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Section 1 THIRD DIVISION [G.R. NO. 120639. SEPTEMBER 25, 1998] BPI EXPRESS CARD CORPORATION, PETITIONER, VS.

COURT OF APPEALS AND RICARDO J. MARASIGAN, RESPONDENTS .

DECISION KAPUNAN, J.: The question before this Court is whether private respondent can recover moral damages arising from the cancellation of his credit card by petitioner credit card corporation. The facts of the case are as stated in the decision of the respondent court,i[1] to wit: The case arose from the dishonor of the credit card of the plaintiff Atty. Ricardo J. Marasigan by Cafe Adriatico, a business establishment accredited with the defendantappellant BPI Express Card Corporation (BECC for brevity) on December 8, 1989 when the plaintiff entertained some guests thereat. The records of this case show that plaintiff, who is a lawyer by profession was a complimentary member of BECC from February 1988 to February 1989 and was issued Credit Card No. 100-012-5534 with a credit limit of P3,000.00 and with a monthly billing every 27th of the month (Exh. N), subject to the terms and conditions stipulated in the contract (Exh. 1-b). His membership was renewed for another year or until February 1990 and the credit limit was increased to P5,000.00 (Exh. A). The plaintiff oftentimes exceeded his credit limits (Exhs. I, I-1 to I-12) but this was never taken against him by the defendant and even his mode of paying his monthly bills

in check was tolerated. Their contractual relations went on smoothly until his statement of account for October, 1989 amounting to P8,987.84 was not paid in due time. The plaintiff admitted having inadvertently failed to pay his account for the said month because he was in Quezon province attending to some professional and personal commitments. He was informed by his secretary that defendant was demanding immediate payment of his outstanding account, was requiring him to issue a check for P15,000.00 which would include his future bills, and was threatening to suspend his credit card. Plaintiff issued Far East Bank and Trust Co. Check No. 494675 in the amount of P15,000.00, postdated December 15, 1989 which was received on November 23, 1989 by Tess Lorenzo, an employee of the defendant (Exhs. J and J-1), who in turn gave the said check to Jeng Angeles, a co-employee who handles the account of the plaintiff. The check remained in the custody of Jeng Angeles. Mr. Roberto Maniquiz, head of the collection department of defendant was formally informed of the postdated check about a week later. On November 28, 1989, defendant served plaintiff a letter by ordinary mail informing him of the temporary suspension of the privileges of his credit card and the inclusion of his account number in their Caution List. He was also told to refrain from further use of his credit card to avoid any inconvenience/embarrassment and that unless he settles his outstanding account with the defendant within 5 days from receipt of the letter, his membership will be permanently cancelled (Exh. 3). There is no showing that the plaintiff received this letter before December 8, 1989. Confident that he had settled his account with the issuance of the postdated check, plaintiff invited some guests on December 8, 1989 and entertained them at Caf Adriatico. When he presented his credit card to Caf Adriatico for the bill amounting to P735.32, said card was dishonored. One of his guests, Mary Ellen Ringler, paid the bill by using her own credit card, a Unibankard (Exhs. M, M-1 and M-2).

In a letter addressed to the defendant dated December 12, 1989, plaintiff requested that he be sent the exact billing due him as of December 15, 1989, to withhold the deposit of his postdated check and that said check be returned to him because he had already instructed his bank to stop the payment thereof as the defendant violated their agreement that the plaintiff issue the check to the defendant to cover his account amounting to only P8,987.84 on the condition that the defendant will not suspend the effectivity of the card (Exh. D). A letter dated December 16, 1989 was sent by the plaintiff to the manager of FEBTC, Ramada Branch, Manila requesting the bank to stop the payment of the check (Exhs. E, E-1). No reply was received by plaintiff from the defendant to his letter dated December 12, 1989. Plaintiff sent defendant another letter dated March 12, 1990 reminding the latter that he had long rescinded and cancelled whatever arrangement he entered into with defendant and requesting for his correct billing, less the improper charges and penalties, and for an explanation within five (5) days from receipt thereof why his card was dishonored on December 8, 1989 despite assurance to the contrary by defendant's personnel-in-charge, otherwise the necessary court action shall be filed to hold defendant responsible for the humiliation and embarrassment suffered by him (Exh. F). Plaintiff alleged further that after a few days, a certain Atty. Albano, representing himself to be working with office of Atty. Lopez, called him inquiring as to how the matter can be threshed out extrajudicially but the latter said that such is a serious matter which cannot be discussed over the phone. The defendant served its final demand to the plaintiff dated March 21, 1990 requiring him to pay in full his overdue account, including stipulated fees and charges, within 5 days from receipt thereof or face court action also to replace the postdated check with cash within the same period or face criminal suit for violation of the Bouncing Check Law (Exh. G/Exh. 13). The plaintiff, in a reply letter dated April 5, 1990 (Exh. H), demanded defendant's compliance with his request in his first letter dated March 12, 1990 within three (3) days from receipt, otherwise the plaintiff will file a case against them, x x x.ii[2]

Thus, on May 7, 1990 private respondent filed a complaint for damages against petitioner before the Regional Trial Court of Makati, Branch 150, docketed as Civil Case No. 90-1174. After trial, the trial court ruled for private respondent, finding that herein petitioner abused its right in contravention of Article 19 of the Civil Code.iii[3] The dispositive portion of the decision reads: Wherefore, judgment is hereby rendered ordering the defendant to pay plaintiff the following: 1. P100,000.00 as moral damages; 2. P50,000.00 as exemplary damages; and 3. P20,000.00 by way of attorney's fees. On the other hand, plaintiff is ordered to pay defendant its outstanding obligation in the amount of P14,439.41, amount due as of December 15, 1989.iv[4] The trial court's ruling was based on its findings and conclusions, to wit: There is no question that plaintiff had been in default in the payment of his billings for more than two months, prompting defendant to call him and reminded him of his obligation. Unable to personally talk with him, this Court is convinced that somehow one or another employee of defendant called him up more than once. However, while it is true that, as indicated in the terms and conditions of the application for BPI credit card, upon failure of the cardholder to pay his outstanding obligation for more than thirty (30) days, the defendant can automatically suspend or cancel the credit card, that reserved right should not have been abused, as it was in fact abused, in plaintiff's case. What is more peculiar here is that there have been admitted communications between plaintiff and defendant prior to the suspension or cancellation of plaintiff's credit card and his inclusion in the caution list. However, nowhere in any of these communications was there ever a hint given to plaintiff

that his card had already been suspended or cancelled. In fact, the Court observed that while defendant was trying its best to persuade plaintiff to update its account and pay its obligation, it had already taken steps to suspend/cancel plaintiff's card and include him in the caution list. While the Court admires defendant's diplomacy in dealing with its clients, it cannot help but frown upon the backhanded way defendant dealt with plaintiff's case. For despite Tess Lorenzo's denial, there is reason to believe that plaintiff was indeed assured by defendant of the continued honoring of his credit card so long as he pays his obligation of P15,000.00. Worst, upon receipt of the postdated check, defendant kept the same until a few days before it became due and said check was presented to the head of the collection department, Mr. Maniquiz, to take steps thereon, resulting to the embarrassing situation plaintiff found himself in on December 8, 1989. Moreover, Mr. Maniquiz himself admitted that his request for plaintiff to replace the check with cash was not because it was a postdated check but merely to tally the payment with the account due. Likewise, the Court is not persuaded by the sweeping denials made by Tess Lorenzo and her claim that her only participation was to receive the subject check. Her immediate superior, Mr. Maniquiz testified that he had instructed Lorenzo to communicate with plaintiff once or twice to request the latter to replace the questioned check with cash, thus giving support to the testimony of plaintiff's witness, Dolores Quizon, that it was one Tess Lorenzo who she had talked over the phone regarding plaintiff's account and plaintiff's own statement that it was this woman who assured him that his card has not yet been and will not be cancelled/suspended if he would pay defendant the sum of P15,000.00. Now, on the issue of whether or not upon receipt of the subject check, defendant had agreed that the card shall remain effective, the Court takes note of the following:

1. An employee of defendant corporation unconditionally accepted the subject check upon its delivery, despite its being a postdated one; and the amount did not tally with plaintiff's obligation; 2. Defendant did not deny nor controvert plaintiff's claim that all his payments were made in checks; 3. Defendant's main witness, Mr. Maniquiz, categorically stated that the request for plaintiff to replace his postdated check with cash was merely for the purpose of tallying plaintiff's outstanding obligation with his payment and not to question the postdated check; 4. That the card was suspended almost a week after receipt of the postdated check; 5. That despite the many instances that defendant could have informed plaintiff over the phone of the cancellation or suspension of his credit card, it did not do so, which could have prevented the incident of December 8, 1989, the notice allegedly sent thru ordinary mail is not only unreliable but takes a long time. Such action as suspension of credit card must be immediately relayed to the person affected so as to avoid embarrassing situations. 6. And that the postdated check was deposited on December 20, 1989. In view of the foregoing observations, it is needless to say that there was indeed an arrangement between plaintiff and the defendant, as can be inferred from the acts of the defendant's employees, that the subject credit card is still good and could still be used by the plaintiff as it would be honored by the duly accredited establishment of defendant.v[5] Not satisfied with the Regional Trial Court's decision, petitioner appealed to the Court of Appeals, which, in a decision promulgated on March 9, 1995 ruled in its dispositive portion: WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED with the MODIFICATION that the defendant-appellant shall pay the plaintiff-appellee the

following: P50,000.00 as moral damages; P25,000.00 as exemplary damages; and P10,000.00 by way of attorney's fees. SO ORDERED.vi[6] Hence, the present petition on the following assignment of errors: I THE LOWER COURT ERRED IN DECLARING THAT THERE WAS INDEED AN AGREEMENT OR ARRANGEMENT ENTERED INTO BETWEEN THE PARTIES WHEREIN THE DEFENDANT REQUIRED THE PLAINTIFF TO ISSUE A POSTDATED CHECK IN ITS FAVOR IN THE AMOUNT OF P15,000.00 AS PAYMENT FOR HIS OVERDUE ACCOUNTS, WITH THE CONDITION THAT THE PLAINTIFF'S CREDIT CARD WILL NOT BE SUSPENDED OR CANCELLED. II THE LOWER COURT ERRED IN HOLDING DEFENDANT LIABLE FOR DAMAGES AND ATTORNEY'S FEES ARISING OUT FROM THE DISHONOR OF THE PLAINTIFF'S CREDIT CARD.vii[7] We find the petition meritorious. The first issue to be resolved is whether petitioner had the right to suspend the credit card of the private respondent. Under the terms and conditions of the credit card, signed by the private respondent, any card with outstanding balances after thirty (30) days from original billing/statement shall automatically be suspended, thus: PAYMENT OF CHARGES - BECC shall furnish the Cardholder a monthly statement of account made through the use of the CARD and the Cardholder agrees that all charges

made through the use of the CARD shall be paid by the Cardholder on or before the last day for payments, which is twenty (20) days from the date of the said statement of account, and such payment due date may be changed to an earlier date if the Cardholder's account is considered overdue and/or with balances in excess of the approved credit limit; or to such other date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly statement of account. If the last day for payment falls on a Saturday, Sunday or Holiday, the last day for payment automatically becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of proof of service of the statement of charges to the Cardholder, the latter shall pay any or all charges made through the use of the CARD within thirty (30) days from the date or dates thereof. Failure of Cardholder to pay any and all charges made through the CARD within the payment period as stated in the statement of charges or within thirty (30) days from actual date or dates whichever occur earlier, shall render him in default without the necessity of demand from BECC, which the Cardholder expressly waives. These charges or balance thereof remaining unpaid after the payment due date indicated on the monthly statement of account shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% of the amount due for every month or a fraction of a month's delay. PROVIDED, that if there occurs any change on the prevailing market rates. BECC shall have the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior notice to the Cardholder. xxx xxx xxx

Any CARD with outstanding balances unpaid after thirty (30) days from original billing/statement date shall automatically be suspended, and those with accounts unpaid after sixty (60) days from said original billing/statement date shall automatically be cancelled, without prejudice to BECC's right to suspend or cancel any CARD any time and for whatever reason. In case of default in his obligation as provided for in

the preceding paragraph, Cardholder shall surrender his CARD to BECC and shall in addition to the interest and penalty charges aforementioned, pay the following liquidated damages and/or fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency or attorney; (b) a service fee of P100 for every dishonored check issued by the Cardholder in payment of his account, with prejudice, however, to BECC's right of considering Cardholder's obligation unpaid, cable cost for demanding payment or advising cancellation of membership shall also be for Cardholder's account; and (c) a final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial costs, if the payment of the account is enforced through court action.viii[8] The aforequoted provision of the credit card cannot be any clearer. By his own admission, private respondent made no payment within thirty days for his original billing/statement dated 27 September 1989. Neither did he make payment for his original billing/statement dated 27 October 1989. Consequently, as early as 28 October 1989, thirty days from the non-payment of his billing dated 27 September 1989, petitioner corporation could automatically suspend his credit card. The next issue is whether prior to the suspension of private respondent's credit card on 28 November 1989, the parties entered into an agreement whereby the card could still be used and would be duly honored by duly accredited establisments. We agree with the findings of the respondent court, that there was an arrangement between the parties, wherein the petitioner required the private respondent to issue a check worth P15,000 as payment for the latter's billings. However, we find that the private respondent was not able to comply with his obligation. As the testimony of private respondent himself bears out, the agreement was for the immediate payment of the outstanding account: Q In said statement of account that you are supposed to pay the P8,974.84 the charge of interest and penalties, did you note that?

A Q A Q A

Yes, sir. I noted the date. When? When I returned from the Quezon province, sir. When? I think November 22, sir.

Q So that before you used again the credit card you were not able to pay immediately this P8,987.84 in cash? A I paid P15,000.00, sir.

Q My question Mr. Witness is, did you pay this P8,987.84 in charge of interest and penalties immediately in cash? A In cash no, but in check, sir.

Q You said that you noted the word "immediately" in bold letters in your statement of account, why did you not pay immediately? A Because I received that late, sir.

Q Yes, on November 22 when you received from the secretary of the defendant telling you to pay the principal amount of P8,987.84, why did you not pay? A There was a communication between me and the defendant, I was required to pay P8,000.00 but I paid in check for P15,000.00, sir. Q Do you have any evidence to show that the defendant required you to pay in check for P15,000.00? A Q Yes, sir. Where is it?

It was by telecommunication, sir.

Q So there is no written communication between you and the defendant? A There was none, sir.

To find the existence of an abuse of right under Article 19 the following elements must be present: (1) There is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another.x[10] Time and again this Court has held that good faith is presumed and the burden of proving bad faith is on the party alleging it.xi[11] This private respondent failed to do. In fact, the action of the petitioner belies the existence of bad faith. As early as 28 October 1989, petitioner could have suspended private respondent's card outright. Instead, petitioner allowed private respondent to use his card for several weeks. Petitioner had even notified private respondent of the impending suspension of his credit card and made special accommodations for him for settling his outstanding account. As such, petitioner cannot be said to have capriciously and arbitrarily canceled the private respondent's credit card. We do not dispute the findings of the lower court that private respondent suffered damages as a result of the cancellation of his credit card. However, there is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury in those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria.xii[12] In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff - a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis for the award of tort damages is the premise that an individual was injured in contemplation of law. Thus, there must first be a breach of some duty and the imposition of liability for that breach before damages may be

Q There is no written agreement which says that P8,987.84 should be paid for P15,000.00 in check, there is none? A Yes, no written agreement, sir.

Q And you as a lawyer you know that a check is not considered as cash specially when it is postdated sent to the defendant? A That is correct, sir.

Clearly, the purpose of the arrangement between the parties on November 22, 1989, was for the immediate payment of the private respondent's outstanding account, in order that his credit card would not be suspended. As agreed upon by the parties, on the following day, private respondent did issue a check for P15,000. However, the check was postdated 15 December 1989. Settled is the doctrine that a check is only a substitute for money and not money, the delivery of such an instrument does not, by itself operate as payment.ix[9] This is especially true in the case of a postdated check. Thus, the issuance by the private respondent of the postdated check was not effective payment. It did not comply with his obligation under the arrangement with Miss Lorenzo. Petitioner corporation was therefore justified in suspending his credit card. Finally, we find no legal and factual basis for private respondent's assertion that in canceling the credit card of the private respondent, petitioner abused its right under the terms and conditions of the contract.

awarded;xiii[13] and the breach of such duty should be the proximate cause of the injury. We therefore disagree with the ruling of the respondent court that the dishonor of the credit card of the private respondent by Caf Adriatico is attributable to petitioner for its willful or gross neglect to inform the private respondent of the suspension of his credit card, the unfortunate consequence of which brought social humiliation and embarrassment to the private respondent.xiv[14] It was petitioner's failure to settle his obligation which caused the suspension of his credit card and subsequent dishonor at Caf Adriatico. He can not now pass the blame to the petitioner for not notifying him of the suspension of his card. As quoted earlier, the application contained the stipulation that the petitioner could automatically suspend a card whose billing has not been paid for more than thirty days. Nowhere is it stated in the terms and conditions of the application that there is a need of notice before suspension may be effected as private respondent claims.xv[15] This notwithstanding, on November 28, 1989, the day of the suspension of private respondent's card, petitioner sent a letter by ordinary mail notifying private respondent that his card had been temporarily suspended. Under the Rules on Evidence, there is a disputable presumption that letters duly directed and mailed were received on the regular course of mail.xvi[16] Aside from the private respondent's bare denial, he failed to present evidence to rebut the presumption that he received said notice. In fact upon cross examination, private respondent admitted that he did received the letter notifying him of the cancellation: Q Now you were saying that there was a first letter sent to you by the defendant? A Q A Your letter, sir. Was that the first letter that you received? Yes, sir.

Q Is it that there was a communication first between you and the defendant? A There was none, sir. I received a cancellation notice but that was after November 27.xvii[17] As it was private respondent's own negligence which was the proximate cause of his embarrassing and humiliating experience, we find the award of damages by the respondent court clearly unjustified. We take note of the fact that private respondent has not yet paid his outstanding account with petitioner. IN VIEW OF THE FOREGOING, the decision of the Court of Appeals ordering petitioner to pay private respondent P100,000.00 as moral damages, P50,000.00 as exemplary damages and P20,000.00 as attorney's fees, is SET ASIDE. Private respondent is DIRECTED to pay his outstanding obligation with the petitioner in the amount of P14,439.41. SO ORDERED. Narvasa, C.J., (Chairman), and Romero, J., concur. Purisima, J., no part, being signatory to CA decision.

i[1] CA decision penned by: Justice Salome A. Montoya, concurred by: Justices Fidel P. Purisima and Godardo A. Jacinto, Rollo, p. 12. ii[2] Id., at 24-26. iii[3] Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

iv[4] See note 1, p. 45. v[5] Id., at 42-44. vi[6] Id., at 35. vii[7] Id., at 6. viii[8] Records, p. 104. ix[9] Roman Catholic Bishop of Malolos, Inc. vs. IAC, 191 SCRA 411 (1990). x[10] Albenson Enterprises Corp. vs. CA, 217 SCRA 16, 25 (1993). xi[11] Barons Marketing Corp. vs. Court of Appeals and Phelps Dodge Phils., Inc., G.R. No. 126486, February 9, 1998. xii[12] Custodio vs. CA, 253 SCRA 483 (1996) citing 22 Am Jur 2d, Damages, Sec. 4, 35-36. xiii[13] Ibid. xiv[14] See note 1, p. 33.

A Q A

Yes, sir. They also earn charges, may we know your answer Mr. Witness? Yes, sir.

Q Thank you. In case collection suit is filed you know that there were litigation charges that will be claimed against you, is it not? A Q A Q A I don't know sir. But you as a practicing lawyer? Yes, as matter of fact that is the procedure. But you did not read the contents? Yes, sir.

Q But how did you come to know that you are supposed to pay the charges since you have not read the contents? A By the statement of account, sir.

xv[15] During cross-examination of plaintiff-private respondent Ricardo Marasigan by counsel for the defendant-petitioner, the following exchange ensued: Q Now you know that after using the credit card you have to pay the monthly charges as they fall due in accordance with the obligation/application that you signed? A Yes, sir.

Q What about the date when you should pay your monthly charges, did you know when to pay it? A Q A It is also stated there, sir. In the monthly statement of account? Yes, sir.

Q And if the payments were not made on time they are supposed to earn interest?

Q When you received this monthly statement of account did you not complain to the defendant the credit card since you have not read the contents of your application? A No, sir. I did not.

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

Q You continued using that credit card until it was suspended and terminated? A Yes, sir.

Q Now do you also know from the terms and conditions of the contract between you and the defendant that if the charges for the use of the credit card are not paid it will be suspended? A Yes, sir. But there has got to be a prior notice.

Q Thank you. After a suspension is still not paid your credit card has to be terminated? A I think that is the procedure, sir (TSN, November 5, 1990, pp. 39-42).

xvi[16] Revised Rules of Court, Rule 131 Sec. 3 (m). xvii[17] TSN, November 5, 1990, pp. 51-52. G.R. No. 97753 August 10, 1992 CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Bito, Lozada, Ortega & Castillo for petitioners. Nepomuceno, Hofilea & Guingona for private.

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 BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE 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)

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

AUTHORIZED SIGNATURES 5 (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. 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?
7

witness: a Angel dela Cruz is the depositor. 8 xxx xxx xxx On this score, the accepted rule is that the negotiability or nonnegotiability 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. Narvasa, C.J., Padilla and Nocon, JJ., concur.

4 Ibid., 12. 5 Exhibit A, Documentary Evidence for the Plaintiff, 8. 6 Rollo, 28. 7 TSN, February 9, 1987, 46-47. 8 Ibid., id., 152-153. 9 11 Am. Jur. 2d, Bills and Notes, 79. 10 Ibid., 86. 11 Ibid., 87-88. 12 Art. 1377, Civil Code. 13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211. 14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989). 15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990). 16 Section 2(a), Rule 131, Rules of Court.

Footnotes 1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan and Luis L. Victor. 2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88. 3 Rollo, 24-26.

17 Original Record, 152. 18 Ibid., 154. 19 Section 3(e), Rule 131, Rules of Court. 20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of Appeals, et al., G.R. No. 60907.

21 Sec. 30, Act No. 2031. 22 Sec. 191, id.

34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982). 35 Luna vs. Abaya, 86 Phil. 472 (1950).

23 Sec. 27, id.; see also Art. 2118, Civil Code. 24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin, 1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031. 25 Rollo, 25. 26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916); Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil. 394 (1922). 27 Rollo, 25. 28 Ibid., 15. 29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984; Original Record, 209. 30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973). 31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA 597 (1981); Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs. Commissioner of Internal Revenue, et al., 112 SCRA 136 (1982); Dulos Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA 425 (1988). 32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989). 33 Rollo, 58. 36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590. 37 Rollo, 59. SECOND DIVISION [G.R. No. 96405. June 26, 1996] BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents. SYLLABUS 1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT.- Clearly, the rule does not specify that the written agreement be a public document. What is required is that the agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them" [FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties. As a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence. 2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION, DEFINED.- A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217] Section 4,

Chapter 3, Title 1, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for the proportionate part of the debt. There is a solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires. [Sesbreo v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.] 3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR.- While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title 1, Book IV of the Civil Code." [Tolentino, Civil Code of the Philippines, Vol. V, 1992 ed., p. 502] APPEARANCES OF COUNSEL Emilio G. Abrogena for petitioner. Teogenes X. Velez for private respondent. DECISION ROMERO, J.: This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch 18,xvii[1] which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as follows: "WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to the plaintiff Philippine Bank of

Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00),with interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated damages or penalty from May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorney's fees; and to pay the costs. The counterclaim, as well as the cross claim, are dismissed for lack of merit. SO ORDERED." Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983. Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment thereof.xvii[2] On December 11, 1984 private respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors. On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia. In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the venture. He added that, although Naybe had no money to buy the equipment Pio Tio had assured Naybe of the approval of a loan he

would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for the loan of P5,000.00. Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00. In the aforementioned decision of the lower court, it noted that the typewritten figure "P50,000-" clearly appears directly below the admitted signature of the petitioner in the promissory note.xvii[3] Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that even granting that said limited amount had actually been agreed upon, the same would have been merely collateral between him and Naybe and, therefore, not binding upon the private respondent as creditorbank. The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the alleged business venture although he knew for a fact that the falcata logs operation was encouraged by the bank for its export potential. Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the lower court. His motion for reconsideration of the said decision having been denied, he filed the instant petition for review on certiorari. On February 6,1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned decision.xvii[4] His motion for the reconsideration of the denial of his petition was likewise denied with finality in the Resolution of April 24, 1991.xvii[5] Thereafter, petitioner filed a motion for leave to file a

second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this case.xvii[6] Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the latter motion, he asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,1991, the Court granted his prayer that his petition be given due course and reinstated the same.xvii[7] Nonetheless, we find the petition unmeritorious. Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan to be increased to P50,000.00. The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should have declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit committee which was the practice, at it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas were not present at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent to him.xvii[8] Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000. 00, the promissory note stated the amount of P50,000.00. The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas' affidavit before the

lower court, it would have strengthened his claim that the promissory note did not reflect the correct amount of the loan. Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities prescribed by law but x x x a mere commercial paper which does not bear the signature of x x x attesting witnesses," parol evidence may "overcome" the contents of the promissory note.xvii[9] The first paragraph of the parol evidence rulexvii[10] states: "When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement." Clearly, the rule does not specify that the written agreement be a public document. What is required is that agreement be in writing as the rule is in fact founded on "long experience that written evidence is so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the parties intended a different contract from that expressed in the writing signed by them."xvii[11] Thus, for the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties.xvii[12] As a general rule, bills, notes and other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.xvii[13] By alleging fraud in his answer,xvii[14] petitioner was actually in the right direction towards proving that he and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving cause of the written contract, it may be shown by parol evidence.xvii[15] However, fraud must be established by clear and convincing evidence, mere preponderance of evidence, not even being adequate.xvii[16] Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that: "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter." It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence of the promissory note which states as follows: "Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000. 00) Pesos, Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid." A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation.xvii[17] On the other hand, Article 2047 of the Civil Code states: "By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed, In such a case the contract is called a suretyship." (Italics supplied.) While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-

debtor, and a fiador in solidum (surety). The later, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code."xvii[18] Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is a solidarity liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.xvii[19] Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation.xvii[20] The choice is left to the solidary creditor to determine against whom he will enforce collection.xvii[21] Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law. WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of Appeals is AFFIRMED. Costs against petitioner. SO ORDERED. Regalado (Chairman), Puno, Mendoza, and Torres, Jr., JJ., concur.

G.R. No. 72110. November 16, 1990.* ROMAN CATHOLIC BISHOP OF MALOLOS, INC., petitioner, vs. INTERMEDIATE APPELLATE COURT, and ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION, respondents. PETITION for certiorari to review the decision of the Court of Appeals. The facts are stated in the opinion of the Court. Rodrigo Law Office for petitioner. Antonio P. Barredo and Napoleon M. Malinas for private respondent.

SARMIENTO, J.:

This is a petition for review on certiorari which seeks the reversal and setting aside of the decision1 of the Court of Appeals,2 the dispositive portion of which reads: WHEREFORE, the decision appealed from is hereby reversed 2 AC-G.R. CV No. 69626, Robes-Francisco Realty & Development Corporation vs. Roman Catholic Bishop of Malolos, Inc. and set aside and another one entered for the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor of Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates of Title Nos. T-169493, 169494, 169495 and 169496) of the Register of Deeds of Bulacan. In case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is directed to execute the said document. Without pronouncement as to damages and attorneys fees. Costs against the defendant-appellee.3

Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, G.R. No. 72110, 191 SCRA 411 , November 16, 1990

The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the petitioner, then defendant, in the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan,4 for specific performance with damages, based on a contract5 executed on July 7, 1971.

On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco wrote the petitioner a formal request7 that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon approval of the said request. On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request of the private respondent, but granted the latter a grace period of five (5) days from the receipt of the denial8 to pay the total balance of P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be implemented. On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote9 the counsel of the petitioner requesting an extension of 30 days from said date to fully settle its account. The counsel for the petitioner, Atty. Fernandez, received the said letter on the same day. Upon consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private respondent a letter10 dated August. Consequently, Atty. Francisco, the private respondents president, wrote a letter11 dated August 22, 1975, directly addressed to the petitioner, protesting the alleged refusal of the latter to accept tender of payment purportedly made by the former on August 5, 1975, the last day of the grace period. In the same letter of August 22, 1975, received on the following day by the petitioner, the private respondent demanded the execution of a deed of absolute sale over the land in question and after which it would pay its account in full, otherwise, judicial action would be resorted to.

The property subject matter of the contract consists of a 20,655 sq.m.portion, out of the 30,655 sq.m. total area, of a parcel of land covered by Original Certificate of Title No. 575 of the Province of Bulacan, issued and registered in the name of the petitioner which it sold to the private respondent for and in consideration of P123,930.00. The crux of the instant controversy lies in the compliance or noncompliance by the private respondent with the provision for payment to the petitioner of the principal balance of P100,000.00 and the accrued interest of P24,000.00 within the grace period. A chronological narration of the antecedent facts is as follows: On July 7, 1971, the subject contract over the land in question was executed between the petitioner as vendor and the private respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on or before July 7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in question in case the private respondent would fail to complete payment within the said period.

On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed a letter6 to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the supporting documents.

On August 27, 1975, the petitioners counsel, Atty. Fernandez, wrote a reply12 to the private respondent stating the refusal of his client to execute the deed of absolute sale due to its (private respondents) failure to pay its full obligation. Moreover, the petitioner denied that the private respondent had made any tender of payment whatsoever within the grace period. In view of this alleged breach of contract, the petitioner cancelled the contract and considered all previous payments forfeited and the land as ipso facto reconveyed.

From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the main question of tender of payment.

its president, Atty. Francisco, only had a savings account deposit of P64,840.00, and although the latter had a money-market placement of P300,000.00. the same was to mature only after the expiration of the 5-day grace period.

The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private respondent. According to the trial court:

Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the dispositive portion of which reads:

x x x What made Atty. Francisco suddenly decide to pay plaintiffs obligation on August 5, 1975, go to defendants office at Malolos, and there tender her payment, when her request of August 4, 1975 had not yet been acted upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and had available funds for the purpose on August 5, 1975, then there would have been no need for her to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Franciscos claim that she made a tender of payment on August 5, 1975such alleged act, considered in relation to the circumstances both antecedent and subsequent thereto, being not in accord with the normal pattern of human conductis not worthy of credence.13

WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject contract cancelled and plaintiffs down payment of P23,930.00 forfeited in favor of defendant, and hereby dismisses the complaint; and on the counterclaim, the Court orders plaintiff to pay defendant.

(1) Attorneys fees of P10,000.00; (2) Litigation expenses of P2,000.00; and (3) Judicial costs.

The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private respondent, who earlier testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another person, however, named Aurora Oracion, was presented to testify as the secretary-companion of Atty. Francisco on that same occasion.

SO ORDERED.14

Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank records thereof. Finally, the trial court found that the private respondent had insufficient funds available to fulfill the entire obligation considering that the latter, through

Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate Appellate Court (now Court of Appeals) assigning as reversible errors, among others, the findings of the trial court that the available funds of the private respondent were insufficient and that the latter did not effect a valid tender of payment and consignation. The respondent court, in reversing the decision of the trial court, essentially relies on the following findings:

x x x We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the plaintiff-appellant they have a total available sum of P364,840.00 at her and at the plaintiffs disposal on or before August 4, 1975 to answer for the obligation of the plaintiff-appellant. It was not correct for the trial court to conclude that the plaintiff-appellant had only about P64,840.00 in savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. The plaintiffappellant, through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia Francisco had about P300,000.00 in money market placement. The error of the trial court lies in concluding that the money market placement of P300,000.00 was out of reach of Atty. Francisco. But as testified to by Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty. Francisco could withdraw anytime her money market placement and place it at her disposal, thus proving her financial capability of meeting more than the whole of P124,000.00 then due per contract. This situation, We believe, proves the truth that Atty. Francisco apprehensive that her request for a 30-day grace period would be denied, she tendered payment on August 4, 1975 which offer defendant through its representative and counsel refused to receive. x x x15 (Italics supplied) In other words, the respondent court, finding that the private respondent had sufficient available funds, ipso facto concluded that the latter had tendered payment. Is such conclusion warranted by the facts proven? The petitioner submits that it is not. Hence, this petition.16

latter has actually paid the complete consideration of the salewhere the contract between and executed by the parties stipulates That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.

xxx

xxx

xxx

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that the consideration of the sale is in Philippine Currency?17

We find the petition impressed with merit.

The petitioner presents the following issues for resolution: A. Is a finding that private respondent had sufficient available funds on or before the grace period for the payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said obligation within said period? xxx xxx xxx

With respect to the first issue, we agree with the petitioner that a finding that the private respondent had sufficient available funds on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the formers obligation and demanding that the latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. A proof that an act could have been done is no proof that it was actually done.

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the private respondent (as vendee) before the

The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds on the part of the private respondent to meet more than the total obligation within the grace period, the alleged truth of tender of payment. The same is a classic case of nonsequitur.

A Yes, sir.22 xxx xxx xxx

On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important findings of fact made by the trial court which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should be accorded full consideration and respect and should not be disturbed unless for strong and cogent reasons.18 While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the trial court,19 or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken,20 the Court has to review the evidence in order to arrive at the correct findings based on the record.

Art. 1159 of the Civil Code of the Philippines provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. And unless the stipulations in said contract are contrary to law, morals, good customs, public order, or public policy, the same are binding as between the parties.23

What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to pay the petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the private respondent could have demanded from the petitioner the execution of the necessary documents. In case the petitioner refused, the private respondent could have had always resorted to judicial action for the legitimate enforcement of its right. For the failure of the private respondent to undertake this more judicious course of action, it alone shall suffer the consequences. With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the private respondent still can not succeed in view of the fact that the latter used a certified personal check which is not legal tender nor the currency stipulated, and therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The Court en banc in the recent case of Philippine Airlines v. Court of Appeals,24 G.R. No. L-49188, stated thus: Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a managers check or ordinary check, is not

Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had not been prepared, the subject contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the said documents by the petitioner. That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.21 The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in cross-examination of its president, Atty. Francisco, which reads: Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale before you would given (sic) the personal certified check in payment of your balance, is that correct?

legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.

Cecilio D. Ignacio for petitioner. Hildawa & Gomez for private respondent.

Hence, where the tender of payment by the private respondent was not valid for failure to comply with the requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused receipt by the petitioner, the subsequent consignation did not operate to discharge the former from its obligation to the latter. FELICIANO, J.:p In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly order therefore the cancellation of the said contract, the forfeiture of the previous payment, and the reconveyance ipso facto of the land in question.

RESOLUTION

WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent court promulgated on April 25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby REINSTATED. Costs against the private respondent.

Sometime in early March 1968, petitioner Loreta Serrano bought some pieces of jewelry for P48,500.00 from Niceta Ribaya. On 21 March 1968, petitioner, then in need of money, instructed her private secretary, Josefina Rocco, to pawn the jewelry. Josefina Rocco went to private respondent Long Life Pawnshop, Inc. ("Long Life"), pledged the jewelry for P22,000.00 with its principal owner and General Manager, Yu An Kiong, and then absconded with said amount and the pawn ticket. The pawnshop ticket issued to Josefina Rocco stipulated that it was redeemable "on presentation by the bearer." Three (3) months later, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket issued by private respondent was being offered for sale. They told Niceta the ticket probably covered jewelry once owned by the latter which jewelry had been pawned by one Josefina Rocco. Suspecting that it was the same jewelry she had sold to petitioner, Niceta informed the latter of this offer and suggested that petitioner go to the Long Life pawnshop to check the matter out. Petitioner claims she went to private respondent pawnshop, verified that indeed her missing jewelry was pledged there and told Yu An Kiong not to permit anyone to redeem the jewelry because she was the lawful owner thereof. Petitioner claims that Yu An Kiong agreed. On 9 July 1968, petitioner went to the Manila Police Department to report the loss, and a complaint first for qualified theft and later changed to estafa was subsequently filed against Josefina Rocco. On the same date, Detective Corporal Oswaldo Mateo of the Manila Police also claims to have gone to the pawnshop, showed Yu An

SO ORDERED. Melencio-Herrera (Chairman), Paras and Regalado, JJ., concur. Padilla, J., No part, former counsel of petitioner. Petition granted. Decision set aside and annulled. G.R. No. 45125 April 22, 1991 LORETA SERRANO, petitioner, vs. COURT OF APPEALS and LONG LIFE PAWNSHOP, INC., respondents.

Kiong petitioner's report and left the latter a note asking him to hold the jewelry and notify the police in case some one should redeem the same. The next day, on 10 July 1968, Yu An Kiong permitted one Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the jewelry. On 4 October 1968, petitioner filed a complaint with the then Court of First Instance of Manila for damages against private respondent Long Life for failure to hold the jewelry and for allowing its redemption without first notifying petitioner or the police. After trial, the trial judge, Hon. Luis B. Reyes, rendered a decision in favor of petitioner, awarding her P26,500.00 as actual damages, with legal interest thereon from the date of the filing of the complaint, P2,000.00 as attorney's fees, and the costs of the suit. Judge L.B. Reyes' decision was reversed on appeal and the complaint dismissed by the public respondent Court of Appeals in a Decision promulgated on 26 September 1976. The Court of Appeals gave credence to Yu An Kiong's testimony that neither petitioner nor Detective Mateo ever apprised him of the misappropriation of petitioner's loan, or obtained a commitment from him not to permit redemption of the jewelry, prior to 10 July 1968. Yu An Kiong claims to have become aware of the loan's misappropriation only on 16 August 1968 when a subpoena duces tecum was served by the Manila Fiscal's Office requiring him to bring the record of the pledge in connection with the preliminary investigation of the estafa charge against Josefina Rocco. Consequently, the appellate court ruled, there could have been no negligence, much less a grave one amounting to bad faith, imputable to Yu An Kiong as the basis for an award of damages. In this Petition for Review, petitioner seeks reversal of the Public respondent's findings relating to the credibility of witnesses and the restoration of the trial court's decision. Deliberating on the present Petition for Review, the Court considers that the public respondent Court of Appeals committed reversible error in rendering its questioned Decision.

It is a settled principle of civil procedure that the conclusions of the trial court regarding the credibility of witnesses are entitled to great respect from the appellate courts because the trial court had an opportunity to observe the demeanor of witnesses while giving testimony which may indicate their candor or lack thereof. 1 While the Supreme Court ordinarily does not rule on the issue of credibility of witnesses, that being a question of fact not properly raised in a petition under Rule 45, the Court has undertaken to do so in exceptional situations where, for instance, as here, the trial court and the Court of Appeals arrived at divergent conclusions on questions of fact and the credibility of witnesses. 2 The Court of Appeals rejected what it considered to be the incredible testimony of petitioner and Detective Mateo. It faulted petitioner for failing to report to the police authorities the loss of her jewelry immediately on 21 March 1968 when Josefina Rocco failed to return to her either the loan proceeds or the jewelry. But it must be noted that Josefina Rocco simply disappeared without a trace on said date. Petitioner had no way of knowing if Josefina had misappropriated her jewelry, or had first pledged the jewelry as instructed and then misappropriated the proceeds of the loan. In the latter case, which was in fact what had occurred, petitioner could have had no idea as to the identity of the pawnbroker. Moreover, this Court has several times recognized that different people may have diverse reasons for failing to report promptly to the police their having been victimized by some criminal or fraudulent scheme and that such failure does not by itself render their subsequent testimony unworthy of credence. 3 The Court of Appeals also found it hard to believe that Detective Mateo had failed to obtain a written acknowledgment from Yu An Kiong of the receipt of the note as corroboration for his testimony. However, absent evidence that it was an established practice for police officers to obtain such acknowledgment in situations like the one here, it is difficult to see why Detective Mateo's behavior should be considered unbelievable. On the other hand, as the trial court pointed out, it would not have been sensible for Detective Mateo to leave a note reminding Yu An Kiong to hold unto the jewelry if the latter had in fact then told the policeman that the jewelry had already been redeemed. The public respondent apparently believed petitioner had failed to establish her ownership of the jewelry pledged by Josefina Rocco, such failure purportedly engendering doubt that Tomasa de Leon may

have redeemed jewelry different from that owned by petitioner. This is curious and untenable because the record on appeal indicates that Yu An Kiong had admitted in his answer and memorandum before the trial court that he received pledged jewelry from Josefina Rocco and, in his memorandum, that such jewelry had been entrusted to Josefina by petitioner as the latter's employer. It is clear from these judicial admissions that he considered petitioner to have been the true owner of the jewelry. Finally, the Court of Appeals did not believe petitioner's testimony because of a claimed material inconsistency therein. On direct examination, petitioner said she "immediately" went to the private respondent's establishment upon being informed by Niceta Ribaya of the possible whereabouts of her jewelry. On cross-examination, she said she went to the establishment "a few days later." If this is an inconsistency, it relates to an unimportant detail. What is clear is that in any event, petitioner testified that she went to the respondent's pawnshop to meet Yu An Kiong and notify him of the misappropriation before anyone had redeemed the jewelry. We must also note that the Court of Appeals apparently over-looked a fact of substance which did not escape the attention of the trial court. Petitioner's version of events was corroborated by Police Detective Mateo and by Niceta Ribaya. These were two (2) individuals who had nothing to gain from the outcome of the case. Certainly, their disinterested testimony should have been accorded more probative weight than the negative, uncorroborated and self-serving testimony of Yu An Kiong, which presented a diametrically opposed version of events calculated to show that in permitting redemption of the jewelry, he was acting in good faith. 4 The testimony of Detective Mateo was moreover supported by the presumption that he had acted in the regular performance of his official duty as a police officer, a presumption that Yu An Kiong did not try to rebut. This being a civil case, it was enough for petitioner to show, by a preponderance of evidence, that her version of events did in fact occur. We agree with the trial court that this burden of proof had been discharged by petitioner because her evidence was direct and more credible and persuasive than that propounded by Yu An Kiong, 5 and corroborated by disinterested witnesses.

Turning to the substantive legal rights and duties of the parties, we believe and so hold that, having been notified by petitioner and the police that jewelry pawned to it was either stolen or involved in an embezzlement of the proceeds of the pledge, private respondent pawnbroker became duty bound to hold the things pledged and to give notice to petitioner and the police of any effort to redeem them. Such a duty was imposed by Article 21 of the Civil Code. 6 The circumstance that the pawn ticket stated that the pawn was redeemable by the bearer, did not dissolve that duty. The pawn ticket was not a negotiable instrument under the Negotiable Instruments Law nor a negotiable document of title under Articles 1507 et seq. of the Civil Code. If the third person Tomasa de Leon, who redeemed the things pledged a day after petitioner and the police had notified Long Life, claimed to be owner thereof, the prudent recourse of the pawnbroker was to file an interpleader suit, impleading both petitioner and Tomasa de Leon. The respondent pawnbroker was, of course, entitled to demand payment of the loan extended on the security of the pledge before surrendering the jewelry, upon the assumption that it had given the loan in good faith and was not a "fence" for stolen articles and had not conspired with the faithless Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the instant case and must bear the consequences, without prejudice to its right to recover damages from Josefina Rocco. The trial court correctly held that private respondent was liable to petitioner for actual damages which corresponded to the difference in the value of the jewelry (P48,500.00) and the amount of the loan (P22,000.00), or the sum of P26,500.00. Petitioner is entitled to collect the balance of the value of the jewelry, corresponding to the amount of the loan, in an appropriate action against Josefina Rocco. Private respondent Long Life in turn is entitled to seek reimbursement from Josefina Rocco of the amount of the damages it must pay to petitioner. ACCORDINGLY, the Petition is GRANTED. The Decision of the Court of Appeals dated 23 September 1976 is hereby REVERSED and SET ASIDE. The Decision of the Court of First Instance dated 22 May 1970 is hereby REINSTATED in toto. No pronouncement as to costs. Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

14 expressly requires the pawnbroker to notify the pawner of the date, hour and place of the sale. Footnotes G.R. No. 89252 May 24, 1993 1 Vda. de Alberto v. Court of Appeals, 173 SCRA 436 (1989). 2 Robleza v. Court of Appeals, 174 SCRA 354 (1989). 3 E.g., People v. Pacabes, 137 SCRA 158 (1985); People vs. Coronado, 145 SCRA 250 (1986). 4 Vda. de Alberto v. Court of Appeals, supra. 5 Stronghold Insurance Co., Inc. v. Court of Appeals, 173 SCRA 619 (1989). FELICIANO, J.: 6 Article 21 of the Civil Code provides: Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. The problems exemplified in this case are now addressed by P.D. No. 114 entitled the "Pawnshop Regulation Act," dated 29 January 1973. Section 13 of this statute grants the pawner an automatic grace period of ninety (90) days from the date of maturity of the obligation, within which to redeem the pawn by payment of the principal of the debt with interest, principal and interest being compounded at the time the obligation matured. Under Section 15 of the same statute, the pawnbroker is expressly forbidden to sell or otherwise dispose of things received in pawn or pledge to anyone other than the pawner, except at public auction, under the control and direction of a licensed auctioneer, and then only after publication of notice in at least two (2) daily newspapers during the week preceding the date of such public auction sale. Section On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner: (a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum; (b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents. Salva, Villanueva & Associates for Delta Motors Corporation. Reyes, Salazar & Associates for Pilipinas Bank.

Bank of Asia and America as drawee, in the total amount of P304,533.33. On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn against insufficient funds. On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows: PILIPINAS BANK Makati Stock Exchange Bldg., Ayala Avenue, Makati, Metro Manila TO Raul Sesbreo

F e b r u a r y 9 , 1 9 8 1

to you should this Denominated I Custodianship Receipt remain outstanding in your Tfavor thirty (30) days after its maturity. Y D A T E N O . 1 0 8 0 5 DENOMINATED CUSTODIAN RECEIPT This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated. SERIAL MAT. FACE ISSUED REGISTERED AMOUNT NUMBER DATE VALUE BY HOLDER PAYEE 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 UNDERWRITERS FINANCE CORP. We further certify that these securities may be inspected by you or your duly authorized representative at any time during regular banking hours. Upon your written instructions we shall undertake physical delivery of the above securities fully assigned

referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly I agreed upon in "Securities Custodianship Agreement" l between Pilipinas and Philfinance. Philfinance did not provide l the appropriate instructions; Pilipinas never released DMC PN No. e 2731, nor any other instrument in respect thereof, to petitioner. g i b demand on 14 July 1981 3 upon private Petitioner also made a written l respondent Delta for the partial satisfaction of DMC PN No. 2731, e as payee thereof, had assigned to him explaining that Philfinance, said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on theS promissory note, and explained in turn that i Philfinance to offset its DMC PN No. it had previously agreed with 2731 (along with DMC PNgNo. 2730) against Philfinance PN No. 143A issued in favor of Delta. n a t on 18 June 1981, was placed under the In the meantime, Philfinance, u joint management of the Securities and exchange commission r ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN e No. 2731, which to date apparently remains in the custody of the ) SEC. 4 As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner. Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6 Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiffappellant, it is Philfinance. As correctly observed by the trial court: This act of Philfinance in accepting the investment of plaintiff and charging it
1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner. Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly

against DMC PN No. 2731 when its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision) WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant. Petitioner moved for reconsideration of the above Decision, without success. Hence, this Petition for Review on Certiorari. After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the parties to file their respective memoranda. 7 Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships. I. We consider first the relationship between petitioner and Delta. The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point: Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "nonnegotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.) 9 Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtormaker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance. Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee; (2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and (3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11 We consider Delta's arguments seriatim. Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or nonnegotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A nonnegotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument: The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the

assignee taking subject to the equities between the original parties. 12 (Emphasis added) DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note. Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

Philippine Underwriters Finance Corp. Benavidez St., Makati, Metro Manila. Attention: Mr. Alfredo O. Banaria SVPTreasurer GENTLEMEN: This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note

No. 143-A, dated April 10, 1980, to mature on April 6, 1981. As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity. Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo. V e r y T r u l y Y o u r s , ( S g d . ) F l o r e

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes. Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case. It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement: There is another aspect to this case. What is involved here is a money market transaction. As defined by

Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities." The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor. xxx xxx xxx There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18 (Citations omitted; emphasis supplied) We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A.

It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts are due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasis supplied) On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity." As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of

petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him. The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the equities i.e., the defenses which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that: Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that: [n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice.
22

solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words: Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you . 23 The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that: (1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and payable to the order of Philfinance; (2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24 (3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and (4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity." Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him. It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner. II. We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became

the obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731. We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo. We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by

them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placerbeneficiary, cannot be enforced as against such beneficiary-placer. We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted. In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the

attention of petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance. We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981. The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance. III.

entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner. 28 WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. Bidin, Davide, Jr., Romero and Melo, JJ., concur. # Footnotes

The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity need not detain us for long. In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us. Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate

1 Exhibit "C", Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41. 2 Records, p. 441; Plaintiff's Memorandum, p. 3. 3 Id., p. 451; Plaintiff's Memorandum, p. 13. 4 TSN, 14 June 1983, p. 35.

5 Petitioner explained that he did not implead Philfinance as party defendant because the latter was under rehabilitation by the Securities and Exchange Commission (TSN of the Pre-trial Conference, pp. 6 and 30; dated 04 March 1983). 6 Court of Appeals' Decision, p. 8; Rollo, p. 90. 7 Private respondent Delta adopted as its own the Memorandum filed by private respondent Pilipinas (Rollo, pp. 269-73). 8 Rollo, p. 6; Petition, p. 5. 9 Id., p. 88. 10 TSN, 17 August 1983, p. 36. 11 Records, pp. 36-37. 12 National Bank of Bristol v. Bartolome & O.R. Co., 59 A. 134, 138. See also, in this connection, Consolidated Plywood v. IFC Leasing, 149 SCRA 449 (1987). 13 Exhibit "3," Records, p. 240. 14 National Investment and Development Corporation v. De Los Angeles, 40 SCRA 487 (1971); Bastida v. Dy Buncio & Co., 93 Phil. 195 (1953). See also Articles 1285 and 1625, Civil Code. 15 Article 1300, Civil Code. 16 Article 1292, id. 17 127 SCRA 636 (1984). 18 127 SCRA at 645-646. 19 Records, p, 451; Plaintiff's Memorandum, p. 13.

20 Gonzales v. Land Bank of the Philippines, 183 SCRA 520 (1990); Philippine National bank v. General Acceptance and Finance Corp., 161 SCRA 449 (1988); National Investment and Development Corporation v. De los Angeles, 40 SCRA 489 (1971); Montinola v. Philippine National Bank, 88 Phil. 178 (1951); National Exchange Company, Ltd. v. Ramos, 51 Phil. 310 (1927); Sison v. Yap-Tico, 37 Phil. 584 (1918). 21 37 Phil. 584 (1918). 22 37 Phil. at 589. See also Rodriguez v. Court of Appeals, 207 SCRA 553, 559 (1992). See, generally, Philippine National Bank v. General Acceptance and Finance Corp., 161 SCRA 449, 457 (1988). 23 Petitioner's Memorandum, p. 12; Rollo, p. 221. 24 The DCR specified the amount of P307,933.33 as the extent to which DMC PN No. 2731 pertained to petitioner Raul Sesbreo. This amount probably refers to the placement of P300,000.00 by petitioner plus interest from 9 February 1981 until the maturity date of DMC PN No. 2731, i.e., 6 April 1981. 25 Complaint, pp. 2-3; Rollo, pp. 23-24; TSN of 11 April 1983, p. 51; TSN, 9 October 1986, pp. 15-16. See also Minutes of the Pre-trial Conference, dated 04 March 1983, p. 9. 26 Article 1988, Civil Code. 27 See, in this connection, the second and third "whereas" clauses of P.D. No. 678, dated 2 April 1975. 28 Pabalan v. National Labor Relations Commission, 184 SCRA 495 (1990); Del Rosario v. National Labor Relations Commission, 187 SCRA 777 (1990); Remo, Jr. v. Intermediate Appellate Court, 172 SCRA 405 (1989).

Section 2

EN BANC [G.R. No. 13761. July 12, 1919.] THE BACHRACH GARAGE AND TAXICAB CO. (INC.), Plaintiff-Appellee, vs. VICENTE GOLINGCO, DefendantAppellant. DECISION AVANCEA, J.: This case is brought for the recovery of a sum of money. Three causes of action are alleged. By the first cause of action, the Plaintiff claims the amount of P7,583.93 with interests thereon from December 14th (the year not being mentioned therein), till the date it is fully paid in addition to the 25 per cent of the total amount. By the second cause of action, he claims the amount of P1,059.17 with interests thereon until fully paid plus the 25 per cent of the total amount; by the third cause of action, the amount of P1,534.75 with legal interests thereon. The lower court rendered judgment sentencing the Defendant, for the first cause of action, to pay the amount of P7,583.93 with 10 percent interest thereon from January 19, 1917, plus 12 l/2 percent on the said amount; for the second cause of action P1,059.17 with the same interest from the said date plus 12 1/2 percent on the same amount; for the third, P154.75 with legal interest from January 19, 1917. From this judgment, the Defendant appealed. On this appeal, the Appellant assigns three errors as having been committed by the trial judge, which we shall examine separately: FIRST ERROR. The lower court erred in not imputing the amount of P7,000 to that of P8,750, as partial payment of the price of a truck, M. White, of 45 horse-power, the object of the promissory note Exhibit A.

The first error assigned refers to the first cause of action. On August 23, 1915, the Defendant subscribed in favor of the Plaintiff a promissory note (Exhibit A), to the following effect: 8,750. BACHRACHS GARAGE & TAXICAB CO., (INC.) MANILA, August 23, 1915. In Manila, on the 1st day of September, 1916, after this date, without days of grace, for value received, I jointly and severally promise to pay to E. Bachrach or to his order the sum of eight thousand seven hundred and fifty pesos, with the corresponding interests from this date at the rate of 10 per cent per annum, the right to protest and notice being hereby completely and expressly waived. We, moreover, bind ourselves, in case it should become necessary to employ an attorney for the recovery of this note, to pay to the holder of the said note 25 per cent of the capital and interests of the said note, by way of fees for the attorney who may be employed to so recover it. On February 16, 1916, the Defendant wrote to the Plaintiff the following letter, Exhibit 1: Tabaco, February 16, 1916. Messrs. Bachrachs Garage & Taxicab Co., Inc. DEAR SIRS: Enclosed is a check No. 203 for the amount of P7,000 against Jose Maria Aldecoa, in your favor, on the account of the price of a truck M. White of 45 horse-power. The balance of said price of 11,750 shall be paid to you in June, when I go there to settle all my accounts. You will please deliver the truck together with its accessories and license to Mr. Ricardo Lanuza, who is coming on board the steamer Sorsogon I remain, your sincere friend.

On the 23rd of the same month of February, 1916, the Plaintiff answered the above-quoted letter of the Defendant, as follows, which is Exhibit C: Mr. Vicente Golingco Tabaco, Albay, P. I. DEAR SIR AND FRIEND: Enclosed with your esteemed letter of the 16th instant, we received the sum of P7,000 in check which we apply to the payment on account of the purchase price of the White truck, of 45 horse-power, the price of which is P9,000. The truck is being shipped to you today The absence of an answer from you to our telegram of last Saturday makes us believe of your conformity to the same. Your representative, Mr. Lanuza, will be the bearer of the accessories of the same as well as the license of the truck. We have been wondering why, after you have promised to buy from us a special car which we have reserved for you for three months at your special order, you have not decided to purchase, for which reason you have disappointed us. Very truly yours, BACHRACHS GARAGE & TAXICAB CO. BY. ............. The question raised in this first assignment of error is whether, as alleged by the Defendant, the payment of P7,000 which appears in Exhibit 1 is on the account of the promissory note for P8,750, Exhibit A. The trial court decided this question affirmatively, but declared that the Plaintiff, in his answer Exhibit C made another application of this payment without the objection of the Defendant. The court concludes that the payment of P7,000 in Exhibit 1 should not be understood as applied to the note for P8,750 (Exhibit A). The Defendant contends on this appeal that the Plaintiff had no right to change in this manner the application of the payment of P7,000. We do not need to decide this question. After having examined all these three documents, we come

to the conclusion that the payment of P7,000, which the Defendant makes in his letter Exhibit 1 is not a payment for the note, Exhibit A. Exhibit 1 seems to convey clearly that the payment of P7,000 which the Defendant makes therein refers to the price of a 45 horse-power M. White truck, which the Defendant wanted to be delivered to Ricardo Lanuza together with its accessories and license. It is likewise clear that the Defendant, in its answer Exhibit C, in saying that it applied the P7,000 to the price of the 45-horse-power White truck, referred to the every truck together with its accessories and license, which was to be delivered to Lanuza as the Defendant desired. It, therefore, appears clearly that the application which the Defendant desired to make in his letter Exhibit 1, wherein he made the payment of P7,000 is the same application which the Plaintiff made, according to its answer Exhibit C. It is, however, necessary to explain one circumstance. According to the tenor of the Defendants letter Exhibit 1, it appears to have been understood by him that the price of 45-horse-power M. White truck, of which he speaks in his letter, is P8,750. On the other hand, the price of the 45- horse-power White truck, referred to by the Plaintiff in its answer Exhibit C is P9,000. It is to be concluded that the object of the Plaintiff in saying in its letter that the price of the truck is P9,000 was to rectify the belief of the Defendant as shown by this letter, that this price is P8,750. Hence, in its answer, the Plaintiff speaks of a telegram sent to the Defendant and which has not been answered by the latter, which facts has led the Plaintiff to say: The absence of an answer from you to our telegram of last Saturday makes us believe of your conformity to the same. This undoubtedly refers to the rectification with regard to the price of the truck. Examining the terms of the promissory note Exhibit A, we find that the P8,750 for which the Defendant appears to be indebted to the Plaintiff is not the price of the 45-horse-power M. White truck which is referred to in the Defendants letter Exhibit 1. In this Exhibit A of August 23, 1915, the Defendant stated that he owed the Plaintiff this amount of P8,750 with the obligation to pay an interest of 10 percent per annum on said debt from that debt. We fail to understand how it can be interpreted that this amount is the price of the

45-horse-power M. White truck, which the Defendant, on February 16, 1916, had not yet received and only requested on this date that it be sent through Ricardo Lanuza. We fail to understand why the Defendant, on August 23, 1915, issued a promissory note, with the obligation of paying interests, in payment of a truck which he had not yet received, and which, as has been seen, was not received by him until after February 16, 1916. Moreover, it should be noted that the promissory note Exhibit A, is an obligation with a period which did not expire till after September 1, 1916. This is a period which should be presumed to have been established for the benefit of both the creditor and debtor, inasmuch as it cannot be inferred from the tenor of the promissory note or from other circumstances that such term has been established in favor of one or the other. (Article 1827, Civil Code.) Such term benefits the Defendant for it gives him time to pay the debt. It also benefits the Plaintiff, as he can recover the interest on the debt so long as the latter is not paid. Neither could the Plaintiff exact payment nor the Defendant make payment before the expiration of the term As the Defendants letter Exhibit 1, wherein he makes the payment of P7,000, is dated February 16, 1916, before the said note became due, it should be presumed that it is not a payment for this note which the Defendant on that date was neither obliged nor able to pay. With regard to the first error assigned, our conclusion is that the payment of P7,000 which the Defendant makes in his letter Exhibit 1 does not refer to his note for P8,750, Exhibit A. According to Article 1172 of the Civil Code, a person owing several debts of the same kind in favor of a single creditor may declare at the time of making a payment to which of them it is to be applied If, in making use of this right, the Defendant applied the payment of P7,000 to another debt, he cannot now claim that it is understood to be applied to his note for P8,750, Exhibit A. SECOND ERROR. The court erred in sentencing the Defendant to pay to the Plaintiff corporation: 1. (a) the eight percent, (b) the ten percent and (c) the twelve and one-half percent of the P7,583.93 which is the amount claimed in the first cause of action. 2. (a) the eight percent (8 percent),

(b) the ten percent (10 percent) and (c) the twelve and one-half percent (12 1/2 percent) of P1,059.17 which is the sum claimed in the second cause of action. As may be seen, the promissory note Exhibit A, the object of the first cause of action, amounts to P8,750. The amount of P1,921.67 was paid on account, on November 2, 1915. When this partial payment was made, there was due on the amount of P8,750, the amount of P138.05 as interests at the rate of 8 percent per annum, as alleged in the complaint; deducting from P8,750 the amount of P1,921.67, the value of the promissory note was thus reduced on November 2, 1915, to P6,828.33. The trial court added to this balance the interests of P138.05 and sentenced the Defendant to pay interest on this amount thus accumulated from November 2, 1915, till January 19, 1917, when the complaint was filed. In this manner, the lower court has adjudicated to the Plaintiff interest on accrued interests till November 2, 1915. This is an error. Article 1109 of the Civil Code only permits accrued interests to earn legal interest from the time they have been judicially claimed. Section 5 of Act No. 2655 also prohibits accrued interests to earn interest, except when there has been an agreement or when they have been judicially claimed. In this case the lower court awarded to the Plaintiff these interests over the accrued interests, without an agreement to that effect and before they had been judicially claimed. It also appears that the lower court sentenced the Defendant to pay an interest of 10 percent on the accrued interests from January 19, 1917, when the complaint was presented, until it should have been fully paid. This is also an error. Section 5 of the above-cited Act No. 2655 only permits an interest of 6 per cent on accrued interests from the time they are judicially claimed. With regard to the amount of P1,059.17 to which the second cause of action refers, it is seen that the P1,000 is the amount of the original debt contracted by the Defendant on May 15, 1916, and ~59.17 are the interests accruing thereon till January 19, 1917, the date of the filing of the complaint. The lower court sentenced the Defendant to pay the interest of 10 per cent of this entire amount from January 19, 1917, until it should have been fully paid. For the same reasons we have

already indicated, it is error for the lower court to have sentenced the Defendant to pay 10 per cent interest on P59.17 the accumulated interests on the capital, because the Defendant should have been sentenced to pay 6 per cent interest only. (Section 5, Act No. 2655.) Hence, the judgment that the court should render in connection with the first two causes of action should be to sentence the Defendant to pay the amount of P6,828.33 with 10 per cent interest per annum from January 19, 1917; to pay the amount of P755.70 with 6 per cent interest per annum from January 19, 1917; for the second cause of action, to pay P1,000 with 10 per cent interest per annum from January 19, 1917; and to pay P59.17 with 6 per cent interest per annum from January 19, 1917. In the promissory notes subscribed by the Defendant for the amounts stated in the first and second causes of action, the Defendant bound himself to pay to the Plaintiff 25 per cent of the capital and interests, by way of counsel fees, in case that, for noncompliance with his obligation, it would become necessary for the Plaintiff to employ an attorney for the collection of the amount of the said notes. By virtue of this stipulation, the lower court sentenced the Defendant to pay 12 1\2 per cent on the capital and accrued interests, thus reducing to one-half the 25 per cent agreed upon in the notes. The Defendant contends that this 25 per cent which was reduced to 12 1\2 per cent by the lower court is illegal and contrary to Act No. 2655, inasmuch as, in addition to the interests stipulated in the said notes, it exceeds the interest allowed by this Act. We are of the opinion that the rate specified in this Act is not applicable to the instant case. In an obligation to pay a certain sum of money, the interest is a form of indemnification for damages. These damages may consist in the loss of the very thing itself or in the deprivation of the enjoyment which should have been obtained through its use. In a certain case, whatever may be the damages that the word interest in its broad sense may include, it appears clearly that the interest which is the object of computation according to Act No. 2655 is only that which represents the enjoyment or gain which is not obtained. We do not believe that it is the intention of the legislator to extend this computation to the resultant damages which make up the loss suffered. The stipulation

that in case of noncompliance the debtor shall pay a fixed amount for the fees of the attorney who may be employed by the creditor for the purpose of enforcing compliance with the obligation is not deemed to be an interest within the purview of Act No. 2655, and neither is the computation fixed in the said Act applicable thereto. It is not an indemnity for gain which cannot be realized, but an amount which the creditor spends and which constitutes a loss really suffered by reason of the noncompliance with the obligation. It is not a payment which the debtor is necessarily obliged to make, inasmuch as he can avoid making such payment by complying with his obligation. It is clear that, when the amount stipulated for the attorneys fees is so exorbitant that it exceeds that which should justly be paid for that purpose, the excess shall be considered as indirect or simulated interest, according to the spirit of the law, and should therefore be subject to the computation. In the case at bar, however, the 12 1\2 per cent of the amount due to which the trial reduced the 25 per cent stipulated represent, in our opinion, the amount which the Plaintiff was justly obliged to pay for his attorneys fees, and should not be considered as interest in the computation of the latter. Therefore, the lower court did not err in sentencing the Defendant to pay 12 1\2 per cent on the amount due. THIRD ERROR. The lower court erred: (a) in sentencing the Defendant; and (b) in not sentencing the Plaintiff corporation to pay to the Defendant the sum of P678.50 which is the difference between the amounts paid by the latter and the total amount claimed by the former in his complaint, excluding interests and costs. The first part of this error is decided in the manner indicated herein before. With regard to the second part, we have examined the evidence and fail to find any ground sustaining the contention of the Appellant. In view of the foregoing, the judgment appealed from is hereby affirmed, with the following modification: The Defendant shall pay to the Plaintiff, for the first cause of action, the amounts of P6,828.33 with 10 per cent interest per annum from January 19, 1917, and P755.60 with 6 per cent interest per annum from January 19, 1917; for the second cause of action, the amount of P1,000 with 10 per cent

interest per annum from January 19, 1917, and P59.17 with 6 per cent interest per annum from January 19, 1917. There is no special finding as to costs. SO ORDERED. Arellano, C.J., Torres, Araullo and Street, JJ., concur. Malcolm, J., concurs in the result.

Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second. There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a private individual. On the other hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for "additional cash advance for Food Production Campaign in La Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a public officer or employee and held in possession by a private individual. Such being the case, the Auditor General can hardly be blamed for not authorizing its redemption out of an appropriation specifically for "treasury warrants issued ... in favor of and held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in favor of a private individual. It was issued in favor of a government employee. The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942, amount to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants those issued to private individuals as distinguished from those issued in favor of government officials. Basis for the discrimination is not lacking. Probably the Government is not so sure that those warrants to officials have all been properly used by the latter during the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present holders thereof. The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instruments law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration," is actually an order for payment out of "a particular fund," and is not unconditional, and does not fulfill one of the essential requirements of a negotiable instrument.

Section 3

G.R. No. L-1405

July 31, 1948

BENJAMIN ABUBAKAR, petitioner, vs. THE AUDITOR GENERAL, respondent. Viray and Viola Viray for petitioner. First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent. BENGZON, J.: We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar. For his refusal the respondent gave two reasons: first, because the money available for the redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and second, because on of the requirements of his office had not been complied with, namely, that it must be shown that the holders of warrants covering payment or replenishment of cash advances for official expenditures (as this warrant is) received them in payment of definite government obligations.

(Section 3 last sentenced and section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants for the payment of money are not negotiable instruments nor commercial proper1 Anyway the question here is not whether the Government should eventually pay this warrant, or is ultimately responsible for it, but whether the Auditor General erred in refusing to permit payment out of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition dismissed, with costs. Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur.

CRUZ, J.:p This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are easily told. The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers. In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1 On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2 More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from

Footnotes
1

Logan County Bank vs. Farmers' National Bank, 155 Pac., 561; Velvet Ridge School District No. 91 vs. Bank of Searcy, 137 S.W., 907; Marshall vs. State, 102 So., 650. G.R. No. 88866 February 18, 1991 METROPOLITAN BANK & TRUST COMPANY, petitioner, vs. COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents. Angara, Abello, Concepcion, Regala & Cruz for petitioner. Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo. Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

the proceeds of the warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00.
4

Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit; 4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses of litigation in the amount of P200,000.00. 5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the amount of P100,000.00. SO ORDERED.

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979. On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered: 1. Dismissing the complaint with costs against the plaintiff; 2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo; 3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan

On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited. (a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or unauthorized. (b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held liable for its failure to collect on the warrants. 2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez. 3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should bear the loss. 4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable instruments.

The petition has no merit. From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit. It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account. The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice from the uncleared treasury warrants in the total amount of P968,000.00 Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive. And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and

give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips. Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case. In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts, according to whether the agency was or was not for a compensation.

is refuted by Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared. Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings before it made its own payment to Gomez. The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and convincing evidence. This was not done in the present case.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this

A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."

Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. xxx xxx xxx Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument judgment. But an order or promise to pay out of a particular fund is not unconditional.

pay "not unconditional" and the warrants themselves nonnegotiable. There should be no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch." The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present controversy. That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to

accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden Savings. We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account. The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury warrants. WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.

Footnotes
1 Rollo, pp. 12-13. 2 Ibid., p. 52. 3 Id., p. 14. 4 Id. 5 Through Judge Marciano T. Virola. 6 Penned by Ejercito, J., with Pe and Victor, JJ., concurring. 7 Rollo, p. 84. 8 TSN, July 29, 1983, p. 20. 9 Rollo, p. 61. 10 143 SCRA 20. 11 81 Phil. 359. 12 66 SCRA 29.F

Section 5

G.R. No. L-18103

June 8, 1922

SO ORDERED. Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant. Antonio Gonzalez for appellant. Roman J. Lacson for appellee.

Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curiae. 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 attorneyat-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. xxx xxx xxx

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. xxx xxx xxx

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. xxx xxx xxx

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. xxx xxx xxx

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 Englishspeaking 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

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

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 EnglishAmerican 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. Araullo, C.J., Avancea, Villamor, Ostrand, Johns and Romualdez, JJ., concur.

Footnotes
1

MEMORANDA OF "AMICI CURIAE" Attorney Thos. L. Hartigan, of Hartigan and Welch, states: "Though we are attorneys for two of the large banks here and keenly interested in the introduction of any improvements that would make for simplication of procedure and rapidity of practice, we cannot favor the introduction of confessions of judgment in the Philippine islands. In our opinion, it would open the

doors to fraud to an extent that would more than counterbalance any advantages of its use. "With our lack of system in recording judgments and with the practice of keeping merchants' books in various foreign languages, there would be ample opportunity for a debtor to make preferences by confessions of judgment which could not be discovered by the creditors until too late and which would be nearly impossible to set aside even when discovered in time. "Although, as representatives of the banks, we are representing the creditor class, we believe the introduction of confessions of judgment would ultimately cause much more loss than benefit to that class." Attorney Clyde A. DeWitt, of Fisher and DeWitt, states: "There is no statutory sanction in this jurisdiction for such provisions in negotiable instruments. Section 5 (b) of the Negotiable Instruments Law does not constitute such sanction because (1) it merely provides that such clauses will not affect the negotiable character of the instrument, and (2) it concludes with language showing that the Legislature did not intend thereby to validate any provision otherwise unlawful. The language is: 'But nothing in this section shall validate any provision or stipulation otherwise illegal.' "The question then is whether or not, in the absence of express legislative sanction, such warrants of attorney are valid. There are not many American cases in which this precise question has been considered, and in those cases in which the question has been raised, the reasoning of the courts has been colored by the fact that

the commercial use of these warrants of attorney as security for debt was sanctioned at common law, and the procedural statutes are held to be merely cumulative and not in derogation of the common law remedies. We, of course, have no such situation here. "The cases are collected in a note to First National Bank vs. White (220 Mo., 717), found in 16 Ann. Cas., 893, and it is there shown that in Missouri and Kansas such provisions are held to be void as against the public policy of the State as expressed in its laws and the decisions of its courts, while in Colorado and Illinois their validity was upheld as a familiar common-law security not affected by the procedural statutes. Yet it is there pointed out that in Kahn vs. Lesser (97 Wis., 217, 72 N.W., 739), the court, in referring to a judgment by confession under warrant of attorney in a promissory note, said: "'The judgment in this case must stand, if at all, by the authority of the statute. The proceeding by which it was entered was outside and in derogation of the common-law practice of courts; and the statute, as well as the proceedings under it, must be strictly construed.'" "In Iowa, in an early case, McClish vs. Manning (3 Green, 233), the validity of these warrants of attorney was upheld, referring to a statute authorizing any person to confess a judgment, by himself or his attorney. In a later decision, Hamilton vs. Schoenberger (47 Ilowa, 385), it was expressly held that such a provision, in a note could not be enforced in the courts of that State, and was not authorized or contemplated by its laws. And in Tolman vs. Jansen (106 Iowa, 455), it was held that such a provision, being void, would not

affect the negotiability of a note, even though its effect would be to make uncertain the time of payment. "The reasoning in First National Bank vs. White, supra, is persuasive. The court there held that these warrants of attorney are void as against the public policy of the state on the ground, first, that their effect is to enlarge the field for fraud; second, that under such an instrument the promissor bargains away his right to his day in court; third, that the effect of the instrument is to strike down the right to appeal accorded by statute, and, fourth, that there was no provision for the public recording of such an instrument if regarded as a security for a debt. "It seems to me that on the precise grounds stated in the White case, these warrants of attorney should be held void as against public policy in this jurisdiction. If given effect, they bargain away the jurisdiction of the courts to try and determine the liability of the maker of the note on its merits. To uphold them would be to facilitate the operations of usurers, the collection of gambling debts, and would make difficult, if not impossible under our procedure, the setting aside of judgments entered in virtue thereof where the execution of the instrument was obtained by fraud, duress, or where there had been an entire failure of consideration. I can think of no advantage which would result to the commercial world from upholding these warrants of attorney which would outweigh the foregoing considerations." Attorney e. Arthur Perkins, of Perkins and Kincaid, states: "Leaving aside entirely the legal considerations involved, I feel that there is only one answer to your inquiry, and that is, that the best interests of the

commercial life of the Philippines require the nonrecognition of such a form of judgment note. Feeling that you would want to know the reasons which impell me to adopt such a conclusion, I will say briefly that if the Supreme Court should, by a decision, recognize such a judgment note and thereby place the stamp of approval upon transactions of such a nature, the entire business population of the Philippine Islands would be justified in their future transactions with debtors in requiring, in all instances, the execution of notes of a similar tenor, with the consequence that the debtor would thereby be deprived, to all intents and purposes, upon ignorant debtors. It will prove a serious drawback to the campaign being now waged against usury. "There is the further fear that the banks and money lenders having accounts now outstanding will immediately require every debtor to execute that form of note and to refuse further extensions of credit unless sit is done, which the debtor under the stress of circumstances will be compelled to accept, amounting in effect to duress. "The recognition of such a form of obligation would be so revolutionary in character as to bring about a complete reorganization of commercial customs and practices with reference to short-term obligations. "Having in mind that the Philippine National Bank is practically the only institution which can assist the farmers and agriculturists, the practice of requiring a judgment note would place the latter wholly at the mercy of the bank, and this is stated without any reflection on the bank, but merely to point out one of the consequent evils which will necessarily follow if the practice should receive the high judicial sanction which a judgment of the Supreme Court would necessarily give to it.

"Another feature which occurs to me is that where any new enterprise is being launched, it is universally the custom for such company to arrange with some banking institution for credit facilities, over and above the capital with which it brings business. Should it become the custom here to require the execution of so-called judgment notes, organizers of corporations, partnerships and the like, who have in mind to secure additional working capital or credit facilities from banks, will be very reluctant to put their funds into any enterprises which could be destroyed without warning by the creditor exercising the rights which that form of transaction would give him. This is would act therefore as a deterrent to new enterprises and the development of industry through individual initiative and with private funds. "Let us take a very simple illustration of his. Suppose that you and I should form a partnership, with a capital of P50,000 to buy hemp and , in connection with our business, we went to some banking institution for the purpose of securing credit facilities, as is customary, in the conduct of our business. Let us then suppose that the bank, taking into consideration the capital which we ourselves had furnished and our standing in the community, was willing to allow us a credit in the further sum of P50,000 upon our signing a so-called judgment note. Would not you and I consider a long time before we would so far obligate ourselves as to place it in the power of the bank to send their attorney over to court, upon the least provocation or at the first unfavorable rumor, and to confess judgment in our names, which would permit the sheriff to close us out without even an opportunity to be heard? "The sum and substance of the whole proposition is that such a practice is contrary to good morals."

Attorney David C. Johnson, of Gibbs, McDonough and Johnson, states: "It seems that under the common law a confession of judgment was only allowable by the defendant himself, either before or after appearance and answer. The confession of judgment by warrant of attorney is a statutory development (15 R.C.L., 656, 657; 17 Am. and Eng. Encyc. of Law [2d ed.], 765; Pl. and Pr., 973975; Masson vs. Ward, 80 Vt., 290; 130 A. S. R., 987,988). "The procedure contemplated in the note quoted in your letter is contrary to that contemplated in our code of procedure, which gives to all defendants an opportunity at least to be heard. An action on the note in question could be so presented that the defendant would never be summoned or notified, since an appearance and confession of judgment might be filed simultaneously. We believe that this procedure should not be recognized in this jurisdiction by implication, but should have legislative sanction with the rights of the defendant amply safeguarded. We believe that section 5 of Act No. 2031 does not of itself sanction any of the acts mentioned in that section, but is only a statement regarding the negotiable character of the instrument. Subsection A of section 5 states that the authority to sell collateral security does not affect negotiability. As we understand the decision of the Supreme Court in the case of Mahoney vs. Tuason(39 Phil., 952), the creditor in this jurisdiction is not authorized by law to sell collateral security except in the manner provided in section 14 of Act No. 1508. This would seem to reinforce our opinion. "There are some favorable features of a judgment note or warrant for confession of judgment, but we believe that there are many objections which outweigh any of

the advantages. Forgery and usury are more prevalent in these Islands than in the United States. The sanctioning of this procedure would add an additional weapon to the money lender who desires to overreach his debtor. "We have delayed answering your letter in order that we might consult our Mr. Gibbs, who returned from Baguio yesterday. "The foregoing is the consensus of opinion of the member of this firm." Attorney Julian Wolfson states: "It is assumed that the only question propounded is : "'Admitting that there may be some doubt, as to a correct solution, which solution, the recognition of a confession of judgment, or a non-recognition of a confession of judgment, would be for the best interest of the commercial life of the Philippines? and that no opinion is required upon the incidental questions previously asked, as same have already been determined by an examination of such authorities as: 23 Cyc., pp. 699, 701-2-3-5-6-7, 723-5; 6 C. J., pp. 645-6 (Notes 35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J., p. 418 (Note 37); and such leading textbooks as 'Brannan's Negotiable Instruments Law' and 'Selover on Negotiable Instruments.' "Everyone is entitled to 'his day in court.' This right may be waved after an opportunity has been given to exercise the right, but must not and cannot be taken away before an opportunity has been given to exercise the right. "The ordinary ship's bill of lading and the ordinary fire and marine insurance policy are generally printed on forms prepared by the carrier and the insurer

respectively, and generally contain a clause making it a condition precedent to the institution of an action to first submit the matter to a board of arbitration. The Supreme Court has never recognized this clause. The reasons are stated in the opinions. Once submitted to arbitration, then another question is raised. "Special defenses to written instruments are common. Need we do more than cite the following cases: Maulini vs. Serrano (28 Phil., 640); Henry W. Peabody and Co. vs. Bromfield and Ross (38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 Phil., 970). "If the judgment note (this term is used throughout for brevity and as it is the recognized term) is to be recognized, what chance has defendant of defending as did the defendants in the above cited cases? Non! "Often a promissory note is a mere formality taken by a bank as evidence of indebtedness, while the real indebtedness may be for a superior or inferior amount incurred by way of overdraft, letters of credit outstanding, acceptances to mature, or a thousand other forms of banking credit. Such "judgment notes" are generally made payable on demand. In the case at bar, the note is made payable on demand. The real indebtedness may be partially paid, or the liquidation may be going along too slow to suit the bank and then use is made of the judgment note. The defendant might have perfect defense except for the judgment note. Would not article 1269 of the Civil Code here apply? "The 'judgment notes,' is not once in a thousand times signed at the time of receiving money from the bank. The indebtedness represented thereby is incurred in prior transactions, the obligation became past due and the bank, as a forcible measure, produces one of these 'judgment notes,' when the debtor is absolutely helpless,

and says 'Sign on the dotted line' and the debtor has no option, he signs. The minds of the parties never met. The debtor owes the money, knows that the bank must have evidence of the indebtedness to pass the auditors and the debtor further realizes he must accept that bank's dictation, because if he declines, he is liable to immediate ruin, or if not that, he will never get further accommodation from the bank. He does not realize, even if he knows, what is meant by a 'judgment note.' Again, would not article 1269 of the Civil Code here apply? "Just a few months ago there was a suit instituted by a local bank for a large sum of money, based on a written instrument which, on its face, seemed absolute. Special defenses were pleaded, setting up that the instrument did not express the real understanding of the parties and the real understanding was set up. The special defenses were fully proved and the lower court dismissed the bank's suit. The bank did not even attempt to appeal to the Supreme Court (See Cause No. 18239 of the Docket of the Court of First Instance of Manila). Suppose the instrument sued on had contained a clause of confession of judgment, what chance would defendant have had to prove his defense? None! "Let us go a step further and see where this leads us. A is a dealer in hardware and sells B a bill of goods. A prints a form, which he has B to sign, in which B acknowledges receipt of the goods and in consideration thereof premises to pay A and "a confession of judgment" clause is inserted. The goods turn out entirely different from those ordered and invoiced. B refuses to pay. A sues on his "judgment note." What change has B? None! "Very often a promissory note is only one of a series of documents given as security for the debt. What about

considering the other documents which bear on the transaction? "A bank may have made certain advances and may have undertaken to make more, but fails to do so, to the damage and prejudice of debtor. Let us assume that the bank agreed to advance several hundred thousand pesos in installments of P60,000 each, and had advanced only the first installments, taking a "judgment note" for said first installment, and had failed to advance further, to the damage of the debtor. What would become of section 97 of the Code of Civil Procedure? How would debtor be able to exercise his right of counterclaim? Was it ever contemplated at the time of signing the judgment note that the debtor would not only waive defense, but absolutely shut himself out of court, as he would, according to section 97 above cited, on his counterclaim? Yet again, would not article 1269 of the Civil Code here apply? "We dare not attempt to elaborate on what would happen in the provinces of the Philippines should a "judgment note" be held valid. "What about the Usury Law? How could a defense be offered there? The usurious rate might not appear on the face of the "judgment note," but it may be there all the same. "Examples could be multiplied until the very absurdity of the proposition would be clearly seen, even by a blind man. "Of what possible benefit would the recognition of a "judgment note" serve "the best interest of the commercial life of the Philippines? None! An honest creditor is willing to let his debtor have his day in court and is willing to prove to the court his case. It might

take slightly longer to go through with a trial, but that cannot be considered a set-back. But, on the other hand, a dishonest creditor would take unfair advantage of a "judgment note" and would use it to the utmost to harass and take advantage of the poor and helpless debtor. The real consequences likely, in fact sure, to arise from such recognition are horrible beyond words to contemplate. "There can be but one answer to the proposition and that is: The non-recognition of a confession of judgment would be for the best interests of the commercial life of the Philippines." Attorney J. G. Lawrence, of Ross and Lawrence, states: "We are aware of no expression of our Legislature or courts which would indicate that confessions of judgment under powers given in a promissory note are contrary to public policy. This action was regularly brought in accordance with the provisions of the Code of Civil Procedure and the defendant served with process. The answer, confessing judgment, was filed in strict accordance with the powers contained in the note a power coupled with an interest which defendant would be estopped of denying. We think that no express legal sanction is necessary to legalize such a proceeding. "On the question of what ought to be the public policy of the Philippines, we hold quite a different opinion. While the use of judgment notes might in some cases expedite the collection of just debts, we believe that under conditions as exist here, their use should be discouraged. The lend themselves easily to fraud in the hands of friends of a dishonest debtor, and to extortion in the hands of usurers who are already too well equipped with the pacto de retro.

"While we believe that the position of the bank is sound legally, we should be very glad to be proven mistaken." Attorney Francis B. Mahoney, of the Philippine Trust Company, states: "I have not gone into the law and cases, except to take a glance at the subject of judgments in Volume 15 of Ruling Case Law. However, the reasons indicated on page 651 thereof are significant. "Unquestionably, if our Legislature provided in unmistakable terms for confession of judgment as herein indicated, the validity and constitutionality of the enactment might be questioned as failing to provide those constitutional safeguards of taking a man's property only after a day in court and after the due process of law. "This conclusion is stronger a fortiori where the enacting provision if such section 5 of Act. No. 2031 may be called is of a lefthanded nature, apparently relating only to negotiability incidentally thus answering here your first inquiry. Whatever legal principles there might be in favor of recognizing a confession of judgment for example, the matter of expediency stronger and more vital principles oppose such recognition. "By refusing to recognize confession of judgment under existing statutes or under general legal principles, at the worst phase from the point of view of the plaintiff bank, there would result only possible delay, costs and attorney's fees, which, after all, are only passed on to the clients of the bank in the shape of interests, charges. etc. If the bank has a meritorious case, the judgment is ultimately certain as courts.

"If the defendant debtor has any defense of merit, he is given an opportunity to present it, as, for example, in the matter of usury so common, so difficult to uncover an such an unscrupulous rival of legitimate banking, the courts may keep their doors open to the equities of each individual case. Whereas, if defendant, who theoretically may allege fraud an who practically has great difficulty in proving it, must rely upon a defense of fraud, he has little chance and the doors of the court are closed to any other defense. "In the final analysis, the matter simmers down to: 1. Possible delay in judgment with costs, etc. 2. Certain justice in the end. 3. The eyes and doors of courts open to the equities of each individual case. 4. Equality before the law, or (a) Expediting judgment. (b) Defendant debtor practically kept out of court by additional expense and difficulty in securing a hearing. (c) Putting a strong weapon in the hands of unscrupulous persons and taking the strength necessary to wield this weapon from the courts. "At first glance, if a debtor signs a document throwing away his right to be heard, the average man has a feeling such debtor deserves to suffer the consequences. If that were the entire story, probably he should. But what man, needing money badly enough facing strenuous necessity will not in the circumstances be inclined to look on the cheerful side-to sign and get the money, letting the future take care of itself? Such is the frailty of human nature. Then, as the usual thing, the rich and powerful can take care of themselves, and it is usually others who have need of courts, just laws and liberal interpretation of them.

"No doubt, banks would favor expediting judgments against their debtors, other things being equal. And no doubt, additional delay in courts and the incidental costs thereof will be borne by the clients of the bank. But sound banking is not established and enhanced by harsh law which put strong weapons in powerful hands. Contented peoples, safe laws and sound banking usually go hand in hand." Professor Jose A. Espiritu, of the University of the Philippines, states: "Permit me to cite first of all the authorities that I have gathered concerning the principal question at issue in the case mentioned in your letter, namely, 'The Effect and Validity of Confession of Judgement in the Philippines.' "1. Confession of judgment has been defined as "a voluntary submission to the jurisdiction of the court, giving by consent and without the service of process, what could otherwise be obtained by summons and complaint, and other formal proceedings, an acknowledgment of indebtedness, upon which it is contemplated that a judgment may and will be rendered." (8 Cyc., pp. 563, 564.) "2. As to the general effects of confession of judgment, the following statements may be mentioned: 'A warrant to confess judgment does not destroy the negotiability of the note. Such a note is commonly called a "judgement note." Decisions to the contrary in the States where the Negotiable Instruments Law is now in force are abrogated thereby, since it expressly provides that the negotiable character of an instrument otherwise negotiable is not affected by a

provision which authorizes a confession of judgment, if the instrument is not paid at maturity. However, this statutory provision does not apply to stipulations for the confession of judgment "prior" to maturity.' (8 C.J., p. 128, sec. 222.) "3. Nature of Requisites. "A judgment may be rendered upon the confession of defendant, either in an action regularly commenced against him by the issuance and service of process, in which case the confession may be made by his attorney of record, or, without the institution of a suit, upon a confession by defendant in person or by his attorney in fact. It implies something more than a mere admission of a debt to plaintiff; in addition, it is defendant's consent that a judgment shall be entered against him. . . . ." (23 cyc., 699.) "4. Statutory Provisions, "Statutes regulating the confession of judgments without action, or otherwise than according to the course of the common law, are strictly construed, and a strict compliance with their provisions must be shown in order to sustain the validity of the judgment." (Chapin vs. Tompson, 20 Cla., 681.) "And this applies also to statutory restriction upon the right to confess judgment, as that authority to confess judgment shall not be given in the same instrument which contains the promise or obligation to pay the debt, or that such confession shall not be authorized by any instrument executed prior to suit brought." (23 Cyc., 699, 700.) "5. Warrant or Power of Attorney Validity and Necessity. 'A judgment by confession may

be entered upon a written authority, called a warrant or letter of attorney, by which the debtor empowers an attorney to enter an appearance for him, waive process, and confess judgment against him for a designated sum, except where this method of proceeding is prohibited by statute. The warrant as the basis of judgment is generally required to be placed on file in the clerk's office, and no judgment can be so entered until it is so filed.' (23 Cyc., 703.) "6. Requisites and Sufficiency. 'A warrant or power of attorney to confess judgement should be in writing and should conform to the requirements of the statute in force at the time of its execution, although in the absence of specific statutory directions it is sufficient, without much regard to its form, if it contains the essential of a good power and clearly states its purpose. It must be signed by the person against whom the judgment is to be entered . . . .' (23 Cyc., 704.) "The above quoted authorities are among the various authorities I found bearing on the question at issue. As it can be readily seen none of them decides squarely and definitely the questions propounded in your letter. One thing, however, seems to be clear, from the very provision of section 5 (b) of the Negotiable Instruments Law and from the quotation No. 2 of this letter, that a provision in a note or bill of exchange authorizing a confession of judgment in default of payment at its maturity has particular reference, in so far as Act No. 2031 is concerned, only to the negotiable character of an instrument. I do not believe that the Legislature had the intention in passing the said Act No. 2031 to introduce in the Philippines a new practice in our

Remedial Law, namely, that of confession of judgment, which is purely procedural in nature. "Now as to the second question, to wit: 'Does the silence of the Code of Civil Procedure on the subject mean that a confession of judgement cannot be recognized in this jurisdiction, or can a judgment by confession be imported into the Philippines under general legal principles?' Before answering this question attention is respectfully called to the quotation No. 4 of this letter, which expressly provides that statutes regulating confession of judgments must be strictly construed and their provisions strictly complied with to sustain the validity of judgments rendered under such statutes. Now it being admitted that there is no express provision in our Code of Civil Procedure authorizing or sanctioning this mode of practice in this jurisdiction, and consequently there are no regulations provided to be followed in this particular remedy, I am therefore of the opinion that confession of judgment should not be deemed as imported in the Philippines under the general legal principles. The remedy itself is a most summary one, and when the defendant-debtor, instead of admitting or allowing a judgment be taken against him, presents his appearance and answers the complaint filed against him, it seems that the trial court should not render a judgement without first hearing the evidence that the parties may wish to submit before him, for it may happen that the defendant-debtor may have some valid or good defenses against the plaintiffcreditor. This is especially true in the case of a counterclaim that the defendant may have against the plaintiff as provided in sections 95 and 96 of the Code of Civil Procedure. The same Code provides that in case of an omission to set up his counterclaim, the defendant or his assignee loses all his right to bring further suit on such claim. (Sec. 97, Act No. 190.)

"In answer to the last question, namely: "Admitting that there may be some doubt, as to the correct solution, which solution, the recognition of a confession of judgement, or the non-recognition of a confession of judgment, would be for the best interests of the commercial life of the Philippines?" I wish first of all to state that a confession of judgment is a quick remedy. It saves time and money as far as the parties to the suit are concerned if the same is properly and legally brought. It saves the court's time and the government the expense that a long litigation entails. As to its disadvantages we may say among other things the following: 1. It may be abused in the same way as the usurious rates of interest on loans are now in the Philippines, because a borrower who is in great need of money might be induced, if not actually compelled, to sign such a burdensome obligation; 2. It deprives the defendant of his day in court, and as a consequence it will prevent him to set up and prove before the court his just claims and other lawful defenses against the plaintiff; 3. It will create multiplicity of actions in this jurisdiction, for if the confession of judgment has been wrongfully or unjustly entered, the judgment debtor may start another litigation on the same subject-matter that might have been brought before the court in case a proper trial was formally held before the rendition of such a judgment; and 4. It does not really hold the plaintiff who has a good cause of action against the defendant as his proofs will surely establish his claims and consequently a judgment must necessarily be rendered in his favor. "From the above statements, I am of the opinion that unless proper regulations are first duly introduced and incorporated in our remedial law, confession of judgments, instead of resulting advantageous to our commercial life in the Philippines, might be the sources of abuse and oppression. The very fact that confession of judgement is almost summary and in fact a violent

remedy, it should first of all be properly regulated by statute, and those regulations must be strictly complied with, before the court should concede to such a remedy."

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