nego cases chapter i and ii

7/31/2019 Nego Cases Chapter I and II

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G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner, vs. COURT OF APPEALS,

FILRITERS GUARANTY ASSURANCE CORPORATION and

CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision ofthe respondent Court of Appeals dated January 29, 1990,

1

affirming the nullity of the transfer of Central Bank Certificate ofIndebtedness (CBCI) No. D891,

2with a face value of P500,000.00,

from the Philippine Underwriters Finance Corporation (Philfinance)

to the petitioner Trader's Royal Bank (TRB), under a RepurchaseAgreement3

dated February 4, 1981, and a Detached Assignment4

dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court ofManila, Branch 32, the action was originally filed as a Petition forMandamus

5under Rule 65 of the Rules of Court, to compel the

Central Bank of the Philippines to register the transfer of the subjectCBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty AssuranceCorporation (Filriters) executed a "Detached Assignment" . . .,

whereby Filriters, as registered owner, sold, transferred, assignedand delivered unto Philippine Underwriters Finance Corporation(Philfinance) all its rights and title to Central Bank Certificates of

Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000)and having an aggregate value of PESOS: THREE MILLION FIVEHUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains anexpress authorization executed by the transferor intended tocomplete the assignment through the registration of the transfer inthe name of PhilFinance, which authorization is specifically phrasedas follows: '(Filriters) hereby irrevocably authorized the said issuer(Central Bank) to transfer the said bond/certificates on the books of

its fiscal agent;

5. On February 4, 1981, petitioner entered into a RepurchaseAgreement with PhilFinance . . ., whereby, for and in considerationof the sum of PESOS: FIVE HUNDRED THOUSAND(P500,000.00), PhilFinance sold, transferred and delivered topetitioner CBCI 4-year, 8th series, Serial No. D891 with a facevalue of P500,000.00 . . ., which CBCI was among those previouslyacquired by PhilFinance from Filriters as averred in paragraph 3 of

the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"),Philfinance agreed to repurchase CBCI Serial No. D891 (Annex"C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEENTHOUSAND THREE HUNDRED SIXTY-ONE & 11/100(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date ofmaturity, April 27, 1981, when the checks it issued in favor of

petitioner were dishonored for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached


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Assignment in favor of the Petitioner to enable the latter to have itstitle completed and registered in the books of the respondent. Andby means of said Detachment, Philfinance transferred and assignedall, its rights and title in the said CBCI (Annex "C") to petitioner and,

furthermore, it did thereby "irrevocably authorize the said issuer(respondent herein) to transfer the said bond/certificate on thebooks of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two(2) aforementioned Detached Assignments (Annexes "B" and "D"),to the Securities Servicing Department of the respondent, andrequested the latter to effect the transfer of the CBCI on its booksand to issue a new certificate in the name of petitioner as absolute

owner thereof;

10. Respondent failed and refused to register the transfer asrequested, and continues to do so notwithstanding petitioner's validand just title over the same and despite repeated demands inwriting, the latest of which is hereto attached as Annex "E" and

made an integral part hereof;

11. The express provisions governing the transfer of the CBCI weresubstantially complied with the petitioner's request for registration,

to wit:

"No transfer thereof shall be valid unless made at said office (wherethe Certificate has been registered) by the registered owner hereof,

in person or by his attorney duly authorized in writing, and similarlynoted hereon, and upon payment of a nominal transfer fee whichmay be required, a new Certificate shall be issued to the transferee

of the registered holder thereof."

and, without a doubt, the Detached Assignments presented torespondent were sufficient authorizations in writing executed by theregistered owner, Filriters, and its transferee, PhilFinance, as

required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, theministerial duties of registering a transfer of ownership over theCBCI and issuing a new certificate to the transferee devolves uponthe respondent;

Upon these assertions, TRB prayed for the registration by the

Central Bank of the subject CBCI in its name.

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

for Admission of Amended Answer with Counter Claim forInterpleader6

thereby calling to fore the respondent Filriters

Guaranty Assurance Corporation (Filriters), the registered owner of

the subject CBCI as respondent.

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

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

12. The CBCI constitutes part of the reserve investment againstliabilities required of respondent as an insurance company under

the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in

violation of law and the trust fund doctrine and to the prejudice ofpolicyholders and to all who have present or future claim againstpolicies issued by Filriters, Alfredo Banaria, then Senior Vice-


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President-Treasury of Filriters, without any board resolution,knowledge or consent of the board of directors of Filriters, andwithout any clearance or authorization from the InsuranceCommissioner, executed a detached assignment purportedly

assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-

Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters(both of whom were holding the same positions in Philfinance),

without any consideration or benefit redounding to Filriters and tothe grave prejudice of Filriters, its policy holders and all who havepresent or future claims against its policies, executed similar

detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperativebecause the assignment is without the knowledge and consent ofdirectors of Filriters, and not duly authorized in writing by the Board,

as requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act ofAlfredo Banaria and not the corporate act of Filriters and such null

and void;

a) The assignment was executed without consideration and for thatreason, the assignment is void from the beginning (Article 1409,

Civil Code);

b) The assignment was executed without any knowledge and

consent of the board of directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against

liabilities, which is a requirement under the Insurance Code for its

existence as an insurance company and the pursuit of its businessoperations. The assignment of the CBCI is illegal act in the sense ofmalum in se or malum prohibitum, for anyone to make, either as

corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters isexpressly prohibited by law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capitalimpairment and in the solvency deficiency of Filriters (and has infact helped in placing Filriters under conservatorship), an inevitable

result known to the officer who executed assignment.

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

illegality and invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as acertificate of indebtedness is not payable to bearer but is a

registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the CentralBank shall treat the registered owner as the absolute owner andthat the value of the registered certificates shall be payable only to

the registered owner; a sufficient notice to plaintiff that theassignments do not give them the registered owner's right as

absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations


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Governing CBCIs) provides that the registered certificates are

payable only to the registered owner (Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of

CBCI No. 891 by Filriters is not a regular transaction made in theusual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filritersagainst liabilities requires by the Insurance Code and its

assignment or transfer is expressly prohibited by law. There was noattempt to get any clearance or authorization from the Insurance

Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a

transaction in the usual or regular course of its business;

c) The CBCI involved substantial amount and its assignment clearlyconstitutes disposition of "all or substantially all" of the assets ofFilriters, which requires the affirmative action of the stockholders

(Section 40, Corporation [sic] Code.7

In its Decision8

dated April 29, 1988, the Regional Trial Court ofManila, Branch XXXIII found the assignment of CBCI No. D891 infavor of Philfinance, and the subsequent assignment of the sameCBCI by Philfinance in favor of Traders Royal Bank null and voidand of no force and effect. The dispositive portion of the decisionreads:

ACCORDINGLY, judgment is hereby rendered in favor of therespondent Filriters Guaranty Assurance Corporation and against

the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor ofPhilFinance, and the subsequent assignment of CBCI byPhilFinance in favor of the plaintiff Traders Royal Bank as null and

void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines todisregard the said assignment and to pay the value of the proceedsof the CBCI No. D891 to the Filriters Guaranty AssuranceCorporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent

Filriters Guaranty Assurance Corp. The sum of P10,000 as

attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court ofAppeals

10, but their appeals likewise failed. The findings of the fact

of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner ofCBCI No. D891. Under a deed of assignment dated November 27,1971, Filriters transferred CBCI No. D891 to Philippine UnderwritersFinance Corporation (Philfinance). Subsequently, Philfinancetransferred CBCI No. D891, which was still registered in the name

of Filriters, to appellant Traders Royal Bank (TRB). The transferwas made under a repurchase agreement dated February 4, 1981,granting Philfinance the right to repurchase the instrument on orbefore April 27, 1981. When Philfinance failed to buy back the noteon maturity date, it executed a deed of assignment, dated April 27,


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1981, conveying to appellant TRB all its right and the title to CBCI

No. D891.

Armed with the deed of assignment, TRB then sought the transfer

and registration of CBCI No. D891 in its name before the Securityand Servicing Department of the Central Bank (CB). Central Bank,however, refused to effect the transfer and registration in view of an

adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action formandamus against the Central Bank in the Regional Trial Court of

Manila. The suit, however, was subsequently treated by the lowercourt as a case of interpleader when CB prayed in its amendedanswer that Filriters be impleaded as a respondent and the courtadjudge which of them is entitled to the ownership of CBCI No.D891. Failing to get a favorable judgment. TRB now comes to this

Court on appeal. 11

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

against all parties liable thereon.12

In ignoring said argument, the appellate court that the CBCI is not a

negotiable instrument, since the instrument clearly stated that it waspayable to Filriters, the registered owner, whose name wasinscribed thereon, and that the certificate lacked the words ofnegotiability which serve as an expression of consent that theinstrument may be transferred by negotiation.

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

Bank Certificates of Indebtedness", which provided that any"assignment of registered certificates shall not be valid unless made. . . by the registered owner thereof in person or by his

representative duly authorized in writing."

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

to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed ofassignment purportedly for and on behalf of Filriters, did not havethe necessary written authorization from the Board of Directors ofFilriters to act for the latter. For lack of such authority, theassignment did not therefore bind Filriters and violated as the sametime Central Bank Circular No. 769 which has the force and effectof a law, resulting in the nullity of the transfer (People v. Que PoLay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of InternalRevenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891which it could assign or transfer to Traders Royal Bank and which

the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with


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costs against plaintiff-appellant.

SO ORDERED.13

Petitioner's present position rests solely on the argument thatPhilfinance owns 90% of Filriters equity and the two corporationshave identical corporate officers, thus demanding the application ofthe doctrine or piercing the veil of corporate fiction, as to givevalidity to the transfer of the CBCI from registered owner to

petitioner TRB.14

This renders the payment by TRB to Philfinanceof CBCI, as actual payment to Filriters. Thus, there is no merit to

the lower court's ruling that the transfer of the CBCI from Filriters to

Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in theabsence of words of negotiability within the meaning of the

negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received,hereby promises to pay bearer, of if this Certificate of indebtednessbe registered, to FILRITERS GUARANTY ASSURANCECORPORATION, the registered owner hereof, the principal sum of

FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to

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

usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable

instrument, stating that:

As worded, the instrument provides a promise "to pay FilritersGuaranty Assurance Corporation, the registered owner hereof."

Very clearly, the instrument is payable only to Filriters, theregistered owner, whose name is inscribed thereon. It lacks thewords of negotiability which should have served as an expression of

consent that the instrument may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to

FILRITERS GUARANTY ASSURANCE CORPORATION, and to noone else, thus, discounting the petitioner's submission that thesame is a negotiable instrument, and that it is a holder in due

course of the certificate.

The language of negotiability which characterize a negotiable paper

as a credit instrument is its freedom to circulate as a substitute formoney. Hence, freedom of negotiability is the touchtone relating to

the protection of holders in due course, and the freedom ofnegotiability is the foundation for the protection which the law

throws around a holder in due course (11 Am. Jur. 2d, 32). Thisfreedom in negotiability is totally absent in a certificateindebtedness as it merely to pay a sum of money to a specified

person or entity for a period of time.


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

:

The accepted rule is that the negotiability or non-negotiability of an

instrument is determined from the writing, that is, from the face of

the instrument itself. In the construction of a bill or note, theintention of the parties is to control, if it can be legally ascertained.While the writing may be read in the light of surroundingcircumstance in order to more perfectly understand the intent andmeaning of the parties, yet as they have constituted the writing tobe the only outward and visible expression of their meaning, noother words are to be added to it or substituted in its stead. Theduty of the court in such case is to ascertain, not what the partiesmay have secretly intended as contradistinguished from what theirwords express, but what is the meaning of the words they haveused. What the parties meant must be determined by what they

said.

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

to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on thematter:

Clearly shown in the record is the fact that Philfinance's title overCBCI No. D891 is defective since it acquired the instrument fromFilriters fictitiously. Although the deed of assignment stated that thetransfer was for "value received", there was really no considerationinvolved. What happened was Philfinance merely borrowed CBCI

No. D891 from Filriters, a sister corporation. Thus, for lack of any

consideration, the assignment made is a complete nullity.

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

Philfinance did not conform to Central Bank Circular No. 769, seriesof 1980, otherwise known as the "Rules and Regulations GoverningCentral Bank Certificates of Indebtedness", under which the notewas issued. Published in the Official Gazette on November 19,1980, Section 3 thereof provides that any assignment of registeredcertificates shall not be valid unless made . . . by the registeredowner thereof in person or by his representative duly authorized inwriting.

In the case at bar, Alfredo O. Banaria, who signed the deed ofassignment purportedly for and on behalf of Filriters, did not havethe necessary written authorization from the Board of Directors ofFilriters to act for the latter. For lack of such authority, theassignment did not therefore bind Filriters and violated at the sametime Central Bank Circular No. 769 which has the force and effectof a law, resulting in the nullity of the transfer (People vs. Que PoLay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal

Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891which it could assign or transfer to Traders Royal Bank and whichthe latter can register with the Central Bank

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


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Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies

have the same corporate officers, if the principle of piercing the veil

of corporate entity were to be applied in this case, then TRB'spayment to Philfinance for the CBCI purchased by it could just aswell be considered a payment to Filriters, the registered owner ofthe CBCI as to bar the latter from claiming, as it has, that it neverreceived any payment for that CBCI sold and that said CBCI was

sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appealshas held that the CBCI was merely borrowed by Philfinance fromFilriters, a sister corporation, to guarantee its (Philfinance's)financing operations, if it were to be consistent therewith, on the

issued raised by TRB that there was a piercing a veil of corporateentity, the Court of Appeals should have ruled that such veil ofcorporate entity was, in fact, pierced, and the payment by TRB to

Philfinance should be construed as payment to Filriters.17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporateentity, as this merely an equitable remedy, and may be awardedonly in cases when the corporate fiction is used to defeat public

convenience, justify wrong, protect fraud or defend crime or wherea corporation is a mere alter ego or business conduit of a person.

18

Peiercing the veil of corporate entity requires the court to seethrough the protective shroud which exempts its stockholders from

liabilities that ordinarily, they could be subject to, or distinguishedone corporation from a seemingly separate one, were it not for theexisting corporate fiction. But to do this, the court must be sure thatthe corporate fiction was misused, to such an extent that injustice,

fraud, or crime was committed upon another, disregarding, thus,his, her, or its rights. It is the protection of the interests of innocentthird persons dealing with the corporate entity which the law aims to

protect by this doctrine.

The corporate separateness between Filriters and Philfinanceremains, despite the petitioners insistence on the contrary. For one,other than the allegation that Filriters is 90% owned by Philfinance,and the identity of one shall be maintained as to the other, there isnothing else which could lead the court under circumstance todisregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction thata corporation is an entity with a juridical personality separate fromits stockholders and from other corporations may be disregarded,

19

in the absence of such grounds, the general rule must upheld. Thefact that Filfinance owns majority shares in Filriters is not by itself aground to disregard the independent corporate status of Filriters. InLiddel & Co., Inc. vs. Collector of Internal Revenue,

20the mere

ownership by a single stockholder or by another corporation of all ornearly all of the capital stock of a corporation is not of itself asufficient reason for disregarding the fiction of separate corporate

personalities.

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

indebtedness from Philfinance.


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On its face the subject certificates states that it is registered in thename of Filriters. This should have put the petitioner on notice, andprompted it to inquire from Filriters as to Philfinance's title over thesame or its authority to assign the certificate. As it is, there is no

showing to the effect that petitioner had any dealings whatsoeverwith Filriters, nor did it make inquiries as to the ownership of thecertificate.

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

TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it isregistered in the owner's name at any office of the Bank or anyagency duly authorized by the Bank, and such registration is notedhereon. After such registration no transfer thereof shall be validunless made at said office (where the Certificates has beenregistered) by the registered owner hereof, in person, or by hisattorney, duly authorized in writing and similarly noted hereon andupon payment of a nominal transfer fee which may be required, anew Certificate shall be issued to the transferee of the registeredowner thereof. The bank or any agency duly authorized by the Bankmay deem and treat the bearer of this Certificate, or if thisCertificate is registered as herein authorized, the person in whosename the same is registered as the absolute owner of thisCertificate, for the purpose of receiving payment hereof, or onaccount hereof, and for all other purpose whether or not this

Certificate shall be overdue.

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

an authorization from Filriters.

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

the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769,series of 1990

21, known as the Rules and Regulations Governing

Central Bank Certificates of Indebtedness, Section 3, Article V of

which provides that:

Sec. 3. Assignment of Registered Certificates. Assignment ofregistered certificates shall not be valid unless made at the officewhere the same have been issued and registered or at theSecurities Servicing Department, Central Bank of the Philippines,and by the registered owner thereof, in person or by hisrepresentative, duly authorized in writing. For this purpose, thetransferee may be designated as the representative of the

registered owner.

Petitioner, being a commercial bank, cannot feign ignorance ofCentral Bank Circular 769, and its requirements. An entity whichdeals with corporate agents within circumstances showing that theagents are acting in excess of corporate authority, may not hold thecorporation liable.

22This is only fair, as everyone must, in the

exercise of his rights and in the performance of his duties, act withjustice, give everyone his due, and observe honesty and good faith.23

The transfer made by Filriters to Philfinance did not conform to thesaid. Central Bank Circular, which for all intents, is considered partof the law. As found by the courts a quo, Alfredo O. Banaria, who


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had signed the deed of assignment from Filriters to Philfinance,purportedly for and in favor of Filriters, did not have the necessarywritten authorization from the Board of Directors of Filriters to act forthe latter. As it is, the sale from Filriters to Philfinance was fictitious,

and therefore void and inexistent, as there was no consideration forthe same. This is fatal to the petitioner's cause, for then, Philfinancehad no title over the subject certificate to convey the Traders RoyalBank. Nemo potest nisi quod de jure potest no man can do

anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form partof its legal and capital reserves, which are required by law

24to be

maintained at a mandated level. This was pointed out by EliasGarcia, Manager-in-Charge of respondent Filriters, in his testimonygiven before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, inshort, CBCI No. D891 in the face value of P5000,000.00 subject of

this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined bythe Insurance Commission sometime in early 1981 and this CBCINo. 891 was among the CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the

knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the

Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put uplegal reserves under Section 213 of the Insurance Code equivalentto 40 percent of the premiums receipt and further, the InsuranceCommission requires this reserve to be invested preferably ingovernment securities or government binds. This is how this CBCI

came to be purchased by the company.

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

Directors, and the maintenance of the required reserve fund.

Consequently, the title of Filriters over the subject certificate ofindebtedness must be upheld over the claimed interest of Traders

Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision

appealed from dated January 29, 1990 is hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Footnotes


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1 Justice Ricardo L. Pronove, Jr., ponente; concurred in by Justices

Alfredo L. Benipayo and Serafain V.C. Guingona, p. 18, Rollo.

2 P. 143, Record.

3 Ibid. at p. 146.

4 Ibid., at p. 148.

5 P. 1, Record.

6 P. 75, Record.

7 Answer, p. 97, Record.

8 P. 315, Record.

9 Pp. 16-17, RTC Decision, p. 330, Rollo.

10 Annex "A". Petition, supra.

11 Court of Appeals Decision, pp. 18-19, Rollo.

12 Section 57. Negotiable Instruments Law.

13 Petition, Annex "A", pp. 21-22, Rollo.

14 Ibid.

15 Campos and Campos, Negotiable Instruments Law, p. 38, 1971

ed.

16 G.R. No. 97753, August 10, 1992, 212 SCRA 448.

17 Petition

18 Yu vs. National Labor Relations Commission 245 SCRA 134.

19 Guatson International Travel and Tours, Inc. vs. National Labor

Relations Commission, 230 SCRA 815.

20 2 SCRA 632.

21 Official Gazette 9370.

22 SeeArticle 1883, Civil Code.

23 See Article 19, Civil Code.

24 Sec. 213 Every insurance company, other than life, shallmaintain a reserve fro unearned premiums on its policies in force,which shall be charged as a liability in any determination of itsfinancial condition. Such reserve shall be equal to forty per centumof the gross permiums, less returns and cancellations, received onpolicies or risks having more than a year to run; ProvidedThat formarine cargo risks, the reserve shall be equal to forty per centum ofthe premiums written in the policies upon yearly risks, and the fullamount of premiums written during the last two months of thecalendar year upon all other marine risks not terminated.

Presidential Decree No. 612 (The Insurance Code of thePhilippines).


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PHILIPPINE NATIONAL BANK, G.R. No. 170325Petitioner,

Present:

YNARES-SANTIAGO,J.,

- versus - AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHU

RA, and

REYES,JJ.

ERLANDO T. RODRIGUEZ Promulgated:and NORMA RODRIGUEZ,

Respondents. September 26,2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

REYES, R.T.,J.:

WHEN the payee of the check is not intended to be the true recipient

of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review oncertiorari of the Amended Decision[1] of the Court of Appeals (CA)which affirmed with modification that of the Regional Trial Court(RTC).[2]

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez wereclients of petitioner Philippine National Bank (PNB), Amelia AvenueBranch, Cebu City. They maintained savings and demand/checking

accounts, namely, PNBig Demand Deposits (Checking/Current AccountNo. 810624-6 under the account name Erlando and/or Norma Rodriguez),

and PNBig Demand Deposit (Checking/Current Account No. 810480-4under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. Inline with their business, they had a discounting[3] arrangement with thePhilnabank Employees Savings and Loan Association (PEMSLA), anassociation of PNB employees. Naturally, PEMSLA was likewise a clientof PNB Amelia Avenue Branch. The association maintained current andsavings accounts with petitioner bank.


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PEMSLA regularly granted loans to its members. Spouses

Rodriguez would rediscount the postdated checks issued to memberswhenever the association was short of funds. As was customary, the

spouses would replace the postdated checks with their own checks issuedin the name of the members.

It was PEMSLAs policy not to approve applications for loansof members with outstanding debts. To subvert this policy, somePEMSLA officers devised a scheme to obtain additional loans despite theiroutstanding loan accounts. They took out loans in the names ofunknowing members, without the knowledge or consent of the latter. ThePEMSLA checks issued for these loans were then given to the spouses forrediscounting. The officers carried this out by forging the indorsement ofthe named payees in the checks.

In return, the spouses issued their personal checks (Rodriguezchecks) in the name of the members and delivered the checks to an officerof PEMSLA. The PEMSLA checks, on the other hand, were deposited bythe spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly byPEMSLA to its savings account without any indorsement from the

named payees. This was an irregular procedure made possible through thefacilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank tellerin the PNB Branch. It appears that this became the usual practice for the

parties.

For the period November 1998 to February 1999, the spousesissued sixty nine (69) checks, in the total amount of P2,345,804.00. Thesewere payable to forty seven (47) individual payees who were all membersof PEMSLA.[4]

Petitioner PNB eventually found out about these fraudulentacts. To put a stop to this scheme, PNB closed the current account ofPEMSLA. As a result, the PEMSLA checks deposited by the spouses

were returned or dishonored for the reason Account Closed. Thecorresponding Rodriguez checks, however, were deposited as usual to thePEMSLA savings account. The amounts were duly debited from theRodriguez account. Thus, because the PEMSLA checks given as paymentwere returned, spouses Rodriguez incurred losses from the rediscountingtransactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spousesRodriguez filed a civil complaint for damages against PEMSLA, theMulti-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.

They sought to recover the value of their checks that were deposited to thePEMSLA savings account amounting to P2,345,804.00. The spousescontended that because PNB credited the checks to the PEMSLAaccount even without indorsements, PNB violated its contractualobligation to them as depositors. PNB paid the wrong payees, hence, it

should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of causeof action. PNB argued that the claim for damages should come from the

payees of the checks, and not from spouses Rodriguez. Since there was nodemand from the said payees, the obligation should be considered asdischarged.

In an Order dated January 12, 2000, the RTC denied PNBs motionto dismiss.


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In its Answer,[5] PNB claimed it is not liable for the checkswhich it paid to the PEMSLA account without any indorsement from the

payees. The bank contended that spouses Rodriguez, the makers, actuallydid not intend for the named payees to receive the proceeds of the

checks. Consequently, the payees were considered as fictitious payeesas defined under the Negotiable Instruments Law (NIL). Being checksmade to fictitious payees which are bearer instruments, the checks werenegotiable by mere delivery. PNBs Answer included its cross-claimagainst its co-defendants PEMSLA and the MCP, praying that in the eventthat judgment is rendered against the bank, the cross-defendants should beordered to reimburse PNB the amount it shall pay.

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

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

1. Defendant is hereby ordered to pay the

plaintiffs the total amount ofP2,345,804.00 or reinstate or restore the

amount of P775,337.00 in the PNBigDemand Deposit Checking/CurrentAccount No. 810480-4 of Erlando T.Rodriguez, and the amount ofP1,570,467.00 in the PNBig DemandDeposit, Checking/Current Account No.810624-6 of Erlando T. Rodriguez and/or

Norma Rodriguez, plus legal rate ofinterest thereon to be computed from the

filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to paythe plaintiffs the following reasonable

amount of damages suffered by themtaking into consideration the standing ofthe plaintiffs being sugarcane planters,realtors, residential subdivision owners,and other businesses:

(a) Consequential damages,unearned income in theamount ofP4,000,000.00, as aresult of their havingincurred great dificulty

(sic) especially in theresidential subdivision

business, which was notpushed through and thecontractor even

threatened to file a caseagainst the plaintiffs;

(b) Moral damages in theamount ofP1,000,000.00;

(c) Exemplary damages in theamount of P500,000.00;

(d) Attorneys fees in the


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amount of P150,000.00considering that this casedoes not involve verycomplicated issues; and

for the

(e) Costs of suit.

3. Other claims and counterclaims are herebydismissed.[6]

CA Disposition

PNB appealed the decision of the trial court to the CA on theprincipal ground that the disputed checks should be considered as payable

to bearer and not to order.

In a Decision[7] dated July 22, 2004, the CA reversed and setaside the RTC disposition. The CA concluded that the checks wereobviously meant by the spouses to be really paid to PEMSLA. The court aquo declared:

We are not swayed by the contention ofthe plaintiffs-appellees (Spouses Rodriguez) thattheir cause of action arose from the alleged breach ofcontract by the defendant-appellant (PNB) when it

paid the value of the checks to PEMSLA despite thechecks being payable to order. Rather, we are moreconvinced by the strong and credible evidence for

the defendant-appellant with regard to the plaintiffs-

appellees and PEMSLAs business arrangement

that the value of the rediscounted checks of the

plaintiffs-appellees would be deposited in PEMSLAs

account for payment of the loans it has approved in

exchange for PEMSLAs checks with the full value of

the said loans. This is the only obvious explanationas to why all the disputed sixty-nine (69) checkswere in the possession of PEMSLAs errand boy for

presentment to the defendant-appellant that led tothis present controversy. It also appears that theteller who accepted the said checks was PEMSLAsofficer, and that such was a regular practice by the

parties until the defendant-appellant discovered thescam. The logical conclusion, therefore, is that thechecks were never meant to be paid to order, but

instead, to PEMSLA. We thus find no breach ofcontract on the part of the defendant-appellant.

According to plaintiff-appellee ErlandoRodriguez testimony, PEMSLA allegedly issued

post-dated checks to its qualified members who hadapplied for loans. However, because of PEMSLAs

insufficiency of funds, PEMSLA approached theplaintiffs-appellees for the latter to issue

rediscounted checks in favor of said applicantmembers. Based on the investigation of thedefendant-appellant, meanwhile, this arrangementallowed the plaintiffs-appellees to make a profit byissuing rediscounted checks, while the officers ofPEMSLA and other members would be able to claimtheir loans, despite the fact that they weredisqualified for one reason or another. They wereable to achieve this conspiracy by using other


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members who had loaned lesser amounts of moneyor had not applied at all. x x x.[8] (Emphasis added)

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

The spouses Rodriguez moved for reconsideration. Theyargued, inter alia, that the checks on their faces were unquestionably

payable to order; and that PNB committed a breach of contract when itpaid the value of the checks to PEMSLA without indorsement from thepayees. They also argued that their cause of action is not only againstPEMSLA but also against PNB to recover the value of the checks.

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

In sum, we rule that the defendant-

appellant PNB is liable to the plaintiffs-appelleesSps. Rodriguez for the following:

1. Actual damages inthe amount ofP2,345,804 with interestat 6% per annum from14 May 1999 untilfully paid;

2. Moral damages in the

amount of P200,000;

3. Attorneys fees in theamount of P100,000;

and

4. Costs of suit.

WHEREFORE, in view of the foregoingpremises, judgment is hereby rendered by UsAFFIRMING WITH MODIFICATION the assaileddecision rendered in Civil Case No. 99-10892, as setforth in the immediately next preceding paragraphhereof, and SETTING ASIDE Our original decision

promulgated in this case on 22 July 2004.

SO ORDERED.[9]

The CA ruled that the checks were payable to order. Accordingto the appellate court, PNB failed to present sufficient proof to defeat theclaim of the spouses Rodriguez that they really intended the checks to be

received by the specified payees. Thus, PNB is liable for the value of thechecks which it paid to PEMSLA without indorsements from the named

payees. The award for damages was deemed appropriate in view of thefailure of PNB to treat the Rodriguez account with the highest degreeof care considering the fiduciary nature of their relationship, whichconstrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues


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

PNB argues anew that when the spouses Rodriguez issued the

disputed checks, they did not intend for the named payees to receive theproceeds. Thus, they are bearer instruments that could be validlynegotiated by mere delivery. Further, testimonial and documentaryevidence presented during trial amply proved that spouses Rodriguez andthe officers of PEMSLA conspired with each other to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than anerroneous judgment attaining finality to the prejudice of innocent parties.A court discovering an erroneous judgment before it becomes final may,motu proprio or upon motion of the parties, correct its judgment with the

singular objective of achieving justice for the litigants.[10]

However, a word of caution to lower courts, the CA in Cebu inthis particular case, is in order. The Court does not sanction carelessdisposition of cases by courts of justice. The highest degree of diligence

must go into the study of every controversy submitted for decision bylitigants. Every issue and factual detail must be closely scrutinized and

analyzed, and all the applicable laws judiciously studied, before thepromulgation of every judgment by the court. Only in this manner willerrors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be

the true recipient of the proceeds, the check is considered as a bearer

instrument . A check is a bill of exchange drawn on a bank payable on

demand.[11] It is either an order or a bearer instrument. Sections 8 and 9of the NIL states:

SEC. 8. When payable to order. The

instrument is payable to order where it is drawnpayable to the order of a specified person or to himor his order. It may be drawn payable to the order of

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

(b) The drawer or maker; or(c) The drawee; or(d) Two or more payees jointly; or(e) One or some of several payees;

or

(f) The holder of an office for thetime being.

Where the instrument is payable to order,the payee must be named or otherwise indicated

therein with reasonable certainty.

SEC. 9. When payable to bearer. Theinstrument is payable to bearer

(a) When it is expressed to be sopayable; or

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

(c) When it is payable to the order ofa fictitious or non-existing person,


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and such fact is known to theperson making it so payable; or

(d) When the name of the payee doesnot purport to be the name of any

person; or(e) Where the only or lastindorsement is an indorsement in

blank.[12] (Underscoringsupplied)

The distinction between bearer and order instruments lies intheir manner of negotiation. Under Section 30 of the NIL, an orderinstrument requires an indorsement from the payee or holder before it may

be validly negotiated. A bearer instrument, on the other hand, does notrequire an indorsement to be validly negotiated. It is negotiable by meredelivery. The provision reads:

SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferredfrom one person to another in such manner as toconstitute the transferee the holder thereof. If

payable to bearer, it is negotiated by delivery; ifpayable to order, it is negotiated by the indorsement

of the holder completed by delivery.

A check that is payable to a specified payee is an orderinstrument. However, under Section 9(c) of the NIL, a check payable to aspecified payee may nevertheless be considered as a bearer instrument if itis payable to the order of a fictitious or non-existing person, and such factis known to the person making it so payable. Thus, checks issued toPrinsipe Abante or Si Malakas at si Maganda, who are well-knowncharacters in Philippine mythology, are bearer instruments because the

named payees are fictitious and non-existent.

We have yet to discuss a broader meaning of the termfictitious as used in the NIL. It is for this reason that We look elsewhere

for guidance. Court rulings in the United States are a logical starting pointsince our law on negotiable instruments was directly lifted from theUniform Negotiable Instruments Law of the United States.[13]

A review of US jurisprudence yields that an actual, existing,and living payee may also be fictitious if the maker of the check did notintend for the payee to in fact receive the proceeds of the check. Thisusually occurs when the maker places a name of an existing payee on thecheck for convenience or to cover up an illegal activity. [14] Thus, a checkmade expressly payable to a non-fictitious and existing person is notnecessarily an order instrument. If the payee is not the intended

recipient of the proceeds of the check, the payee is considered a

fictitious payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved fromliability and the drawer bears the loss. When faced with a check payableto a fictitious payee, it is treated as a bearer instrument that can be

negotiated by delivery. The underlying theory is that one cannot expect afictitious payee to negotiate the check by placing his indorsement thereon.

And since the maker knew this limitation, he must have intended for theinstrument to be negotiated by mere delivery. Thus, in case ofcontroversy, the drawer of the check will bear the loss. This rule is

justified for otherwise, it will be most convenient for the maker whodesires to escape payment of the check to always deny the validity of theindorsement. This despite the fact that the fictitious payee was purposelynamed without any intention that the payee should receive the proceeds ofthe check.[15]


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The fictitious-payee rule is best illustrated in Mueller & Martinv. Liberty Insurance Bank.[16] In the said case, the corporation Mueller &Martin was defrauded by George L. Martin, one of its authorizedsignatories. Martin drew seven checks payable to the German Savings

Fund Company Building Association (GSFCBA) amounting to $2,972.50against the account of the corporation without authority from the latter.Martin was also an officer of the GSFCBA but did not have signingauthority. At the back of the checks, Martin placed the rubber stamp of theGSFCBA and signed his own name as indorsement. He then successfullydrew the funds from Liberty Insurance Bank for his own personal profit.When the corporation filed an action against the bank to recover theamount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the personmaking the check so payable did not intend for the specified payee to haveany part in the transactions, the payee is considered as a fictitious payee.

The check is then considered as a bearer instrument to be validlynegotiated by mere delivery. Thus, the US Supreme Court held thatLiberty Insurance Bank, as drawee, was authorized to make payment to the

bearer of the check, regardless of whether prior indorsements weregenuine or not.[17]

The more recent Getty Petroleum Corp. v. American ExpressTravel Related Services Company, Inc.[18] upheld the fictitious-payeerule. The rule protects the depositary bank and assigns the loss to thedrawer of the check who was in a better position to prevent the loss in thefirst place. Due care is not even required from the drawee or depositary

bank in accepting and paying the checks. The effect is that a showing ofnegligence on the part of the depositary bank will not defeat the protectionthat is derived from this rule.

However, there is a commercial bad faith exception to the

fictitious-payee rule. A showing of commercial bad faith on the part ofthe drawee bank, or any transferee of the check for that matter, willwork to strip it of this defense. The exception will cause it to bear theloss. Commercial bad faith is present if the transferee of the check acts

dishonestly, and is a party to the fraudulent scheme. Said the US SupremeCourt in Getty:

Consequently, a transferees lapse of waryvigilance, disregard of suspicious circumstanceswhich might have well induced a prudent banker toinvestigate and other permutations of negligence arenot relevant considerations under Section 3-405 x xx. Rather, there is a commercial bad faithexception to UCC 3-405, applicable when the

transferee acts dishonestly where it has actual

knowledge of facts and circumstances that amount to

bad faith, thus itself becoming a participant in afraudulent scheme. x x x Such a test finds supportin the text of the Code, which omits a standard ofcare requirement from UCC 3-405 but imposes onall parties an obligation to act with honesty in fact.

x x x[19] (Emphasis added)

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

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


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

For the fictitious-payee rule to be available as a defense, PNB

must show that the makers did not intend for the named payees to be partof the transaction involving the checks. At most, the banks thesis showsthat the payees did not have knowledge of the existence of the checks.This lack of knowledge on the part of the payees, however, was not

tantamount to a lack of intention on the part of respondents-spouses

that the payees would not receive the checks proceeds . Consideringthat respondents-spouses were transacting with PEMSLA and not theindividual payees, it is understandable that they relied on the informationgiven by the officers of PEMSLA that the payees would be receiving thechecks.

Verily, the subject checks are presumed order instruments.This is because, as found by both lower courts, PNB failed to presentsufficient evidence to defeat the claim of respondents-spouses that thenamed payees were the intended recipients of the checks proceeds. The

bank failed to satisfy a requisite condition of a fictitious-payee situation

that the maker of the check intended for the payee to have no interest inthe transaction.

Because of a failure to show that the payees were fictitious inits broader sense, the fictitious-payee rule does not apply. Thus, thechecks are to be deemed payable to order. Consequently, the drawee bank

bears the loss.[20]

PNB was remiss in its duty as the drawee bank. It does notdispute the fact that its teller or tellers accepted the 69 checks for depositto the PEMSLA account even without any indorsement from the named

payees. It bears stressing that order instruments can only be negotiatedwith a valid indorsement.

A bank that regularly processes checks that are neither payable

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

In a checking transaction, the drawee bank has the duty toverify the genuineness of the signature of the drawer and to pay the checkstrictly in accordance with the drawers instructions, i.e., to the named

payee in the check. It should charge to the drawers accounts only thepayables authorized by the latter. Otherwise, the drawee will be violating

the instructions of the drawer and it shall be liable for the amountcharged to the drawers account.[24]

In the case at bar, respondents-spouses were the banksdepositors. The checks were drawn against respondents-spouses

accounts. PNB, as the drawee bank, had the responsibility to ascertain theregularity of the indorsements, and the genuineness of the signatures on

the checks before accepting them for deposit. Lastly, PNB was obligatedto pay the checks in strict accordance with the instructions of the drawers.Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a

representative of PEMSLA absent any type of indorsement, forged orotherwise. The facts clearly show that the bank did not pay the checks instrict accordance with the instructions of the drawers, respondents-spouses.Instead, it paid the values of the checks not to the named payees or their


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order, but to PEMSLA, a third party to the transaction between the drawersand the payees.

Moreover, PNB was negligent in the selection and supervision

of its employees. The trustworthiness of bank employees is indispensableto maintain the stability of the banking industry. Thus, banks are enjoinedto be extra vigilant in the management and supervision of their employees.In Bank of the Philippine Islands v. Court of Appeals,[25] this Courtcautioned thus:

Banks handle daily transactions involvingmillions of pesos. By the very nature of their workthe degree of responsibility, care and trustworthinessexpected of their employees and officials is fargreater than those of ordinary clerks andemployees. For obvious reasons, the banks are

expected to exercise the highest degree of diligencein the selection and supervision of theiremployees.[26]

PNBs tellers and officers, in violation of banking rules of

procedure, permitted the invalid deposits of checks to the PEMSLAaccount. Indeed, when it is the gross negligence of the bank employees

that caused the loss, the bank should be held liable.[27]

PNBs argument that there is no loss to compensate since nodemand for payment has been made by the payees must also fail. Damagewas caused to respondents-spouses when the PEMSLA checks they

deposited were returned for the reason Account Closed. ThesePEMSLA checks were the corresponding payments to the Rodriguezchecks. Since they could not encash the PEMSLA checks, respondents-spouses were unable to collect payments for the amounts they had

advanced.

A bank that has been remiss in its duty must suffer theconsequences of its negligence. Being issued to named payees, PNB was

duty-bound by law and by banking rules and procedure to require that thechecks be properly indorsed before accepting them for deposit andpayment. In fine, PNB should be held liable for the amounts of thechecks.

One Last Note

We note that the RTC failed to thresh out the merits of PNBscross-claim against its co-defendants PEMSLA and MPC. The records are

bereft of any pleading filed by these two defendants in answer to thecomplaint of respondents-spouses and cross-claim of PNB. The Rulesexpressly provide that failure to file an answer is a ground for a declaration

that defendant is in default.[28] Yet, the RTC failed to sanction thefailure of both PEMSLA and MPC to file responsive pleadings. Verily,the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgmentshall be without prejudice to whatever action the bank might take againstits co-defendants in the trial court.

To PNBs credit, it became involved in the controversial transaction

not of its own volition but due to the actions of some of its employees.Considering that moral damages must be understood to be in concept of

grants, not punitive or corrective in nature, We resolve to reduce the awardof moral damages to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision isAFFIRMED with the MODIFICATION that the award for moraldamages is reduced to P50,000.00, and that this is without prejudice towhatever civil, criminal, or administrative action PNB might take against


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PEMSLA, MPC, and the employees involved.

SO ORDERED.

G.R. No. 126670 December 2, 1999

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

YNARES-SANTIAGO, J.:

Petitioner spouses are engaged in the construction business.Complainant Romualdo Vicencio was a former Judge and his wife,

Luz Vicencio, owns a pawnshop in Samar. On May 17, 1989, due tofinancial difficulties arising from the repeated delays in the paymentof their receivables for the construction projects from the DPWH,

1

petitioners were constrained to obtain a loan of P10,000.00 fromMrs. Vicencio. The latter acceded. Instead of merely requiring anote of indebtedness, however, her husband Mr. Vicencio requiredpetitioners to issue an undated check as evidence of the loan whichallegedly will not be presented to the bank. Despite being informedby petitioners that their bank account no longer had any funds, Mrs.Vicencio insisted that issue the check, which according to her was

only a formality. Thus, petitioner Virginia Pacheco issued on May17, 1989 an undated RCBC

2check with number CT 101756 for

P10,000.00. However, she only received the amount of P9,000.00

as the 10% interest on the loan was already deducted. Mrs.Vicencio also required Virginia's husband, herein petitioner ErnestoPacheco, to sign the check on the same understanding that the

check is not to be encashed but merely intended as an evidence of

indebtedness which cannot be negotiated.

On June 14, 1989, Virginia obtained another loan of P50,000.00

from Mrs. Vicencio. She received only P35,000.00 as the previousloan of P10,000.00 as well as the 10% interest amounting toP5,000.00 on the new loan were deducted by the latter. With thepayment of the previous debt, Virginia asked for the return of thefirst check (RCBC check no. 101756) but Mrs. Vicencio told her thather filing clerk was absent. Despite several demands for the returnof the first check, Mrs. Vicencio told Virginia that they can no longerlocate the folder containing that check. For the new loan, she alsorequired Virginia to issue three (3) more checks in various amounts two checks for P20,000.00 each and the third check forP10,000.00. Petitioners were not amendable to these requirements,but Mrs. Vicencio insisted that they issue the same assuring them

that the checks will not be presented to the banks but will merelyserve as guarantee for the loan since there was no promissory noterequired of them. Due to her dire financial needs, Virginia issuedthree undated RCBC checks numbered 101783 and 101784 in the

sum of P20,000.00 each and 101785 for P10,000.00, and againinformed Mrs. Vicencio that the cheeks cannot be encashed as the

same were not funded. Petitioner Ernesto also signed the threechecks as required by Mrs. Vicencio on the same conditions as the

first check.

On June 20 and July 21, 1989, petitioner Virginia obtained twomore loans, one for P10,000.00 and another for P15,000.00. Againshe issued two more RCBC checks (No. 101768 for P10,000.00

and No. 101774 for P15,000.00) as required by Mrs. Vicencio withthe same assurance that the checks shall not be presented for

payment but shall stand only as evidence of indebtedness in lieu of


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the usual promissory note.

All the checks were undated at the time petitioners handed them to

Mrs. Vicencio. The six checks represent a total obligation of

P85,000.00. However, since the loan of P10,000.00 under the firstcheck was already paid when the amount thereof was deductedfrom the proceeds of the second loan, the remaining account wasonly P75,000.00. Of this amount, petitioners were able to settle andpay in cash P60,000.00 in July 1989. Petitioners never had anytransaction nor ever dealt with Mrs. Vicencio's husband, the

complainant herein.

When the remaining balance of P15,000.00 on the loans becamedue and demandable, petitioners were not able to pay despitedemands to do so. On August 3, 1992, Mrs. Vicencio together withher husband and their daughter Lucille, went to petitioners'

residence to persuade Virginia to place the date "August 15, 1992"on checks nos. 101756 and 101774, although said checks wererespectively given undated to Mrs. Vicencio on May 17, 1989 andJuly 21, 1989. Check no. 101756 was required by Mrs. Vicencio tobe dated as additional guarantee for the P15,000.00 unpaidbalance allegedly under check no. 101774. Despite being informedby petitioner Virginia that their account with RCBC had been closedas early as August 17, 1989, Mrs. Vicencio and her daughterinsisted that she place a date on the checks allegedly so that it willbecome evidence of their indebtedness. The former reluctantly

wrote the date on the checks for fear that she might not be able toobtain future loans from Mrs. Vicencio.

Later, petitioners were surprised to receive on August 29, 1992 ademand letter from Mrs. Vicencio's spouse informing them that thechecks when presented for payment on August 25, 1992 were

dishonored due to "Account Closed". Consequently, upon thecomplaint of Mrs., Vicencio's husband with whom petitioners neverhad any transaction, two informations for estafa, defined in Article315 (2) (d) of the Revised Penal Code, were filed against them. The

informations which were amended on April 1, 1993 alleged thatpetitioners "through fraud and false pretenses and in payment of adiamond ring (gold necklace)" issued checks which when presentedfor payment were dishonored due to account closed.

3After

entering a plea of not guilty during arraignment, petitioners weretried and sentenced to suffer imprisonment and ordered toindemnify the complainant in the total amount of P25,000.00.

4On

appeal, the Court of Appeals (CA) affirmed the decision of the court

a quo.5

Hence this petition.

Estafa may be committed in several ways. One of these is bypostdating a check or issuing a check in payment of an obligation,

as provided in Article 315, paragraph 2(d) of the RPC, viz:

Art. 315. Swindling(estafa). Any person who shall defraud another

by any of the means mentioned hereinbelow shall be punished by:

xxx xxx xxx

2. By means of any of the following false pretenses or fraudulentacts executed prior to or simultaneously with the commission of the

fraud:

xxx xxx xxx

(d) By postdating a check, or issuing a check in payment of anobligation when the offender had no funds in the bank, or his fundsdeposited therein were not sufficient to cover the amount of the


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check. The failure of the drawer of the check to deposit the amountnecessary to cover his check within three (3) days from receipt ofnotice from the bank and/or the payee or holder that said check hasbeen dishonored for lack or insufficiency of funds shall be prima

facie evidence of deceit constituting false pretense or fraudulentact.

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

1. that the offender postdated or issued a check in payment of an

payment obligation contracted at the time the check was issued;

2. that such postdating or issuing a check was done when theoffender had no funds in the bank, or his funds deposited therein

were not sufficient to cover the amount of the check;

3. deceit or damage to the payee thereof.6

The first and third elements are not present in this case. A checkhas the character of negotiability and at the same time it constitutesan evidence of indebtedness. By mutual agreement of the parties,the negotiable character of a check may be waived and theinstrument may be treated simply as proof of an obligation. Therecannot be deceit on the part of the obligor, petitioners herein,because they agreed with the obligee at the time of the issuanceand postdating of the checks that the same shall not be encashed

or presented to the banks. As per assurance of the lender, thechecks are nothing but evidence of the loan or security thereof inlieu of and for the same purpose as a promissory note. By their owncovenant, therefore, the checks became mere evidence ofindebtedness. It has been ruled that a drawer who issues a check

as security or evidence of investment is not liable for estafa.7

Mrs.Vicencio could not have been deceived nor defrauded by petitionersin order to obtain the loans because she was informed that they nolonger have funds in their RCBC accounts. In 1992, when the

Vicencio family asked Virginia to place a date on the check, thelatter again informed Mrs. Vicencio that their account with RCBCwas already closed as early as August 1989. With the assurance,however, that the check will only stand as a firm evidence ofindebtedness, Virginia placed a date on the check. Under thesecircumstances, Mrs. Vicencio cannot claim that she was deceivedor defrauded by petitioners in obtaining the loan. In the absence ofthe essential element of deceit,

8no estafa was committed by

petitioners.

Both courts below relied so much on the fact that Mrs. Vicencio'shusband is a former Judge who knows the law. He should have

known, then, that he need not even ask the petitioners to place adate on the check, because as holder of the check, he could haveinserted the date pursuant to Section 13 of the NegotiableInstruments Law (NIL).

9Moreover, as stated in Section 14 thereof,

complainant, as the person in possession of the check, has primafacie authority to complete it by filling up the blanks therein.

Besides, pursuant to Section 12 of the same law, a negotiableinstrument is not rendered invalid by reason only that it is antedatedor postdated.

10Thus, the allegation of Mrs. Vicencio that the date

to be placed by Virginia was necessary so as to make the checkevidence of indebtedness is nothing but a ploy. Petitioners openlydisclosed and never hid the fact that they no longer have funds inthe bank as their bank account was already closed. Knowledge bythe complainant that the drawer does not have sufficient funds inthe bank at the time it was issued to him does not give rise to acase for estafa through bouncing checks.

11


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Moreover, a check must be presented within a reasonable timefrom issue.

12By current banking practice, a check becomes stale

after more than six (6) months. In fact a check long overdue formore than two and one-half years is considered stale.

13In this

case, the checks were issued more than three years prior to theirpresentment. In his complaint, complainant alleged that petitionersbought jewelry from him and that he would not have parted with hisjewelry had not petitioners issued the checks. The evidence on

record, however, does not support the theory of the crime.

There were six checks given by petitioners to Mrs. Vicencio but onlytwo were presented for encashment. If all were issued in paymentof the alleged jewelry, why were not all the checks presented?There was a deliberate choice of these two checks as the totalamount reflected therein is equivalent to the amount due under theunpaid obligation. The other checks, on the other hand, could not

be used as the amounts therein do not jibe with the amount of theunpaid balance. Following complainant's theory that he would nothave sold the jewelries had not petitioners issued "postdated"checks, still no estafa can be imputed to petitioners. It is clear that

the checks were not intended for encashment with the bank, butwere delivered as mere security for the payment of the loan and

under an agreement that the checks would be redeemed with cashas they fell due. Hence, the checks were not intended by the partiesto be modes of payment but only as promissory notes. Sincecomplainant and his wife were well aware of that fact, they cannotnow complain there was deception on the part of petitioners.Awareness by the complainant of the fictitious nature of thepretense cannot give rise to estafa by means of deceit. 14 When thepayee was informed by the by the drawer that the checks are notcovered by adequate funds it does not give rise to bad faith orestafa.

15

Moreover, complainant's allegations that the two subject checkswere issued in 1992 as payment for the jewelry he allegedly sold topetitioners is belied by the evidence on record. First, complainant isnot engaged in the sale of jewelry.

16Neither are petitioners. If the

pieces of jewelry were important to complainant considering thatthey were with him for more than twenty-five years already,17

hewould not have easily parted with them in consideration forunfunded personal checks in favor of persons whose means ofliving or source of income were unknown to him.

18Applicable here

is the legal precept that persons are presumed to have taken care

of their business.19

Second, petitioners' bank account with RCBC was opened onMarch 26, 1987 and was closed on April 17, 1989, during the spanof which they were issued 10 check booklets with the last bookletissued on April 6, 1984. This last booklet contains 50 checks

consecutively numbered from 101751 to 101800. The two subjectchecks came from this booklet. All the checks in this booklet wereissued in the year 1989 including the two subject checks, so thatthe complainants' theory that the jewelry were sold in 1992 cannot

be believed.

The rule that factual findings of the trial court bind this court is notabsolute but admits of exceptions such as when the conclusion is afinding grounded on speculation, surmise, and conjecture and whenthe findings of the lower court is premised on the absence of

evidence and is contradicted by the evidence on record.20

Basedon the foregoing discussions, this Court is constrained to departfrom the general rule. Equally applicable is what Vice-Chancellor

Van Fleet once said:21

Evidence to be believed must not only proceed from the mouth of a


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credible witness but must be credible in itself such as thecommon experience and observation of mankind can approve asprobable under the circumstances. We have no test of the truth ofhuman testimony, except its conformity to our knowledge,

observation and experience. Whatever is repugnant to thesebelongs to the miraculous, and is outside of judicial cognizance.

Petitioners, however, are not without liability. An accused acquittedof a criminal charge may nevertheless be held civilly liable in thesame case where the facts established by the evidence so warrant.22

Based on the records, they still have an outstanding obligation ofP15,000.00 in favor of Mrs. Vicencio. There was mention that theloan shall earn interests. However, an agreement as to payment ofinterest must be in writing, otherwise it cannot be valid,

23although

there was actual payment of interests by virtue of the advancedeductions from the loan. Once the judgment becomes final and

executory, the amount due is deemed equivalent to a forbearanceof credit during the interim period from the finality of judgment untilfull payment, in which case it shall earn legal interest at the rate oftwelve per cent (12%) per annum pursuant to Central Bank (CB)

Circular No. 416.24

WHEREFORE, the assailed Decision is REVERSED and SETASIDE. Petitioners are ACQUITTED of the charge of estafa butthey are ORDERED to pay Mrs. Vicencio the amount of P15,000.00without interest. However, from the time this judgment becomes

final and executory, the amount due shall earn legal interest oftwelve percent (12%) per annum until full payment.

SO ORDERED.

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

Footnotes

1 Department of Public Works and Highways.

2 Rizal Commercial Banking Corporation.

3 Except as to the date and time of commission, the jewelriesinvolved, the amount of the check and the check number, theamended Informations in Criminal Case No. C-1708-1709

identically read: "That on or about the 15th day of August, 1992, atabout 8:00 o'clock in the morning, in the Municipality of Catarman,

Province of Northern Samar, Philippines and within the jurisdictionof this Honorable Court, the above-named accused, conspiring,confederating and helping one another, with intent to gain, throughfraud and false pretenses and in payment of a diamond ring, did,then and there wilfully and unlawfully issue an RCBC Check with

No. CT 101774 in the amount of FIFTEEN THOUSAND(P15,000.00) PESOS, and when presented for payment on August19, 1992, the RCBC in Catarman dishonored the check on theground that it was drawn against "ACCOUNT CLOSED", anddespite notice accused failed to pay to the actual damage andprejudice of Romualdo Vicencio in the amount aforestated."(Regional Trial Court (RTC) Records in Criminal Case No. C-1709,p. 24).

4 The dispositive portion of the RTC Decision (Branch 19,Catarman, Northern Samar) dated August 4, 1993 penned by

Judge Cesar R. Cinco, p. 6 reads: "WHEREFORE, the Courthereby finds Ernesto Pacheco y Tambuyat, also known as Erning,and Virginia Pacheco y Oledan, also known as Virgie, GUILTYbeyond reasonable doubt as co-principals in the crimes of estafadefined and penalized under paragraph 2(d) of Article 315 of the


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Revised Penal Code, amended by Republic Act 4885 andPresidential Decree 818, as charged under the informations andsentences each, to wit:

In Criminal Case No. C-1708, to suffer an imprisonment rangingfrom EIGHT (8) YEARS, EIGHT (8) MONTHS and ONE (1) DAY ofprision mayor, as minimum, to FOURTEEN (14) YEARS, EIGHT (8)MONTHS and ONE (1) DAY ofreclusion temporal, as maximum, tojointly and severally indemnify Atty. Romualdo Vicencio in the

amount of P15,000.00 and to pay the costs; and

In Criminal Case No. C-1709, to suffer an imprisonment rangingfrom EIGHT (8) YEARS, EIGHT (8) MONTHS and ONE (1) DAY, asminimum, to TEN (10) YEARS, EIGHT (8) MONTHS and ONE (1)day, as maximum, of prison mayor, to indemnify jointly andseverally Atty. Romualdo Vicencio in the amount of P10,000,00 and

to pay the costs. SO ORDERED." (Rollo, p. 128).

5 The dispositive portion of the Court of Appeals (CA) Decisionpromulgated March 19, 1996 penned by Justice Romeo Callejo, Sr.with Justices Antonio Martinez (now a retired member of this Court)and Delilah Vidallon-Magtolis, concurring, p.14 reads: "IN THELIGHT OF THE FOREGOING, the Decision appealed from ishereby AFFIRMED in toto. With costs against the Appellants. SO

ORDERED." (Rollo, p. 21).

6 People v. Ong, 204 SCRA 942 (1991); People v. Tugbang. 196

SCRA 341 (1991); Sales v. CA, 144 SCRA 717 (1988); People v.Sabio, Jr., 86 SCRA 568 (1978).

7 People v. Tugbang, 196 SCRA 341 (1991).

8 Buaya v. Polo, 169 SCRA 471 (1989); People v. Grospe, 157

SCRA 154 (1988); US v. Rivera, 23 Phil. 383.

9 When date may be inserted. Where an instrument expressed

to be payable at a fixed period after date is issued undated, orwhere the acceptance of an instrument payable at a fixed periodafter sight is undated, any holder may insert therein the true date ofissue or acceptance, and the instrument shall be payableaccordingly. The insertion of a wrong date does not avoid theinstrument in the hands or a subsequent holder in due course; butas to him, the date so inserted is to be regarded as the true date.(Emphasis supplied).

10 Ante-dated and post-direct. The instrument is not invalid forthe reason only that it is ante-dated or post-dated, provided this isnot done for an illegal or fraudulent purpose. The person to whom

an instrument so dated is delivered acquires the title thereto as ofthe date of delivery.

11 See Magno v. CA, 210 SCRA 471 (1992).

12 Sec. 186, NIL. Within what time a check must be presented. A check must be presented for payment within a reasonable time

after its issue or the drawer will be discharged from liability thereonto the extent of the loss caused by the delay.

13 Montinola v. Philippine National Bank, 88 Phil. 178 (1951).

14 People v. Concepcion, 44 Phil. 544.

15 Firestone Tire and Rubber Co. of the Philippines v. Inez Chavezand Co., 18 SCRA 356 (1966).


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16 Transcript of Stenographic Notes (TSN), July 20, 1993, p. 49.

17 TSN, April 29, 1993, p. 12.

18 TSN, April 29, 1993, p. 9.

19 Rules of Court, Rule 131, Sec. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but

may be contradicted and overcome by other evidence:

xxx xxx xxx

(d) That a person takes ordinary care of his concerns;

xxx xxx xxx

(p) That private transactions have been fair and regular.

20 Smith Kline & French Laboratories, Ltd. v. CA, 342 Phil. 187citing among others Vda. De Alcantara v. CA, 252 SCRA 457(1996); Republic v. IAC, 196 SCRA 335 (1991); Fernan v. CA, etal., 181 SCRA 546 (1990); People v. Traya, 147 SCRA 381 (1987);

Tolentino v. de Jesus, 56 SCRA 67 (1974).

21 Cited In Daggers v. Van Dyck, 37 N.J. Eq., 130, 132; See alsoPeople v. Cara, 283 SCRA 96 (1997).

22 People v. Tugbang, 196 SCRA 341 (1991); Nuez v. CA, G.R.No. 80216, December 7, 1988, Minute Resolution.

23 Art. 1956, New Civil Code.

24 Philippine National Bank v. CA, 331 Phil. 1079, 263 SCRA 706(1996) citingEastern Shipping Lines v. CA, 234 SCRA 78 (1994).

[G.R. No. 148864. August 21, 2003]

SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C.EVANGELISTA, petitioners,vs. MERCATOR FINANCECORP., LYDIA P. SALAZAR, LAMECS**REALTY ANDDEVELOPMENTCORP. and the REGISTER OF DEEDSOF BULACAN, respondents.

D E C I S I O N

PUNO, J.:

Petitioners, Spouses Evangelista (Petitioners), are beforethis Court on a Petition for Review on Certiorariunder Rule 45 of

the Revised Rules of Court, assailing the decision of the Court ofAppeals dismissing their petition.

Petitioners filed a complaint[1] for annulment of titles againstrespondents, 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 land[2] contained in the Real EstateMortgage[3] executed by them and Embassy Farms, Inc.

(Embassy Farms). They alleged that they executed the RealEstate Mortgage in favor of Mercator Financing Corporation


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(Mercator) only as officers of Embassy Farms. They did notreceive the proceeds of the loan evidenced by a promissory note,as all of it went to Embassy Farms. Thus, they contended that themortgage was without any consideration as to them since they did

not personally obtain any loan or credit accommodations. Therebeing no principal obligation on which the mortgage rests, the realestate mortgage is void.[4] With the void mortgage, they assailedthe validity of the foreclosure proceedings conducted by Mercator,the sale to it as the highest bidder in the public auction, theissuance of the transfer certificates of title to it, the subsequent saleof the same parcels of land to respondent Lydia P. Salazar(Salazar), and the transfer of the titles to her name, and lastly, thesale 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 February16, 1982, plaintiffs executed a Mortgage in favor of defendantMercator Finance Corporation for and in consideration of certainloans, and/or other forms of credit accommodations obtained from

the Mortgagee (defendant Mercator Finance Corporation)amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIXHUNDRED TWENTY-FIVE & 78/100 (P844,625.78) PESOS,Philippine Currency and to secure the payment of the same andthose others that the MORTGAGEE may extend to theMORTGAGOR (plaintiffs) x x x.[5] It contended that sincepetitioners and Embassy Farms signed the promissory note[6] asco-makers, aside from the Continuing Suretyship Agreement[7]

subsequently executed to guarantee the indebtedness of EmbassyFarms, and the succeeding promissory notes[8] restructuring theloan, then petitioners are jointly and severally liable with EmbassyFarms. Due to their failure to pay the obligation, the foreclosure andsubsequent sale of the mortgaged properties are valid.

Respondents Salazar and Lamecs asserted that they areinnocent purchasers for value and in good faith, relying on thevalidity of the title of Mercator. Lamecs admitted the prior ownershipof petitioners of the subject parcels of land, but alleged that they are

the present registered owner. Both respondents likewise assailedthe long silence and inaction by petitioners as it was only after alapse of almost ten (10) years from the foreclosure of the propertyand the subsequent sales that they made their claim. Thus, Salazarand Lamecs averred that petitioners are in estoppel and guilty oflaches.[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, Me

nego cases chapter i and ii

Documents