu and Manila were already occupied. He could not have therefore issued the check-as a bank employee-payable at the central office of the Philippine National Bank.

Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National Bank' below the signature of Ubaldo D. Laya and the printed words "Provincial Treasurer" were added in the check after the same was issued by the Provincial Treasurer of Misamis Oriental.

From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank" now appearing on the face of the check (Exh. A) were added or placed in the instrument after it was issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. Said check for P100,000 was issued to complete the payment of the other check for P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for the USAFFE in Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds, not of the bank but of the Provincial Treasury. Said USAFFE were being financed not by the Bank but by the Government and, presumably, one of the reasons for the issuance of the emergency notes in Mindanao

was for this purpose. As already stated, according to Provincial Treasurer Laya, upon receiving a relatively considerable amount of these emergency notes for his office, he deposited P500,000 of said currency in the Philippine National Bank branch in Cebu, and that in issuing the check (Exh. A), he expected to have it cashed at said Cebu bank branch against his deposit of P500,000.

The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer and as an official of the Government which was under obligation to provide the USAFFE with advance funds, and not by the Philippine National Bank which has no such obligation. The very Annex C, made part of plaintiff's complaint, and later introduced in evidence for him as Exhibit E states that Laya issued the check "in his capacity as Provincial Treasurer of Misamis Oriental", obviously, not as agent of the Bank.

Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the check to Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the Philippine National Bank. Naturally, Ramos must have known the procedure followed there as to the issuance of checks, namely, that when a check is issued by the Provincial Treasurer as such, it is countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil. National Bank" after he received the check, because he should have realized that following the practice already described, the check having been issued by Laya as Provincial Treasurer, and not as agent of the bank, and since the check bears the countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words "Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical to believe and to find that the addition of those words was made after the check had been transferred by Ramos to Montinola. Moreover, there are other facts and circumstances involved in the case which support this view. Referring to the mimeographed record on appeal filed by the plaintiff-appellant, we find that in transcribing and copying the check, particularly the face of it (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing on the face of the check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making this copy or transcription in the complaint committed a serious omission which is decisive as far as the bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on the face of the check. That probably was the reason why the bank in its motion to dismiss dated September 2, 1947, contended that if the check in question had been issued by the provincial treasurer in his capacity as agent of the Philippine National Bank, said treasurer would have placed below his signature the words "Agent of the Philippine National Bank". The plaintiff because of the alleged loss of the check, allegedly

attached to the complaint a photostatic copy of said check and marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase "Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer. We tried to verify this discrepancy by going over the original records of the Court of First Instance so as to compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy, but said original Annex A appears to be missing from the record. How it disappeared is not explained. Of course, now we have in the list of exhibit a photostatic copy marked Annex A and Exhibit B, but according to the manifestation of counsel for the plaintiff dated October 15, 1948, said photostatic copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in compliance with the verbal order of the trial court. It is therefore evident that the Annex A now available is not the same original Annex A attached to the complaint in 1947.

There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is the photostatic copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said photostatic copy should be a faithful and accurate reproduction of the check, particularly of the phrase "Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer on the face of the original check (Exhibit A). But a minute examination of and comparison between Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially with the aid of a handlens, show notable differences and discrepancies. For instance, on Exhibit A, the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail.

The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and "Treasurer"; but the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B.

The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the same letter "a" in Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".

The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the lower right hand corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B is on the very border line itself or even before said border line.

The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and appears to be double instead of one single line; this same ")" on Exhibit B appears in a single line and is relatively nearer to the border line.

There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit B, as regards the relative position of the phrase "Agent, Phil.

National Bank", with the title Provincial Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check (Exhibit A).

We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial Treasurer of Misamis Oriental as drawer on the Philippine National Bank as drawee. Ramos sold P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only P45,000 was paid by Montinola. The writing made by Ramos at the back of the check was an instruction to the bank to pay P30,000 to Montinola and to deposit the balance to his (Ramos) credit. This writing was obliterated and in its place we now have the supposed indorsement appearing on the back of the check (Exh. A-1).

At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, or the first days of January, 1945, the check which, being a negotiable instrument, was payable on demand, was long overdue by about 2 ½ years. It may therefore be considered, even then, a stable check. Of course, Montinola claims that about June, 1944 when Ramos supposedly approached him for the purpose of negotiating the check, he (Montinola) consulted President Carmona of the Philippine National Bank who assured him that the check was good and negotiable. However, President Carmona on the witness stand flatly denied Montinola's claim and assured the court that the first time that he saw Montinola was after the Philippine National Bank, of which he was President, reopened, after liberation, around August or September, 1945, and that when shown the check he told Montinola that it was stale. M. V. Ramos also told the court that it is not true that he ever went with Montinola to see President Carmona about the check in 1944.

On the basis of the facts above related there are several reasons why the complaint of Montinola cannot prosper. The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable Instruments Law). The check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be considered as a holder in due course because section 52 of said law defines a holder in due course as a holder who has taken the instrument under certain conditions, one of which is that he became the holder before it was overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note and Montinola is not a payee.

Neither is he an indorsee for as already stated, at most he can be considered only as assignee. Neither could it be said that he took it in good faith. As already stated, he has not paid the full amount of P90,000 for which Ramos sold him P30,000 of the value of the check. In the second place, as was stated by the trial court in its decision, Montinola speculated on the check and took a chance on its being paid after the war. Montinola must have known that at the time the check was issued in May, 1942, the money circulating in Mindanao and the Visayas was only the emergency notes and that the check was intended to be payable in that currency. Also, he should have known that a check for such a large amount of P100,000 could not have been issued to Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that at the time that Ramos sold a part of the check to him, Ramos was no longer connected with the USAFFE but already a civilian who needed the money only for himself and his family.

As already stated, as a mere assignee Montinola is subject to all the defenses available against assignor Ramos. And, Ramos had he retained the check may not now collect its value because it had been issued to him as disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he transferred nothing to the plaintiff.

In view of all the foregoing, finding no reversible error in the decision appealed from, the same is hereby affirmed with costs.

In the prayer for relief contained at the end of the brief for the Philippine National Bank dated September 27, 1949, we find this prayer:

It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City Fiscal's Office for appropriate criminal action against the plaintiff-appellant if the facts so warrant.

Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27, 1950, he asked this Court to allow him to withdraw the original check (Exh. A) for him to keep, expressing his willingness to submit it to the court whenever needed for examination and verification. The bank on March 2, 1950 opposed the said petition on the ground that inasmuch as the appellant's cause of action in this case is based on the said check, it is absolutely necessary for the court to examine

the original in order to see the actual alterations supposedly made thereon, and that should this Court grant the prayer contained in the bank's brief that the check be later referred to the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed to withdraw said document. In view of said opposition this Court resolution of March 6, 1950, denied said petition for withdrawal.

Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes final, let the Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent papers and documents in this case, for any action he may deem proper in the premises.

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. DE CASTRO, J.:

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

On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that in case on non-payment of any of the installments, the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to twenty-five percent of the total amount due.

On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following indorsement:

Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived.

SAMBOK MOTORS CO. (BACOLOD)

By:

RODOLFO G. NONILLO Asst. General Manager

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

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

During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1

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

WHEREFORE, judgment is rendered:

(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of interest from October 30, 1969;

(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and

(c) To pay the cost of suit.

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

The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only secondarily liable thereof.

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

The appeal is without merit.

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

"Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or

both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general indorser.

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

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

SO ORDERED.