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VELASCO, JR., J.

Violago v. BA Finance

This is a Petition for Review on Certiorari of the August 20, 2002


Decision[1] and May 15, 2003 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV
No. 48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia
Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third Party
Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for the
reversal of the appellate courts ruling which held them liable to respondent BA Finance
Corporation (BA Finance) under a promissory note and a chattel mortgage. Petitioners
likewise pray that respondent Avelino Violago be adjudged directly liable to BA
Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales
Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the
latters wife, Florencia. Avelino explained that he needed to sell a vehicle to increase the
sales quota of VMSC, and that the spouses would just have to pay a down payment of
PhP 60,500 while the balance would be financed by respondent BA Finance. The
spouses would pay the monthly installments to BA Finance while Avelino would take
care of the documentation and approval of financing of the car. Under these terms, the
spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.[3]
On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of VMSC the
amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the first
installment to be due and payable onSeptember 16, 1983. Avelino prepared a Disclosure
Statement of Loan/Credit Transportation which showed the net purchase price of the
vehicle, down payment, balance, and finance charges. VMSC then issued a sales invoice
in favor of the spouses with a detailed description of the Toyota Cressida car. In turn,
the spouses executed a chattel mortgage over the car in favor of VMSC as security for
the amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to
BA Finance without recourse. After receiving the amount of PhP 209,601, VMSC
executed a Deed of Assignment of its rights and interests under the promissory note
and chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the
amount of PhP 60,500 to VMSC through Avelino.[4]
The sales invoice was filed with the Land Transportation Office (LTO)Baliwag Branch, which issued Certificate of Registration No. 0137032 in the name of

Pedro on August 8, 1983. The spouses were unaware that the same car had already
been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in
Esmeraldos name by the LTO-San Rafael Branch. Despite the spouses demand for
the car and Avelinos repeated assurances, there was no delivery of the vehicle. Since
VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA
Finance. [5]
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC),
Branch 116 in Pasay City a complaint for Replevin with Damages against the
spouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of
the vehicle in favor of BA Finance or, if delivery cannot be effected, for the payment of
PhP 199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 until
fully paid. BA Finance also asked for the payment of attorneys fees, liquidated
damages, replevin bond premium, expenses in the seizure of the vehicle, and costs of
suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses,
as defendants a quo, were declared in default for failing to file an answer. Eventually, the
RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ of
execution was thereafter issued on January 11, 1985, followed by an alias writ of
execution.[6]
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was
then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch
on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle
in favor of Generoso Lopez as security for a loan covered by a promissory note in the
amount of PhP 260,664. This promissory note was later endorsed to BA
Finance, CebuCity branch.[7]
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration
and Motion to Quash Writ of Execution on the basis of lack of a valid service of
summons on them, among other reasons. The RTC denied the motions; hence, the
spouses filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R.
No. 2002-SP. On May 31, 1991, the CA nullified the RTCs order. This CA decision
became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging
the following: they never received the vehicle from VMSC; the vehicle was previously
sold to Esmeraldo; BA Finance was not a holder in due course under Section 59 of
the Negotiable Instruments Law(NIL); and the recourse of BA Finance should be against
VMSC. On February 25, 1995, the Violago spouses, with prior leave of court, filed a
Third Party Complaint against Avelino praying that he be held liable to them in the
event that they be held liable to BA Finance, as well as for damages. VMSC was not

impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino
contended that he was not a party to the transaction personally, but VMSC. Avelinos
motion was denied and the third party complaint against him was entertained by the trial
court. Subsequently, the spouses belabored to prove that they affixed their signatures on
the promissory note and chattel mortgage in favor of VMSC in blank.[8]
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but
against the Violago spouses. The RTC, however, declared that they are entitled to be
indemnified by Avelino. The dispositive portion of the RTCs decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses
Pedro F. Violago and Florencia R. Violago are ordered to deliver to
plaintiff BA Finance Corporation, at its principal office the BAFC
Building, Gamboa St., Legaspi Village, Makati, Metro Manila the
Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117,
and with Serial No. RX60-804614, covered by the deed of chattel
mortgage dated August 4, 1983; or if such delivery cannot be made,
to pay, jointly and severally, to the plaintiff the sum of P198,003.06
together with the penalty [thereon] at three percent (3%) a month,
from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are
required to pay, jointly and severally, to the plaintiff a sum equivalent
to twenty-five percent (25%) of P198,003.06 as attorneys fees, and
another amount also equivalent to twenty five percent (25%) of the
said unpaid balance, as liquidated damages. The defendant-third
party-plaintiffs are also required to shoulder the litigation expenses
and costs.
As indemnification, third-party defendant Avelino Violago is
ordered to deliver to defendants-third-party plaintiffs spouses Pedro
F. Violago and Florencia R. Violago the aforedescribed motor
vehicle; or if such delivery is not possible, to pay to the said spouses
the sum of P198,003.06, together with the penalty thereon at three
(3%) a month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the
defendant-third-party plaintiffs spouses a sum equivalent to twentyfive percent (25%) of P198,003.06 as attorneys fees, and another
sum equivalent also to twenty-five percent (25%) of the said unpaid
balance, as liquidated damages.

Third-party defendant Avelino Violago is further ordered to


return to the third-party plaintiffs the sum of P60,500.00 they paid to
him as down payment for the car; and to pay them P15,000.00 as
moral damages; P10,000.00 as exemplary damages; and reimburse
them for all the expenses and costs of the suit.
The counterclaims of the defendants and third-party
defendant, for lack of merit, are dismissed.[9]
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that
the promissory note is a negotiable instrument; hence, the trial court should have
applied the NIL and not the Civil Code. The spouses also asserted that since VMSC
was not the owner of the vehicle at the time of sale, the sale was null and void for the
failure in the cause or consideration of the promissory note, which in this case was
the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not a
holder in due course of the note since it knew, through its Cebu City branch, that the
car was never delivered to the spouses.[10] On the other hand, Avelino prayed for the
dismissal of the complaint against him because he was not a party to the transaction,
and for an order to the spouses to pay him moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument
and that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the
NIL. The CA faulted petitioners for failing to implead VMSC, the seller of the vehicle
and creditor in the promissory note, as a party in their Third Party
Complaint. Citing Salas v. Court of Appeals,[11] the appellate court reasoned that since
VMSC is an indispensable party, any judgment will not bind it or be enforced against
it. The absence of VMSC rendered the proceedings in the RTC and the judgment in the
Third Party Complaint null and void, not only as to the absent party but also to the
present parties, namely the Defendants-Appellants (petitioners herein) and the ThirdParty-Defendant-Appellant (Avelino Violago). The CA set aside the trial courts order
holding Avelino liable for damages to the spouses without prejudice to the action of the
spouses against VMSC and Avelino in a separate action.[12]
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the
appeal of the Plaintiffs-Appellants is DISMISSED. The appeal of
the Third-Party-Defendant-Appellant is GRANTED. The Decision

of the Court a quo is AFFIRMED, with the modification that the


Third-Party Complaint against the Third-Party-Defendant-appellant
is DISMISSED, without prejudice. The counterclaims of the ThirdParty Defendant Appellant against the Defendants-Appellants
are DISMISSED, also without prejudice.[13]

consent was vitiated by fraud, and, thus, the promissory note does not carry any legal
effect despite its negotiation. Either way, the petitioners arguments deserve no merit.

The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.

Section 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.

The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID
NEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED
A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE
CONSIDERED VALID DESPITE VITIATION OF CONSENT
OF, AND THE FRAUD COMMITTED ON, THE
MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE
OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY
MAY BE INVOKED AND SUSTAINED DESPITE THE
FRAUD AND DECEPTION OF AVELINO
The Courts Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby effectively
absolving Avelino from any liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due
course of the promissory note, we must determine whether the note is a negotiable
instrument and, hence, covered by the NIL. In their appeal to the CA, petitioners
argued that the promissory note is a negotiable instrument and that the provisions of
the NIL, not the Civil Code, should be applied. In the present petition, however,
petitioners claim that Article 1318 of the Civil Code [14] should be applied since their

The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL provides:

The promissory note signed by petitioners reads:


209,601.00
1983

Makati, Metro Manila, Philippines, August 4,

For value received, I/we, jointly and severally, promise to pay to


the order of VIOLAGO MOTOR SALES CORPORATION, its
office, the principal sum of TWO HUNDRED NINE THOUSAND
SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines
Currency, with interest at the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the
first installment to be paid on 9-16-83, and the succeeding monthly
installments on the 16th day of each and every succeeding month
thereafter until the account is fully paid, provided that the penalty
charge of three (3%) per cent per month or a fraction thereof shall be
added on each unpaid installment from maturity thereof until fully
paid.
xxxx

Notice of demand, presentment, dishonor and protest are hereby


waived.
(Sgd.)
PEDRO F. VIOLAGO
VIOLAGO

(Sgd.)
FLORENCIA R.

763 Constancia St., Sampaloc, Manila


(Address)
(Sgd.)
Marivic Avaria
(WITNESS)

same
(Address)
(Sgd.)
Jesus Tuazon
(WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION


WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By:
(Sgd.)
AVELINO A. VIOLAGO, Pres. [15]
The promissory note clearly satisfies the requirements of a negotiable
instrument under the NIL. It is in writing; signed by the Violago spouses; has an
unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates in
the future which could be determined from the terms of the note; made payable to the
order of VMSC; and names the drawees with certainty. The indorsement by VMSC to
BA Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due
course. The resolution of this issue will determine whether petitioners defense of fraud
and nullity of the sale could validly be raised against respondent corporation. Sec. 52 of
the NIL provides:
Section 52. What constitutes a holder in due course.A holder in
due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and


without notice that it had been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the person
negotiating it.
The law presumes that a holder of a negotiable instrument is a holder
thereof in due course. [16] In this case, the CA is correct in finding that BA Finance
meets all the foregoing requisites:
In the present recourse, on its face, (a) the Promissory
Note, Exhibit A, is complete and regular; (b) the Promissory
Note was endorsed by the VMSC in favor of the Appellee; (c) the
Appellee, when it accepted the Note, acted in good faith and for
value; (d) the Appellee was never informed, before and at the time
the Promissory Note was endorsed to the Appellee, that the
vehicle sold to the Defendants-Appellants was not delivered to the
latter and that VMSC had already previously sold the vehicle to
Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to
Generoso Lopez, who assigned his rights to the BA Finance
Corporation (Cebu Branch), the same occurred only on May 8, 1987,
much later than August 4, 1983, when VMSC assigned its rights over
the Chattel Mortgage by the Defendants-Appellants to the
Appellee. Hence, Appellee was a holder in due course.[17]
In the hands of one other than a holder in due course, a negotiable instrument
is subject to the same defenses as if it were non-negotiable.[18] A holder in due course,
however, holds the instrument free from any defect of title of prior parties and from
defenses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof.[19] Since BA Finance is a holder in due course,
petitioners cannot raise the defense of non-delivery of the object and nullity of the sale
against the corporation. The NIL considers every negotiable instrument prima facie to
have been issued for a valuable consideration.[20] In Salas, we held that a party holding
an instrument may enforce payment of the instrument for the full amount thereof. As
such, the maker cannot set up the defense of nullity of the contract of sale.[21] Thus,
petitioners are liable to respondent corporation for the payment of the amount stated in
the instrument.
From the third party complaint to the present petition, however, petitioners
pray that the veil of corporate fiction be set aside and Avelino be adjudged directly liable

to BA Finance. Petitioners likewise pray for damages for the fraud committed upon
them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders
and from other corporations to which it may be connected. But, this
separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote justice. So, when the
notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used
as a device to defeat the labor laws, this separate personality of the
corporation may be disregarded or the veil of corporate fiction
pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
1.

2.

3.

Control, not mere majority or complete stock control, but


complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust acts in
contravention of plaintiffs legal rights; and
The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.[22]

This case meets the foregoing test. VMSC is a family-owned corporation of


which Avelino was president. Avelino committed fraud in selling the vehicle to
petitioners, a vehicle that was previously sold to Avelinos other cousin,
Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle in this
case was already previously sold to Esmeraldo; he merely insisted that he cannot be held
liable because he was not a party to the transaction. The fact that Avelino and Pedro
are cousins, and that Avelino claimed to have a need to increase the sales quota, was
likely among the factors which motivated the spouses to buy the car. Avelino, knowing
fully well that the vehicle was already sold, and with abuse of his relationship with the

spouses, still proceeded with the sale and collected the down payment from
petitioners. The trial court found that the vehicle was not delivered to the spouses.
Avelino clearly defrauded petitioners. His actions were the proximate cause of
petitioners loss. He cannot now hide behind the separate corporate personality of
VMSC to escape from liability for the amount adjudged by the trial court in favor of
petitioners.
The fact that VMSC was not included as defendant in petitioners third party
complaint does not preclude recovery by petitioners from Avelino; neither would such
non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil
doctrine. We suggested as much in Arcilla v. Court of Appeals, an appellate proceeding
involving petitioner Arcillas bid to avoid the adverse CA decision on the argument that
he is not personally liable for the amount adjudged since the same constitutes a
corporate liability which nevertheless cannot even be enforced against the corporation
which has not been impleaded as a party below. In that case, the Court found as welltaken the CAs act of disregarding the separate juridical personality of the corporation
and holding its president, Arcilla, liable for the obligations incurred in the name of the
corporation although it was not a party to the collection suit before the trial court. An
excerpt from Arcilla:
x x x In short, even if We are to assume arguendo that the
obligation was incurred in the name of the corporation, the petitioner
[Arcilla] would still be personally liable therefor because for all legal
intents and purposes, he and the corporation are one and the same.
Csar Marine Resources, Inc. is nothing more than his business
conduit and alter ego. The fiction of separate juridical personality
conferred upon such corporation by law should be disregarded.
Significantly, petitioner does not seriously challenge the [CAs]
application of the doctrine which permits the piercing of the
corporate veil and the disregarding of the fiction of a separate
juridical personality; this is because he knows only too well that from
the beginning, he merely used the corporation for his personal
purposes.[23]
WHEREFORE, the CAs August 20, 2002 Decision and May 15,
2003 Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed
without prejudice the third party complaint of petitioners-spouses Pedro and Florencia
Violago against respondent Avelino Violago. The March 5, 1994 Decision of the RTC
is REINSTATED and AFFIRMED. Costs against Avelino Violago.
SO ORDERED.

G.R. No. 74886 December 8, 1992


PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS,
INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:


Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733
which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then
Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312.
The latter involved an action instituted by the petitioner for the recovery of a sum of
money representing the amount paid by it to the Nissho Company Ltd. of Japan for
textile machinery imported by the defendant, now private respondent, Philippine Rayon
Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc.
entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-year deferred payment
plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect
payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said application, the
Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp.
65, 66 to 76), which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on
their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66)
were accepted by the defendant-appellant through its president,

Anacleto R. Chi, while the others were not (Exhibits X-2 to X11,Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the
shipping documents to the defendant-appellant which accepted
delivery of the same. To enable the defendant-appellant to take
delivery of the machineries, it executed, by prior arrangement with
the Prudential Bank, a trust receipt which was signed by Anacleto R.
Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished
by two sureties who, by the very terms and conditions thereof, were
to be jointly and severally liable to the Prudential Bank should the
defendant-appellant fail to pay the total amount or any portion of the
drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69 Obudan
Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation
(sic). On December 29, 1969, defendant-appellant's factory was leased
by Yupangco Cotton Mills for an annual rental of P200,000.00
(Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973
(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries
in the defendant-appellant's factory were sold to AIC Development
Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of
credit and the trust receipt remained unpaid and unliquidated.
Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63,
64) for the payment of the said trust receipt yielded no result Hence,
the present action for the collection of the principal amount of
P956,384.95 was filed on October 3, 1974 against the defendantappellant and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the complaint
states no cause of action; if there is, the same has prescribed; and the
plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits "X" & "X-1", with
interest at 6% per annum beginning September 15, 1974 until fully
paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",
inclusive, the same not having been accepted by defendant Philippine
Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued,
hence, the instant case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the
sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the
said court to reverse or modify the decision, petitioner alleged in its Brief that the trial
court erred in (a) disregarding its right to reimbursement from the private respondents
for the entire unpaid balance of the imported machines, the total amount of which was
paid to the Nissho Company Ltd., thereby violating the principle of the third party
payor's right to reimbursement provided for in the second paragraph of Article 1236 of
the Civil Code and under the rule against unjust enrichment; (b) refusing to hold
Anacleto R. Chi, as the responsible officer of defendant corporation, liable under
Section 13 of P.D No 115 for the entire unpaid balance of the imported machines
covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty
clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial
admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust
receipt obligation; (e) contravening, based on the assumption that Chi is a simple
guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and
jurisprudence which provide that such liability had already attached; (f) contravening the
judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner
the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting

"sight" drafts as requiring acceptance by Philippine Rayon before the latter could be
held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first
and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of
the Civil Code, applies only if there is no express contract between the parties and there
is a clear showing that the payment is justified. In the instant case, the relationship
existing between the petitioner and Philippine Rayon is governed by specific contracts,
namely the application for letters of credit, the promissory note, the drafts and the trust
receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had
not been presented to and were not accepted by Philippine Rayon, petitioner was not
justified in unilaterally paying the amounts stated therein. The public respondent did not
agree with the petitioner's claim that the drafts were sight drafts which did not require
presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented
and accepted, no valid demand for payment can be made.
Public respondent also disagreed with the petitioner's contention that private
respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D.
No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of
the trust receipt. As to the first contention, the public respondent ruled that the civil
liability provided for in said Section 13 attaches only after conviction. As to the second,
it expressed misgivings as to whether Chi's signature on the trust receipt made the latter
automatically liable thereon because the so-called solidary guaranty clause at the dorsal
portion of the trust receipt is to be signed not by one (1) person alone, but by two (2)
persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is
not acknowledged before a notary public. Besides, even granting that it was executed
and acknowledged before a notary public, Chi cannot be held liable therefor because the
records fail to show that petitioner had either exhausted the properties of Philippine
Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code.
As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a
guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore
arise only when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986, 6petitioner filed the instant petition on 31 July 1986
submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE
COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S

CLAIM FOR FULL REIMBURSEMENT AGAINST THE


PRIVATE RESPONDENTS FOR THE PAYMENT
PETITIONER MADE TO NISSHO CO. LTD. FOR THE
BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283
OF THE NEW CIVIL CODE OF THE PHILIPPINES AND
UNDER THE GENERAL PRINCIPLE AGAINST UNJUST
ENRICHMENT;

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after
the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply
to the latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY


LIABLE UNDER THE TRUST RECEIPT (EXH. C);

1. Whether presentment for acceptance of the


drafts was indispensable to make Philippine Rayon
liable thereon;

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL


ADMISSIONS OF RESPONDENT CHI HE IS LIABLE
THEREON AND TO WHAT EXTENT;

2. Whether Philippine Rayon is liable on the basis


of the trust receipt;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A


SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS
SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND
RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON
RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT
TO THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS
LIABLE TO THE PETITIONER UNDER THE TRUST
RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO
THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO
X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON
BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER. 7

3. Whether private respondent Chi is jointly and


severally liable with Philippine Rayon for the
obligation sought to be enforced and if not,
whether he may be considered a guarantor; in the
latter situation, whether the case should have been
dismissed on the ground of lack of cause of action
as there was no prior exhaustion of Philippine
Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held
liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have
been accepted by the latter after due presentment. The liability for the remaining ten
(10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not
presented for acceptance. In short, both courts concluded that acceptance of the drafts
by Philippine Rayon was indispensable to make the latter liable thereon. We are unable
to agree with this proposition. The transaction in the case at bar stemmed from
Philippine Rayon's application for a commercial letter of credit with the petitioner in the
amount of $128,548.78 to cover the former's contract to purchase and import loom and
textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred
payment plan. Petitioner approved the application. As correctly ruled by the trial court
in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial
Letter of Credit, plaintiff bank 10 was under obligation to pay through
its correspondent bank in Japan the drafts that Nisso (sic) Company,
Ltd., periodically drew against said letter of credit from 1963 to 1968,

pursuant to plaintiff's contract with the defendant Philippine Rayon


Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was
obligated to pay plaintiff bank the amounts of the drafts drawn by
Nisso (sic) Company, Ltd. against said plaintiff bank together with any
accruing commercial charges, interest, etc. pursuant to the terms and
conditions stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the credit. 11 Through a letter of
credit, the bank merely substitutes its own promise to pay for one of its customers who
in return promises to pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the
drawee was necessarily the herein petitioner. It was to the latter that the drafts were
presented for payment. In fact, there was no need for acceptance as the issued drafts are
sight drafts. Presentment for acceptance is necessary only in the cases expressly
provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said
section reads:
Sec. 143. When presentment for acceptance must be made. Presentment
for acceptance must be made:
(a) Where the bill is payable
after sight, or in any other case,
where presentment for
acceptance is necessary in order
to fix the maturity of the
instrument; or
(b) Where the bill expressly
stipulates that it shall be
presented for acceptance; or
(c) Where the bill is drawn
payable elsewhere than at the
residence or place of business of
the drawee.

In no other case is presentment for acceptance necessary in order to


render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate
instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are
sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to
be payable upon acceptance unless plaintiff bank has given the
Philippine Rayon Mills Inc. time within which to pay the same. The
first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted
as indicated on their face (sic), and upon such acceptance should have
been paid forthwith. These two drafts were not paid and although
Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are
still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
Sec. 7. When payable on demand. An instrument is payable on
demand
(a) When so it is expressed to be
payable on demand, or at sight,
or on presentation; or
(b) In which no time for
payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue,
it is, as regards the person so issuing, accepting, or indorsing it,
payable on demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at
maturity of any accepted draft, bill of exchange or indebtedness shall not be
extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in the first place
because the drafts which were eventually issued were sight drafts And even if
these were not sight drafts, thereby necessitating acceptance, it would be the
petitioner and not Philippine Rayon which had to accept the same for
the latter was not the drawee. Presentment for acceptance is defined an the
production of a bill of exchange to a drawee for acceptance. 18 The trial court
and the public respondent, therefore, erred in ruling that presentment for
acceptance was an indispensable requisite for Philippine Rayon's liability on
the drafts to attach. Contrary to both courts' pronouncements, Philippine
Rayon immediately became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the petitioner. A different
conclusion would violate the principle upon which commercial letters of credit
are founded because in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be placed at the mercy of
Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank and Trust
Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time necessarily elapses
between the sale and the receipt by a purchaser of the merchandise,
during which interval great price changes may occur. Buyers and
sellers struggle for the advantage of position. The seller is desirous of
being paid as surely and as soon as possible, realizing that the vendee
at a distant point has it in his power to reject on trivial grounds
merchandise on arrival, and cause considerable hardship to the
shipper. Letters of credit meet this condition by affording celerity and
certainty of payment. Their purpose is to insure to a seller payment of
a definite amount upon presentation of documents. The bank deals
only with documents. It has nothing to do with the quality of the
merchandise. Disputes as to the merchandise shipped may arise and
be litigated later between vendor and vendee, but they may not
impede acceptance of drafts and payment by the issuing bank when
the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt
and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai
Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet
Co., 21 thus:
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of business
facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means,
and therefore it is of the first importance that the fundamental factor
in the transaction, the banker's advance of money and credit, should
receive the amplest protection. Accordingly, in order to secure that
the banker shall be repaid at the critical point that is, when the
imported goods finally reach the hands of the intended vendee the
banker takes the full title to the goods at the very beginning; he takes
it as soon as the goods are bought and settled for by his payments or
acceptances in the foreign country, and he continues to hold that title
as his indispensable security until the goods are sold in the United
States and the vendee is called upon to pay for them. This security is
not an ordinary pledge by the importer to the banker, for the
importer has never owned the goods, and moreover he is not able to
deliver the possession; but the security is the complete title vested
originally in the bankers, and this characteristic of the transaction has
again and again been recognized and protected by the courts. Of
course, the title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to reconvey; but
only after his advances have been fully repaid and after the importer
has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional
sale as provided by the Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported merchandise as soon an he
has paid its price. The ownership of the merchandise continues to be
vested in the owner thereof or in the person who has advanced
payment, until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale should be turned over to
him by the importer or by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on
29 January 1973, a trust receipt transaction is defined as "any transaction by and
between a person referred to in this Decree as the entruster, and another person
referred to in this Decree as the entrustee, whereby the entruster, who owns or holds
absolute title or security interests' over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trusts receipt,
or for other purposes substantially equivalent to any one of the following: . . ."

We also conclude, for the reason hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's signature in the dorsal portion of the
trust receipt did not bind him solidarily with Philippine Rayon. The statement at the
dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty
clause", reads:

It is alleged in the complaint that private respondents "not only have presumably put
said machinery to good use and have profited by its operation and/or disposition but
very recent information that (sic) reached plaintiff bank that defendants already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees
of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic)
capacity, defendants have willfully violated their duty to account for the whereabouts of
the machinery covered by the trust receipt or for the proceeds of any lease, sale or other
disposition of the same that they may have made, notwithstanding demands therefor;
defendants have fraudulently misapplied or converted to their own use any money
realized from the lease, sale, and other disposition of said machinery." 23 While there is
no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds
of the sale of the machinery covered by the trust receipt, such relief is covered by the
general prayer for "such further and other relief as may be just and equitable on the
premises." 24 And although it is true that the petitioner commenced a criminal action for
the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing
the civil liability arising out of the trust, receipt in a separate civil action. Under Section
13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of
the sale of goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appear in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa, punishable under
the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under
Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct
from the criminal action, may be brought by the injured party in cases of defamation,
fraud and physical injuries. Estafa falls under fraud.

PHILIPPINE RAYON MILLS, INC.

In consideration of the PRUDENTIAL BANK AND TRUST


COMPANY complying with the foregoing, we jointly and severally
agree and undertake to pay on demand to the PRUDENTIAL
BANK AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon
us to pay arising out of or pertaining to, and/or in any event
connected with the default of and/or non-fulfillment in any respect
of the undertaking of the aforesaid:

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
Petitioner insists that by virtue of the clear wording of the statement, specifically the
clause ". . . we jointly and severally agree and undertake . . .," and the concluding
sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to
whether the mere signature of defendant-appellee Chi of (sic) the
guaranty agreement, Exhibit "C-1", will make it an actionable
document. It should be noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows
that it was to be signed and executed by two persons. It was signed
only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by
two persons, but no one signed in that capacity. The last sentence of
the guaranty clause is incomplete. Furthermore, the plaintiff-appellant
also failed to have the purported guarantee clause acknowledged

before a notary public. All these show that the alleged guaranty
provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was
fully executed and acknowledged still defendant-appellee Chi cannot
be held liable thereunder because the records show that the plaintiffappellant had neither exhausted the property of the defendantappellant nor had it resorted to all legal remedies against the said
defendant-appellant as provided in Article 2058 of the Civil Code.
The obligation of a guarantor is merely accessory under Article 2052
of the Civil Code and subsidiary under Article 2054 of the Civil Code.
Therefore, the liability of the defendant-appellee arises only when the
principal debtor fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion
than that the obligation of Chi is only that of a guarantor. This is further bolstered by the
last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in
this case because the space therein for the party whose property may not be exhausted
was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may be held liable for the obligation.
Petitioner likewise admits that the questioned provision is asolidary guaranty clause, thereby
clearly distinguishing it from a contract of surety. It, however, described the guaranty as
solidary between the guarantors; this would have been correct if two (2) guarantors had
signed it. The clause "we jointly and severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either one or both of them on
the one hand and the petitioner on the other with respect to the liability described under
the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it
can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; 28 as such, it must be strictly construed against the party
responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary
guaranty clause was effectively disregarded simply because it was not signed and
witnessed by two (2) persons and acknowledged before a notary public. While indeed,

the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi
who signed the same did not make his act an idle ceremony or render the clause totally
meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses
and the acknowledgement before a notary public are not required by law to make a
party liable on the instrument. The rule is that contracts shall be obligatory in whatever
form they may have been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a
promise to answer for the debt or default of another, the law merely requires that it, or
some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary
public is required to make the same a public document, under Article 1358 of the Civil
Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary
liability of Chi, namely the criminal proceedings against the latter for the violation of
P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would
be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No.
115. Public respondent rejected this claim because such civil liability presupposes prior
conviction as can be gleaned from the phrase "without prejudice to the civil liability
arising from the criminal offense." Both are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster
or as appears in the trust receipt or to return said goods, documents
or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and
fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which
provides for the correct solution. It is clear that if the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is imprisonment, the duration of
which would depend on the amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these entities
which are made liable for the civil liability arising from the criminal offense. This is the
import of the clause "without prejudice to the civil liabilities arising from the criminal
offense." And, as We stated earlier, since that violation of a trust receipt constitutes
fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in
filing an independent civil action to enforce the civil liability arising therefrom against
Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case
against private respondent Chi. The trial court based the dismissal, and the respondent
Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in
any capacity either as surety or as guarantor because his signature at the dorsal
portion thereof was useless; and even if he could be bound by such signature as a simple
guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay
until
after petitioner has exhausted and resorted to all legal remedies against the principal
debtor, Philippine Rayon. The records fail to show that petitioner had done
so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has
resorted to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an
action against a guarantor. InSouthern Motors, Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor not a mortgagor or
pledgor may demand the aforementioned exhaustion, the creditor
may, prior thereto, secure a judgment against said guarantor, who
shall be entitled, however, to a deferment of the execution of said
judgment against him until after the properties of the principal debtor

shall have been exhausted to satisfy the obligation involved in the


case.
There was then nothing procedurally objectionable in impleading private respondent
Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of
fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly
allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against
whom any right to relief in respect to or arising out of the same
transaction or series of transactions is alleged to exist, whether jointly,
severally, or in the alternative, may, except as otherwise provided in
these rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all such
plaintiffs or to all such defendants may arise in the action; but the
court may make such orders as may be just to prevent any plaintiff or
defendant from being embarrassed or put to expense in connection
with any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common
question of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all
the accessories thereof including judicial costs; with respect to the latter, he shall only be
liable for those costs incurred after being judicially required to pay.36 Interest and
damages, being accessories of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the complaint. Attorney's fees may
even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be
paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty
and not the full extent of the latter's liability. All things considered, he can be held liable
for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000.00 as
attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues
raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R.
CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then
Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:

Costs against private respondents.


SO ORDERED.

G.R. No. L-16106

December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.
Office of the Solicitor General for plaintiff-appellant.
Picazo, Lichauco and Agcaoili for defendant-appellee.

1. Declaring private respondent Philippine Rayon


Mills, Inc. liable on the twelve drafts in question
(Exhibits "X", "X-1" to "X-11", inclusive) and on
the trust receipt (Exhibit "C"), and ordering it to
pay petitioner: (a) the amounts due thereon in the
total sum of P956,384.95 as of 15 September 1974,
with interest thereon at six percent (6%) per
annum from 16 September 1974 until it is fully
paid, less whatever may have been applied thereto
by virtue of foreclosure of mortgages, if any; (b) a
sum equal to ten percent (10%) of the aforesaid
amount as attorney's fees; and (c) the costs.

BAUTISTA ANGELO, J.:

2. Declaring private respondent Anacleto R. Chi


secondarily liable on the trust receipt and ordering
him to pay the face value thereof, with interest at
the legal rate, commencing from the date of the
filing of the complaint in Civil Case No. Q-19312
until the same is fully paid as well as the costs and
attorney's fees in the sum of P10,000.00 if the writ
of execution for the enforcement of the above
awards against Philippine Rayon Mills, Inc. is
returned unsatisfied.

In its answer the First National City Bank of New York claims that, while it admits that
various savings deposits, pre-war inactive accounts, and sundry accounts contained in its
report submitted to the Treasurer of the Philippines pursuant to Act No. 3936, totalling
more than P100,000.00, which remained dormant for 10 years or more, are subject to
escheat however, it has inadvertently included in said report certain items amounting to
P18,589.89 which, properly speaking, are not credits or deposits within the
contemplation of Act No. 3936. Hence, it prayed that said items be not included in the
claim of plaintiff.

The Republic of the Philippines filed on September 25, 1957 before the Court of First
Instance of Manila a complaint for escheat of certain unclaimed bank deposits balances
under the provisions of Act No. 3936 against several banks, among them the First
National City Bank of New York. It is alleged that pursuant to Section 2 of said Act
defendant banks forwarded to the Treasurer of the Philippines a statement under oath
of their respective managing officials of all the credits and deposits held by them in
favor of persons known to be dead or who have not made further deposits or
withdrawals during the period of 10 years or more. Wherefore, it is prayed that said
credits and deposits be escheated to the Republic of the Philippines by ordering
defendant banks to deposit them to its credit with the Treasurer of the Philippines.

After hearing the court a quo rendered judgment holding that cashier's is or manager's
checks and demand drafts as those which defendant wants excluded from the complaint
come within the purview of Act No. 3936, but not the telegraphic transfer payment
which orders are of different category. Consequently, the complaint was dismissed with
regard to the latter. But, after a motion to reconsider was filed by defendant, the court a
quo changed its view and held that even said demand drafts do not come within the
purview of said Act and so amended its decision accordingly. Plaintiff has
appealed.lawphil.net

Section 1, Act No. 3936, provides:


Section 1. "Unclaimed balances" within the meaning of this Act shall include
credits or deposits of money, bullion, security or other evidence of
indebtedness of any kind, and interest thereon with banks, as hereinafter
defined, in favor of any person unheard from for a period of ten years or
more. Such unclaimed balances, together with the increase and proceeds
thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may
direct.
It would appear that the term "unclaimed balances" that are subject to escheat include
credits or deposits money, or other evidence of indebtedness of any kind with banks, in
favor of any person unheard from for a period of 10 years or more. And as correctly
stated by the trial court, the term "credit" in its usual meaning is a sum credited on the
books of a company to a person who appears to be entitled to it. It presupposes a
creditor-debtor relationship, and may be said to imply ability, by reason of property or
estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the correlative
to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61
Atl. 2d 1, 4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of
America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same
is true with the term "deposits" in banks where the relationship created between the
depositor and the bank is that of creditor and debtor (Article 1980, Civil Code; Gullas
vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., et
al., 65 Phil. 443).
The questions that now arise are: Do demand draft and telegraphic orders come within
the meaning of the term "credits" or "deposits" employed in the law? Can their import
be considered as a sum credited on the books of the bank to a person who appears to
be entitled to it? Do they create a creditor-debtor relationship between drawee and the
payee?
The answers to these questions require a digression the legal meaning of said banking
terminologies.
To begin with, we may say that a demand draft is a bill of exchange payable on demand
(Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50;
Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of
exchange, a draft is said to be, like the former, an open letter of request from, and an

order by, one person on another to pay a sum of money therein mentioned to a third
person, on demand or at a future time therein specified (13 Words and Phrases, 371). As
a matter of fact, the term "draft" is often used, and is the common term, for all bills of
exchange. And the words "draft" and "bill of exchange" are used indiscriminately (Ennis
vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100,
101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our Negotiable
Instruments Law (Act No. 2031) does not operate as an assignment of funds in the
hands of the drawee who is not liable on the instrument until he accepts it. This is the
clear import of Section 127. It says: "A bill of exchange of itself does not operate as an
assignment of the funds in the hands of the drawee available for the payment thereon
and the drawee is not liable on the bill unless and until he accepts the same." In other
words, in order that a drawee may be liable on the draft and then become obligated to
the payee it is necessary that he first accepts the same. In fact, our law requires that with
regard to drafts or bills of exchange there is need that they be presented either for
acceptance or for payment within a reasonable time after their issuance or after their last
negotiation thereof as the case may be (Section 71, Act 2031). Failure to make such
presentment will discharge the drawer from liability or to the extent of the loss caused
by the delay (Section 186, Ibid.)
Since it is admitted that the demand drafts herein involved have not been presented
either for acceptance or for payment, the inevitable consequence is that the appellee
bank never had any chance of accepting or rejecting them. Verily, appellee bank never
became a debtor of the payee concerned and as such the aforesaid drafts cannot be
considered as credits subject to escheat within the meaning of the law.
But a demand draft is very different from a cashier's or manager's cheek, contrary to
appellant's pretense, for it has been held that the latter is a primary obligation of the
bank which issues it and constitutes its written promise to pay upon demand. Thus, a
cashier's check has been clearly characterized in In Re Bank of the United States, 277
N.Y.S. 96. 100, as follows:
A cashier's check issued by a bank, however, is not an ordinary draft. The latter
is a bill of exchange payable demand. It is an order upon a third party
purporting to drawn upon a deposit of funds. Drinkall v. Movious State Bank, 11
N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler
County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A cashier's
check is of a very different character. It is the primary obligation of the bank
which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and

constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59


S.D. 603, 241 N.W. 734)....lawphil.net
The following definitions cited by appellant also confirm this view:
A cashier's check is a check of the bank's cashier on his or another bank. It is
in effect a bill of exchange drawn by a bank on itself and accepted in advance
by the act of issuance (10 C.J.S. 409).
A cashier's check issued on request of a depositor is the substantial equivalent
of a certified check and the deposit represented by the check passes to the
credit of the checkholder, who is thereafter a depositor to that amount
(Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).
A cashier's check, being merely a bill of exchange drawn by a bank on itself,
and accepted in advance by the act of issuance, is not subject to countermand
by the payee after indorsement, and has the same legal effects as a certificate
deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).
A demand draft is not therefore of the same category as a cashier's check which should
come within the purview of the law.
The case, however, is different with regard to telegraphic payment order. It is said that
as the transaction is for the establishment of a telegraphic or cable transfer the
agreement to remit creates a contractual obligation a has been termed a purchase and
sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon making
payment completes the transaction insofar as he is concerned, though insofar as the
remitting bank is concerned the contract is executory until the credit is established (Ibid.)
We agree with the following comment the Solicitor General: "This is so because the
drawer bank was already paid the value of the telegraphic transfer payment order. In the
particular cases under consideration it appears in the books of the defendant bank that
the amounts represented by the telegraphic payment orders appear in the names of the
respective payees. If the latter choose to demand payment of their telegraphic transfers
at the time the same was (were) received by the defendant bank, there could be no
question that this bank would have to pay them. Now, the question is, if the payees
decide to have their money remain for sometime in the defendant bank, can the latter
maintain that the ownership of said telegraphic payment orders is now with the drawer
bank? The latter was already paid the value of the telegraphic payment orders otherwise
it would not have transmitted the same to the defendant bank. Hence, it is absurd to say
that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the
items specifically referred to and listed under paragraph 3 of appellee bank's answer
representing telegraphic transfer payment orders should be escheated in favor of the
Republic of the Philippines. No costs.

G.R. No. 171266

April 4, 2007

INTERNATIONAL EXCHANGE BANK, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO MORALES, J.:
Is a Savings Account-Fixed Savings Deposit (FSD) evidenced by a passbook issued by
International Exchange Bank (petitioner) subject to documentary stamp tax (DST) for
the years 1996 and 1997?
Petitioner, a banking institution duly organized and existing under the laws of the
Philippines, was on April 13, 1999 served Letter of Authority No. 0000205351 by the
Commissioner of Internal Revenue (respondent) directing the examination by a "Special
Team created pursuant to RSO 797-98" (Special Team) of petitioners books of
accounts and other accounting records for the year 1997 and "unverified prior years."
An examination of said documents was in fact conducted.
Petitioner subsequently received on November 16, 1999 a "Notice to Taxpayer"2 from
the Assistant Commissioner, Enforcement Service of the Bureau of Internal Revenue,
notifying it of the results of the examination conducted by the Special Team regarding
its tax liabilities, which amounted to P465,158,118.31 for 1996 and P17,033,311,974.23
for 1997, and requesting it to appear for an informal conference to present its side.
Between November3 and December4 1999, petitioners representatives met with the
Special Team to discuss and/or dispute portions of the Special Teams audit findings.
Eventually, the parties resolved issues relating to transactions involving payment of final
withholding and gross receipts taxes.5
On January 6, 2000, petitioner was personally served with an undated Pre-Assessment
Notice6 (PAN) assessing it of deficiency on its purchases of securities from the Bangko
Sentral ng Pilipinas or Government Securities Purchased-Reverse Repurchase
Agreement (RRPA) and its FSD for the taxable years 1996 and 1997, viz:
Details of Discrepancies
(Taxable Year 1996)

INDUSTRY ISSUES
1. DOCUMENTARY STAMP TAX (DST) On Government Securities PurchasedRRPA and Savings Deposits - SD totaling P25,180,492.15.
Government Securities Purchased-RRP amounting to P3,584,098,013.35 is subject to
DST under Section 180 of the NIRC, as amended, since this falls under the
classification of Deposits Substitutes as defined by RR 3-97.
Savings Deposit-FSD amounting to P9,845,497,800.27 should be treated as time
deposits considering that its features are very much the same as time deposits (interest
rates; terms). In substance, these are certificate[s] of deposits subject to Documentary
Stamp Tax under Section 180 of the NIRC which provides among others that
certificate[s] of deposits bearing interest and others not payable on sight or demand are
subject to DST.7
Details of Discrepancies
(Taxable Year 1997)
INDUSTRY ISSUES
1. DOCUMENTARY STAMP TAX (DST) On Government Securities PurchasedRRPA and Savings Deposits-FSD totaling P75,383,751.55.
Government Securities Purchased-RRP amounting to P12,180.427,820.44 is subject to
DST under Sec. 180 of the NIRC, as amended, since this falls under the classification of
Deposit Substitutes as defined by RR 3-97.
Savings Deposits-FSD amounting to P28,024,239,673.35 should be treated as time
deposits considering that its features are very much the same as time deposits (interest
rates; terms). In substance, these are certificates of deposit subject to Documentary
Stamp Tax under Section 180 of the NIRC which provides among others that
certificate[s] of deposit bearing interest and others not payable on sight or demand are
subject to DST.8 (Underscoring in the original)
The PAN advised petitioner that in case it was not agreeable to the above-quoted
findings, it may "see the Assistant Commissioner-Enforcement Service to clarify issues
arising from the investigation and/or review," and its failure to do so within 15 days
from receipt of the PAN would mean that it was agreeable.9

On January 12, 2000, petitioner received a Formal Assessment Notice10 (FAN) for
deficiency DST on its RRPA and FSD, including surcharges, in the amounts
of P25,180,492.15 for 1996 and P75,383,751.55 for 1997, and an accompanying demand
letter11 requesting payment thereof within 30 days.
Acting on the FAN, petitioner filed on February 11, 2000 a protest letter12 alleging that
the assessments should be reconsidered on the grounds that: (1) the assessments are null
and void for having been issued without any authority and due process, and were made
beyond the prescribed period for making assessments; (2) there is no law imposing DST
on RRPA, and assuming that DST was payable, it is the Bangko Sentral ng Pilipinas
which is liable therefor; (3) there is no law imposing DST on its FSD; and (4) assuming
the deficiency assessments for DST were proper, the imposition of surcharges was
patently without legal authority.
Respondent failed to act on the protest, prompting petitioner to file a petition for
review before the Court of Tax Appeals (CTA).
By Decision13 of October 26, 2004, the First Division of the CTA (CTA Division)
disposed as follows:
WHEREFORE, petitioners deficiency assessments pertaining to the reverse purchase
agreements in the amounts ofP6,720,183.77 and P22,838,302.16 inclusive of surcharges,
for the years 1996 and 1997, respectively, are hereby CANCELLED and
WITHDRAWN. However, the deficiency assessments pertaining to savings depositsFSD are hereby UPHELD and petitioner is ORDERED to PAY the respondent the
amount of P71,005,757.77 representing deficiency documentary stamp tax for the years
1996 and 1997. In addition thereto, petitioner is ORDERED to PAY respondent 20%
delinquency interest from February 12, 2000 until fully paid pursuant to Section 249 of
the 1997 NIRC.14 (Emphasis and underscoring supplied)
Petitioner moved for reconsideration of the CTA Division decision. Respondent moved
too for a partial review of the decision.
Petitioner argued that its FSD is not subject to DST since it was not one of the
documents enumerated either under the 1977 Tax Code (Tax Code) or the 1997
National Internal Revenue Code (NIRC). Respondent on the other hand argued that
petitioner should be liable not only for DST on its FSD but also on its RRPA.

For lack of merit, the CTA Division, by Resolution15 of April 20, 2005, denied
petitioners motion for reconsideration and respondents motion for partial
reconsideration.
Only petitioner appealed to the CTA En Banc before which it proffered that its FSD
cannot be considered a certificate of deposit subject to DST under Section 180 of the
Tax Code for, unlike a certificate of deposit which is a negotiable instrument, the
passbook it issued for its FSD was not payable to the order of the depositor or to some
other person as the deposit could only be withdrawn by the depositor or by a duly
authorized representative.16
Petitioner likewise proffered that the legislative deliberations on the bill that was to
become Republic Act No. (R.A.) 924317showed that the definition of certificates of
deposit was amended to include "other evidences of deposits that are either drawing
interest significantly higher than the regular savings deposit taking into consideration the
size of the deposit and the risks involved or drawing interest and having a specific
maturity date" in order to plug a revenue loophole caused by the term "certificates of
deposit" provided under the Tax Code and the NIRC.18
Furthermore, petitioner argued that a "deposits [sic] evidenced by a passbook [which]
have features akin to a time deposit," such as petitioners FSD, is not subject to DST
under the Tax Code and the NIRC.19
Finally, petitioner argued that the FAN for 1996 and 1997 were issued in violation of its
right to due process, they having been issued even before it could respond to the PAN;
and that the 1996 assessment is null and void for having been issued beyond the 3-year
prescriptive period.
By Decision20 of January 30, 2006, the CTA En Banc affirmed the decision of the CTA
Division finding petitioner liable for payment of deficiency DST for its FSD.
In affirming the CTA Division Decision, the CTA En Banc held that a time deposit is a
type of a certificate of deposit drawing interest, and petitioners FSD has the same
nature and characteristics as those of a time deposit; that the requirement of due process
had been substantially complied with; and the 1996 assessment was not barred by
prescription because there was no requirement for the filing of a DST return under the
Tax Code.

Hence, the present petition for review on certiorari, petitioner reiterating the same
grounds advanced before the CTA En Banc.
The issue, in the main, is whether petitioners FSD is subject to DST for the years
assessed.
The applicable provision is Section 180 of the Tax Code, as amended by R.A.
7660,21 which reads:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. - On
all loan agreements signed abroad wherein the object of the contract is located or used
in the Philippines; bills of exchange (between points within the Philippines), drafts,
instruments and securities issued by the Government or any of its instrumentalities
or certificates of deposits drawing interest, or orders for the payment of any sum of
moneyotherwise than at sight or on demand, or on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and on each
renewal of any such note, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value
of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided,
That only one documentary stamp tax shall be imposed on either loan agreement, or
promissory notes issued to secure such loan, whichever will yield a higher tax: Provided,
however, That loan agreements or promissory notes the aggregate of which does not
exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his
purchase on installment for his personal use or that of his family and not for business,
resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be
exempt from the payment of the documentary stamp tax provided under this section.
(Emphasis and underscoring supplied)
Petitioner posits that based on this Courts definition of a certificate of deposit in Far
East Bank and Trust Company v. Querimit, 22 viz:
A certificate of deposit is defined as a written acknowledgment by a bank or banker of
the receipt of a sum of money on deposit which the bank or banker promises to pay to
the depositor, to the order of the depositor, or to some other person or his order,
whereby the relation of debtor and creditor between the bank and the depositor is
created. . . .23

its FSD is not a certificate of deposit since there is nothing in the terms and conditions
printed on the passbook evidencing it that can be construed to mean that the bank or
banker acknowledges the receipt of a sum of money on deposit.24
Petitioner moreover posits that the FSD, unlike a certificate of deposit, is not negotiable
or payable to the order of some other person or his order but is "only withdrawable by
the depositor or his authorized representative."25
Petitioners position does not lie.
As correctly found by the CTA En Banc, a passbook representing an interest earning
deposit account issued by a bank qualifies as a certificate of deposit drawing interest.26
A document to be deemed a certificate of deposit requires no specific form as long as
there is some written memorandum that the bank accepted a deposit of a sum of money
from a depositor.27 What is important and controlling is the nature or meaning
conveyed by the passbook and not the particular label or nomenclature attached to it,
inasmuch as substance, not form, is paramount.28
Contrary to petitioners claim, not all certificates of deposit are negotiable. A certificate
of deposit may or may not be negotiable as gathered from the use of the conjunction or,
instead of and, in its definition. A certificate of deposit may be payable to the depositor,
to the order of the depositor, or to some other person or his order.
In any event, the negotiable character of any and all documents under Section 180 is
immaterial for purposes of imposing DST.
Orders for the payment of sum of money payable at sight or on demand are of course
explicitly exempted from the payment of DST. Thus, a regular savings account with a
passbook which is withdrawable at any time is not subject to DST, unlike a time deposit
which is payable on a fixed maturity date.
As for petitioners argument that its FSD is similar to a regular savings deposit because
it is evidenced by a passbook,29and that based on the legislative deliberations on the bill
which was to become R.A. 9243 which amended Section 180 of the NIRC (which is to a
large extent the same as Section 180 of the Tax Code, as amended by R.A. 7660),
Congress admitted that deposits evidenced by passbooks which have features akin to
time deposits are not subject to DST,30 the same does not lie.

The FSD, like a time deposit, provides for a higher interest rate when the deposit is not
withdrawn within the required fixed period; otherwise, it earns interest pertaining to a
regular savings deposit. Having a fixed term and the reduction of interest rates in case of
pre-termination are essential features of a time deposit. Thus explains the CTA En
Banc:
It is well-settled that certificates of time deposit are subject to the DST and that a
certificate of time deposit is but a type of a certificate of deposit drawing interest. Thus,
in resolving the issue before Us, it is necessary to determine whether petitioners Savings
Account-Fixed Savings Deposit (SA-FSD) has the same nature and characteristics as a
time deposit. In this regard, the findings of fact stated in the assailed Decision [of the
CTA Division] are as follows:
"In this case, a depositor of a savings deposit-FSD is required to keep the money with
the bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise,
the deposit earns interest pertaining only to a regular savings deposit.
The same feature is present in a time deposit. A depositor is allowed to withdraw his
time deposit even before its maturity subject to bank charges on its pre[-]termination
and the depositor loses his entitlement to earn the interest rate corresponding to the
time deposit. Instead, he earns interest pertaining only to a regular savings deposit.
Thus, petitioners argument that the savings deposit-FSD is withdrawable anytime as
opposed to a time deposit which has a maturity date, is not tenable. In both cases, the
deposit may be withdrawn anytime but the depositor gets to earn a lower rate of
interest.The only difference lies on the evidence of deposit, a savings deposit-FSD is
evidenced by a passbook, while a time deposit is evidenced by a certificate of time
deposit."
In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount
of deposit must be maintained for a fixed period. Such being the case, We agree with
the finding that the SA-FSD is a deposit account with a fixed term. Withdrawal before
the expiration of said fixed term results in the reduction of the interest rate. Having a
fixed term and reduction of interest rate in case of pre-termination are essentially the
features of a time deposit. Hence, this Court concurs with the conclusion reached in the
assailed Decision that petitioners SA-FSD and time deposit are substantially the same. .
. .31 (Italics in the original; underscoring supplied)
The findings and conclusions reached by the CTA which, by the very nature of its
function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, and unless there has been an abuse or

improvident exercise of authority,32 and none has been shown in the present case,
deserves respect.
It bears emphasis that DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments.33 It is an excise upon the privilege,
opportunity or facility offered at exchanges for the transaction of the business. 34
While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be
circumvented in order to evade payment of just taxes. 35 To claim that time deposits
evidenced by passbooks should not be subject to DST is a clear evasion of the rule on
equality and uniformity in taxation that requires the imposition of DST on documents
evidencing transactions of the same kind, in this particular case, on all certificates of
deposits drawing interest.36
The further amendment of Section 180 of the NIRC and its renumbering as Section 179
by R.A. 9243, which was approved on February 17, 2004, viz:
SEC. 5. Section 180 of the National Internal Revenue Code of 1997, as amended, is
hereby renumbered as Section 179 and further amended to read as follows:
SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt
instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on
each Two hundred pesos (P200), or fractional part thereof, of the issue price of any
such debt instruments: Provided, That for such debt instruments with terms of less than
one (1) year, the documentary stamp tax to be collected shall be of a proportional
amount in accordance with the ratio of its term in number of days to three hundred
sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be
imposed on either loan agreement, or promissory notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments
representing borrowing and lending transactions including but not limited to
debentures, certificates of indebtedness, due bills, bonds, loan agreements, including
those signed abroad wherein the object of contract is located or used in the Philippines,
instruments and securities issued by the government of any of its instrumentalities,
deposit substitute debt instruments, certificates or other evidences of deposits that are
either drawing interest significantly higher than the regular savings deposit taking into
consideration the size of the deposit and the risks involved or drawing interest and
having a specific maturity date, orders for payment of any sum of money otherwise than

at sight or on demand, promissory notes, whether negotiable or non-negotiable, except


bank notes issued for circulation." (Underscoring supplied),
does not mean that as proffered, prior to its further amendment on said date, Section
180 of the Tax Code and the NIRC time deposits for which passbooks were issued were
exempted from payment of DST.
If at all, the further amendment was intended to eliminate precisely the scheme used by
banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. This
is reflected from the following exchanges between Mr. Miguel Andaya of the Bankers
Association of the Philippines and Senator Ralph Recto, Senate Chairman of the
Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which
eventually became R.A. 9243:
MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to
clarify. Savings deposit at the present time is not subject to DST.
THE CHAIRMAN. Thats right.
MR. ANDAYA. Time deposit is subject. I agree with you in principle that if
we are going to encourage deposits, whether savings or time
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . .its questionable whether we should tax it with DST at all,
even the question of imposing final withholding tax has been raised as an
issue.
THE CHAIRMAN. If I had it my way, Ill cut it by half.
MR. ANDAYA. Yeah, but I guess concerning the constraint of government
revenue, even the industry itself right now is not pushing in that direction, but
in the long term, when most of us in this room are gone, we hope that DST
will disappear from the face of this earth, no.
Now, I think the move of the DOF to expand the coverage of or to add that
phrase, "Other evidence of indebtedness," it just removed ambiguity. When we
testified earlier in the House on this very same bull, we did not interpose any
objections if only for the sake of avoiding further ambiguity in the

implementation of DST on deposits. Because of what has happened so far is,


we dont know whether the examiner is gonna come in and say, "This savings
deposit is not savings but its time deposit." So, I think what DOF has done is
to eliminate any confusion. They said that a deposit that has a maturity. . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . . which is time, in effect, regardless of what form it takes
should be subject to DST.
THE CHAIRMAN. Would that include savings deposit now?
MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has
got a fixed maturity . . .
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. . . that would fall under the purview.37 (Underscoring
supplied)
Finally, as the records show, contrary to petitioners claim, it had been afforded the
opportunity to protest the assessment notices as in fact it even requested for a reinvestigation which is, given the nature of the present case, the essence of due process. 38
WHEREFORE, the petition is DENIED.
SO ORDERED.

RAMON GONZALES, plaintiff-appellee,


vs.
GO TIONG and LUZON SURETY CO., INC., defendants-appellants.
Rustico V. Nazareno for appellee.
David, Abel and Ysip for appellant Go Tiong.
Tolentino, Garcia and D. R. Cruz for appellant Luzon Surety Co., Inc.
MONTEMAYOR, J.:
Defendants Go Tiong and Luzon Surety Co. are appealing from the decision of the
Court of First Instance of Manila, Judge Magno S. Gatmaitan presiding, the dispositive
part of which reads as follows:
In view whereof, judgment is rendered condemning defendant Go Tiong and
Luzon Surety Co., jointly and severally, to pay plaintiff the sum of P4,920 with
legal interest from the date of the filing of the complaint until fully paid;
judgment is also rendered against Go Tiong to pay the sum of P3,680 unto
plaintiff, also with legal interest from the date of the filing of the complaint
until fully paid. Go Tiong is also condemned to pay the sum of P1,000 as
attorney's fees, plus costs.
The appeal was first taken to the Court of Appeals, the latter indorsing the case to us
later under the provisions of Section 17 (6) of Republic Act No. 296, on the ground that
the issues raised were purely questions of law.
Go Tiong owned a rice mill and warehouse, located at Mabini, Urdaneta, Pangasinan.
On February 4, 1953, he obtained a license to engage in the business of a bonded
warehouseman (Exhibit N). To secure the performance of his obligations as such
bonded warehouseman, the Luzon Surety Co. executed Guaranty Bond No. 294 in the
sum of P18,334 (Exhibit O), conditioned particularly on the fulfillment by Go Tiong of
his duty or obligation to deliver to the depositors in his storage warehouse, the palay
received by him for storage, at any time demand is made, or to pay the market value
thereof, in case he was unable to return the same. The bond was executed on January
26, 1953. Go Tiong insured the warehouse and the palay deposited therein with the
Alliance Surety and Insurance Company.

But prior to the issuance of the license to Go Tiong to operate as bonded


warehouseman, he had on several occasions received palay for deposit from plaintiff
Gonzales, totaling 368 sacks, for which he issued receipts, Exhibits A, B, C, and D.
After he was licensed as bonded warehouseman, Go Tiong again received various
deliveries of palay from plaintiff, totaling 492 sacks, for which he issued the
corresponding receipts, all the grand total of 860 sacks, valued at P8,600 at the rate of
P10 per sack.
On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his
deposits in the amount of P8,600, but he was told to return after two days, which he
did, but Go Tiong again told him to come back. A few days later, the warehouse burned
to the ground. Before the fire, Go Tiong had been accepting deliveries of palay from
other depositors and at the time of the fire, there were 5,847 sacks of palay in the
warehouse, in excess of the 5,000 sacks authorized under his license. The receipts issued
by Go Tiong to the plaintiff were ordinary receipts, not the "warehouse receipts"
defined by the Warehouse Receipts Act (Act No. 2137).
After the burning of the warehouse, the depositors of palay, including plaintiff, filed
their claims with the Bureau of Commerce, and it would appear that with the proceeds
of the insurance policy, the Bureau of Commerce paid off some of the claim. Plaintiff's
counsel later withdrew his claim with the Bureau of Commerce, according to Go Tiong,
because his claim was denied by the Bureau, but according to the decision of the trial
court, because nothing came from plaintiff's efforts to have his claim paid. Thereafter,
Gonzales filed the present action against Go Tiong and the Luzon Surety for the sum of
P8,600, the value of his palay, with legal interest, damages in the sum of P5,000 and
P1,500 as attorney's fees. Gonzales later renewed his claim with the Bureau of
Commerce (Exhibit S).
While the case was pending in court, Gonzales and Go Tiong entered into a contract of
amicable settlement to the effect that upon the settlement of all accounts due to him by
Go Tiong, he, Gonzales, would have all actions pending against Go Tiong dismissed.
Inasmuch as Go Tiong failed to settle the accounts, Gonzales prosecuted his court
action..
For purposes of reference, we reproduce the assignment of errors of Go Tiong, as well
as the assignment of errors of the Luzon Surety, all reading thus:
I. The trial court erred in finding that plaintiff-appellee's claim is covered by
the Bonded Warehouse Law, Act 3893, as amended, and not by the Civil
Code.

II. The trial court erred in not exempting defendant-appellant Go Tiong for
the loss of the palay deposited, pursuant to the provisions of the New Civil
Code.".
xxx

xxx

xxx

I. The trial court erred in not declaring that the amicable settlement by and
between plaintiff-appellee and defendant Go Tiong constituted a material
alteration of the surety bond of appellant Luzon Surety which extinguished
and discharged its liability.
II. The trial court erred in bolding that the receipts for the palay received by
Go Tiong, though not in the form of "quedans" or warehouse receipts are
chargeable against the surety bond filed under the provisions of the General
Bonded Warehouse Act (Act No. 3893 as amended by Republic Act No. 247)
as a result of a loss.
III. The trial court erred in not holding that the plaintiff had renounced and
abandoned his rights under the Bonded Warehouse Act by the withdrawal of
his claim from the Bureau of Commerce and the execution of the "amicable
settlement".
IV. The trial court erred in not holding that the palay delivered to Go Tiong
constitutes gratuitous deposit which was extinguished upon the loss and
destruction of the subject matter.
V. The trial court erred in not declaring that the transaction between defendant
Go Tiong and plaintiff was more of a sale rather than a deposit.
VI. The trial court erred in declaring that the Luzon Surety Co., Inc., had not
complied with its undertaking despite the liquidation of all the claims by the
Bureau of Commerce.
VII. The lower court erred in adjudging the herein surety liable under the
terms of the Bond.
We shall discuss the assigned errors at the same time, considering the close relation
between them, although we do not propose to discuss and rule upon all of them. Both
appellants urge that plaintiff's claim is governed by the Civil Code and not by the

Bonded Warehouse Act (Act No. 3893, as amended by Republic Act No. 247), for the
reason that, as already stated, what Go Tiong issued to plaintiff were ordinary receipts,
not the warehouse receipts contemplated by the Warehouse Receipts Law, and because
the deposits of palay of plaintiff were gratuitous.
Act No. 3893 as amended is a special law regulating the business of receiving
commodities for storage and defining the rights and obligations of a bonded
warehouseman and those transacting business with him. Consequently, any deposit
made with him as a bonded warehouseman must necessarily be governed by the
provisions of Act No. 3893. The kind or nature of the receipts issued by him for the
deposits is not very material much less decisive. Though it is desirable that receipts
issued by a bonded warehouseman should conform to the provisions of the Warehouse
Receipts Law, said provisions in our opinion are not mandatory and indispensable in the
sense that if they fell short of the requirements of the Warehouse Receipts Act, then the
commodities delivered for storage become ordinary deposits and will not be governed
by the provisions of the Bonded Warehouse Act. Under Section 1 of the Warehouse
Receipts Act, one would gather the impression that the issuance of a warehouse receipt
in the form provided by it is merely permissive and directory and not obligatory:
SECTION 1. Persons who may issue receipts. Warehouse receipts may be issued
by any warehouseman.,
and the Bonded Warebouse Act as amended permits the warehouseman to issue any
receipt, thus:
. . . . "receipt" as any receipt issued by a warehouseman for commodity
delivered to him.
As the trial court well observed, as far as Go Tiong was concerned, the fact that the
receipts issued by him were not "quedans" is no valid ground for defense because he
was the principal obligor. Furthermore, as found by the trial court, Go Tiong had
repeatedly promised plaintiff to issue to him "quedans" and had assured him that he
should not worry; and that Go Tiong was in the habit of issuing ordinary receipts (not
"quedans") to his depositors.
As to the contention that the deposits made by the plaintiff were free because he paid
no fees therefor, it would appear that Go Tiong induced plaintiff to deposit his palay in
the warehouse free of charge in order to promote his business and to attract other
depositors, it being understood that because of this accommodation, plaintiff would
convince other palay owners to deposit with Go Tiong.

Appellants contend that the burning of the warehouse was a fortuitous event and not
due to any fault of Go Tiong and that consequently, he should not be held liable,
appellants supporting the contention with the ruling in the case of La Sociedad Dalisay vs.
De los Reyes, 55 Phil. 452, reading as follows:
Inasmuch as the fire, according to the judgment appealed from, was neither
intentional nor due to the negligence of the appellant company or its officials;
and it appearing from the evidence that the then manager attempted to save
the palay, the appellant company should not be held responsible for damages
resulting from said fire. . . . .
The trial court correctly disposed of this same contention, thus:
The defense that the palay was destroyed by fire neither does the Court
consider to be good for while the contract was in the nature of a deposit and
the loss of the thing would exempt the obligor in a contract of deposit to
return the goods, this exemption from the responsibility for the damages must
be conditioned in his proof that the loss was by force majeure, and without his
fault. The Court does not see from the evidence that the proof is clear on the
legal exemption. On the contrary, the fact that he exceeded the limit of the
authorized deposit must have increased the risk and would militate against his
defense of non-liability. For this reason, the Court does not follow La
Sociedadvs. De Los Santos, 55 Phil. 42 quoted by Go Tiong. (p. 3, Decision).
Considering the fact, as already stated, that prior to the burning of the warehouse,
plaintiff demanded the payment of the value of his palay from Go Tiong on two
occasions but was put off without any valid reason, under the circumstances, the better
rule which we accept is the following:
. . . . This rule proceeds upon the theory that the facts surrounding the care of
the property by a bailee are peculiarly within his knowledge and power to
prove, and that the enforcement of any other rule would impose great
difficulties upon the bailors. ... It is illogical and unreasonable to hold that the
presumption of negligence in case of this kind is rebutted by the bailee by
simply proving that the property bailed was destroyed by an ordinary fire
which broke out on the bailee's own premises, without regard to the care
exercised by the latter to prevent the fire, or to save the property after the
commencement of the fire. All the authorities seem to agree that the rule that
there shall be a presumption of negligence in bailment cases like the present
one, where there is default in delivery or accounting, for the goods is just a

necessary one. . . . (9 A.L.R. 566; see also Hanes vs. Shapiro, 84 S.E. 33; J.
Russel Mfg. Co. vs. New Haven, S.B. Co., 50 N.Y. 211; Beck vs. Wilkins-Ricks
Co., 102 S.E. 313, Fleishman vs. Southern R. Co., 56 S.E. 974).
Besides, as observed by the trial court, the defendant violated the terms of his license by
accepting for deposit palay in excess of the limit authorized by his license, which fact
must have increased the risk.
The Luzon Surety claims that the amicable settlement by and between Gonzales and Go
Tiong constituted a material alteration of its bond, thereby extinguishing and
discharging its liability. It is evident, however, that while there was an attempt to settle
the case amicably, the settlement was never consummated because Go Tiong failed to
settle the accounts of Gonzales to the latter's satisfaction. Consequently, said nonconsummated compromise settlement does not discharge the surety:
A compromise or settlement between the creditor or obligee and the principal,
by which the latter is discharged from liability, discharges the surety, . . . . But
an unconsummated . . . agreement to compromise, falling short of an effective
settlement, will not discharge the surety. (50 C. J. 185)
In relation to the failure of Go Tiong to issue the warehouse receipts contemplated by
the Warehouse Receipts Act, which failure, according to appellants, precluded plaintiff
from suing on the bond, reference may be made to Section 2 of Act No. 3893, defining
receipt as any receipt issued by a warehouseman for commodity delivered to him,
showing that the law does not require as indispensable that a warehouse receipt be
issued. Furthermore, Section 7 of said law provides that as long as the depositor is
injured by a breach of any obligation of the warehouseman, which obligation is secured
by a bond, said depositor may sue on said bond. In other words, the surety cannot avoid
liability from the mere failure of the warehouseman to issue the prescribed receipt. In
the case of Andreson vs. Krueger, 212 N.W. 198, 199, it was held:
The surety company concedes that the bond which it gave contains the
statutory conditions. The statute . . . requires that the bond shall be
conditioned upon the faithful performance of the public local grain
warehouseman of all the provisions of law relating to the storage of grain by
such warehouseman.
The surety company thereby made itself responsible for the performance by
the warehouseman of all the duties and obligations imposed upon him by the
statute; and, if he failed to perform any such duty to the loss or detriment of

those who delivered grain for storage, the surety company became liable
therefor. Where the warehouseman receives grain for storage and refuses to
return or pay it, the fact that he failed to issue the receipt, when the statute
required him to issue on receiving it, is not available to the surety as a defense
against an action on the bond. The obligation of the surety covers the duty of
the warehouseman to issue the prescribed receipt, as well as the other duties
imposed upon him by the statute.
We deem it unnecessary to discuss and rule upon the other questions raised in the
appeal.
In view of the foregoing, the appealed decision is hereby affirmed, with costs.

G.R. No. 90888 September 13, 1990


FRUCTUOSO R. CAPCO, petitioner,
vs.
MANUEL R. MACASAET, JACOBO FELICIANO, and HONORABLE
COURT OF APPEALS, respondents.
Florentino I. Capco for petitioner.
Pacifico Sotelo for M.R. Macasaet.
Edilberto Barot, Jr. for J. Feliciano.

GUTIERREZ, JR., J.:


The petitioner submits to us for review the propriety of the Court of Appeals'
disregarding the findings of fact and the award of damages made by the trial court.
This petition is an offshoot of an action for damages filed by the petitioner against the
private respondents docketed as Civil Case No. 24105 and decided by the Regional Trial
Court, National Capital Judicial Region, Branch 151 of Pasig, Metro Manila which ruled
as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff
and against defendant Manuel Macasaet, sentencing the latter to pay
the former, the following sums:
a) Three Hundred Two Thousand Six Hundred Fifty-Eight Pesos and
Twenty Centavos (P302,658.20) for and as actual damages;
b) One Hundred Thousand Pesos (P100,000.00) for and as moral
damages;
c) Fifty Thousand Pesos (P50,000.00) for and as exemplary damages;
and

d) Fifty Thousand Pesos (P50,000.00) for and as attorney's fees and


litigation expenses.
The complaint and defendant Macasaet's cross claim against
defendant Jacobo Feliciano are dismissed.
Defendants Manuel Macasaet's and Jacobo Feliciano's counterclaims
are likewise dismissed.
Costs against defendant Manuel Macasaet. (Rollo, pp. 55-56)
The petitioner was a stockholder of record, director and executive vice-president of
Monte Oro Mineral Resources, Inc. (Monte Oro for brevity'sake), a local mining
company whose shares were traded in the stock market. He owned 56,588,358 shares of
the capital stock of Monte Oro with par value of P0.01 per share or a total par value of
P565,883.58 as evidenced by Stock Certificate No. 002 (Exhibit "A") for 14,159,583
shares and Stock Certificate No. 026 (Exhibit "B") for 42,428,775 shares.
On February 18, 1976, the petitioner indorsed and delivered Stock Certificates Nos. 002
and 026 to private respondent Manuel Macasaet, board chairman and President of
Monte Oro, who personally received the said certificate in the following tenor:
ACKNOWLEDGMENT RECEIPT
I hereby certify that I have personally received from Mr. Fructuoso
R. Capco the following Monte Oro Certificates in trust and for safe
keeping only to be delivered and/or surrendered to him and/or his
heirs or duly authorized representative on demand. (Exhibit "C")
Cert. No. Amount Date Remarks
002 14,159,583 12/04/74 'Already Indorsed'
026 42,428,775 04/16/75 'Already Indorsed'
________
Total 56,588,358

On April 26,1976, the petitioner demanded the return of his stock certificates from
respondent Macasaet who failed to produce them because he had given them to the
other private respondent Jacobo Feliciano, another officer of Monte Oro, allegedly in
connection with a contemplated joint venture with the group of one Leonilo Esguerra.
On April 28, 1976, respondent Macasaet replaced the petitioner's Stock Certificate No.
026 with his own Stock Certificate No. 025 covering 42,578,700 shares. The petitioner
duly acknowledged the receipt of the said replacement (Exhibit "3").
On May 4, 1976, Stock Certificate No. 002 was returned by respondent Macasaet to the
petitioner as evidenced by the handwritten receipt signed by the latter (Exhibit "2") who
likewise made a handwritten notation stating "all cleared" at the left hand margin
thereof.
On August 12, 1976, the petitioner filed a complaint for damages against the private
respondents alleging, among others, that at the time he demanded his Stock Certificate
Nos. 002 and 026 totalling 56,588,358 shares from respondent Macasaet the petitioner
had a ready buyer for 0.014 per share for all shares; that due to the private respondents'
failure to return the said stock certificates upon demand, the petitioner lost P306,115.25
representing the difference between the amount of P792,237.01 which he would have
realized had his stock certificates been promptly given back and the sum of
P486,121.76, the actual net proceeds from the subsequent sale of P42,550,000 shares at
various prices after respondent Macasaet delivered his own Stock Certificate No. 025 in
exchange for the petitioners Stock Certificate No. 026; that the aforesaid amount of P
306,115.25 had long been overdue and unpaid and despite repeated demands from the
private respondents for the payment thereof, the latter had failed and refused to pay the
same to the petitioner's damage and prejudice; and that due to the private respondents'
intentional, deliberate and malicious acts, moral and exemplary damages could be
awarded to the petitioner.
Respondent Macasaet counter-alleged, among others, that he had in turn entrusted
Stock Certificate Nos. 002 and 026 of the petitioner to his co-defendant, respondent
Feliciano to be shown to a certain group for the purpose of a joint venture; that
respondent Macasaet had actually made several demands for the return of the said stock
certificates from respondent Feliciano who refused and failed to do so; that two days
after the petitioner made the demand, respondent Macasaet replaced the petitioner's
Stock Certificate No. 026 with his own Stock Certificate No. 025 which covered
149,925 shares more than those of the petitioner's Stock Certificate No. 026; that the
respondent Macasaet returned the petitioner's Stock Certificate No. 002 on May 4, 1976
after he recovered the game from respondent Feliciano; and that the words "ALL

CLEARED" written by the petitioner himself on his acknowledgment receipt as he


received Stock Certificate No. 002 from respondent Macasaet undoubtedly meant to
discharge private respondent Macasaet from any responsibility or liability regarding the
petitioner's stock certificates.
On August 8, 1983, the lower court rendered a judgment favorable to the petitioner. It
also dismissed the complaint and respondent Macasaet's cross-claim against respondent
Feliciano and likewise dismissed private respondents' counter-claims against the
petitioner.
On appeal by respondent Macasaet, the Court of Appeals on June 19, 1989, reversed
and set aside the trial court's judgment for lack of merit and supporting proof. The
petitioner's complaint as well as the cross-claims and counter-claims of private
respondents were all dismissed.
After the petitioner's subsequent motion for reconsideration was denied on October 23,
1989, the present petition was filed assigning as errors, to wit:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED
BLINDLY SUPPORTING THE FIRST AND SECOND
THEORY OF PRIVATE RESPONDENT THAT THE WRITTEN
ANNOTATION OF 'ALL CLEARED IN STOCK CERTIFICATE
NO. 002 NECESSARILY INCLUDED ANOTHER SEPARATE
AND DIFFERENT STOCK CERTIFICATE NO. 026 AND
ASSUMING THERETO 'PAYMENT' OF LIABILITY OF
PRIVATE RESPONDENT TO PETITIONER.
II
THE HONORABLE COURT OF APPEALS GRAVELY ERRED
IN CLEARING PRIVATE RESPONDENT OF
RESPONSIBILITIES BY DISREGARDING OR ABROGATING
A VOLUNTARY CONTRACT OF TRUST,
(ACKNOWLEDGMENT RECEIPT, DATED FEBRUARY
18,1976, ANNEX "C" PLAINTIFF'S COMPLAINT; EXH. "C"PLAINTIFF) ALSO ON MERE ASSUMPTION THAT THE
ENDORSEMENT ON THE SUBJECT STOCK CERTIFICATES

CONSTITUTE FULL AUTHORITY TO PRIVATE


RESPONDENT TO DELIVER, CONVEY AND SELL THE
SAME.
III
THE HONORABLE COURT OF APPEALS LIKEWISE
COMMITTED GROSS ERROR IN CLEARING THE PRIVATE
RESPONDENT OF LIABILITY FOR ALL DAMAGES
ALREADY SUFFERED AND INCURRED BY PETITIONER.
IV
THE HONORABLE COURT OF APPEALS ALSO
COMMITTED GRAVE ERROR BY CONCLUDING LACK OF
EVIDENCE TO SUPPORT CLAIM OF DAMAGES AND
DISREGARDING THE FACTS AND EVIDENCE DULY
ADMITTED AND PROVEN AT A FORMAL TRIAL IN THE
LOWER COURT." (Petition, pp. 5-6, Rollo, pp. 16-17)
The petitioner's main argument rests on the oft-repeated pronouncement that the
conclusions and findings of fact by the trial court are entitled to great weight on appeal
and should not be disturbed unless for strong and cogent reasons because the trial court
is in a better position to examine real evidence as well as observe the demeanor of the
witnesses while testifying citing the case of Chase v. Buencamino (136 SCRA 605 [1985]).
The petitioner faults the respondent court for side-stepping the literal interpretation of
the Acknowledgment Receipt dated February 18, 1972 signed by the respondent
Macasaet which allegedly serves as a clear proof that Stock Certificate Nos. 002 and 026
were held by the latter in trust and for safekeeping only. The petitioner further labels as
capricious the respondent court's act of completely ignoring all the established evidence,
both documentary and testimonial, duly admitted and considered by the trial court.
The rule that the trial court's findings of facts are accorded due respect on appeal is not
without exceptions. It is not applicable where there are strong and cogent reasons as
when the trial court's findings are not supported by the evidence or when the trial court
failed to consider material facts which would have led to a conclusion different from
what was stated in its judgment or when the trial court's decision was attended by grave
abuse of discretion amounting to lack of jurisdiction. A review of the bases for the trial
court's decision shows that the appellate court was justified in being skeptical as it went
over both the facts and the law.

The instant case was given due course to enable a more thorough presentation by the
parties and review of the records considering the petitioner's stress on the disparity
between the factual findings of the trial court which found respondent Macasaet liable
for actual, moral and exemplary damages and the respondent appellate court which
discharged the said respondent from any liability regarding the petitioner's Stock
Certificate Nos. 002 and 026.
It is true that when the petitioner delivered Stock Certificate Nos. 002 and 026 to
respondent Macasaet the latter acknowledged receiving them "in trust and for
safekeeping only." This acknowledgment, however, cannot outweigh the legal effects of
the stock certificates having been "already indorsed". There is no dispute that
respondent Macasaet received the petitioner's certificates in that condition as evidenced
by the same Acknowledgment Receipt dated February 18, 1976.
Certificates of stocks are considered as "quasi-negotiable" instruments. When the owner
or shareholder of these certificates signs the printed form of sale or assignment at the
back of every stock certificate without filling in the blanks provided for the name of the
transferee as well as for the name of the attorney-in-fact, the said owner or shareholder,
in effect, confers on another all the indicia of ownership of the said stock certificates.
(Campos and Lopez-Campos, Notes and Selected Cases on Negotiable Instruments
Law, 1971 ed., p. 605). In the case at bar, the petitioner signed the printed form at the
back of both Stock Certificate Nos. 002 and 026 without filling in the blanks at the time
the said stock certificates were delivered to respondent Macasaet. Hence, the petitioner's
acts of indorsement and delivery conferred on respondent Macasaet the right to hold
them as though they were his own. On account of this apparent transfer of ownership,
it was not irregular on the part of respondent Macasaet to deliver the stock certificates
in question to respondent Feliciano for consideration in connection with a
contemplated tie-up between two business groups.
At this juncture, it is worth noting that in view of the petitioner's concurrent positions
as director, Executive Vice-President and General Manager of Monte Oro at the time of
the incident under consideration, he could not have been unaware of the consequences
of the delivery coupled with the indorsement of his two stock certificates to respondent
Macasaet, notwithstanding the tenor of the Acknowledgment Receipt. Moreover, it is
hard to believe that the petitioner's delivery of the subject stock certificates to
respondent Macasaet was strictly for safe-keeping purposes only because if that were his
real and only intention, there is neither logic nor reason for the indorsement of the said
certificates.

After a careful perusal and examination of the records of this case, we find no legal
ground that will constrain us to depart from the rule that the Court of Appeals' findings
of fact are deemed final, conclusive and binding on us if supported by substantial
evidence. We reiterate our ruling in the case of Hermo v. Court of Appeals, (155 SCRA 24
[1987]) that:
At once apparent is that the factual findings of the Court of Appeals
are diametrically at odds with those of the Trial Court,.... And basic is
the rule that the conclusions of fact of a trial court are entitled to
great weight, and should not generally be disturbed on appeal,
because it is in a better position than the appellate tribunal to
examine the evidence directly, and to observe the demeanor of the
witnesses while testifying. Withal, its findings of fact, though entitled
to great respect, are not conclusive on the Court of Appeals. In the
exercise of its appellate jurisdiction, the Court of Appeals may affirm,
reverse, or modify the judgment or order appealed from, and may
direct a new trial or further proceeding to be had. It is indeed the
duty of that Court chiefly though not exclusively to review a Trial
Court's findings of fact and correct such serious errors affecting them
as may have been properly assigned and as may be established by a
reexamination of the recorded evidence. And it is the findings of fact of
the Court of Appeals, not those of the trial court that are as a rule deemed final,
and conclusive even on this Court. (Emphasis Supplied) (At p. 27)
We find no reversible error in the respondent Court's holding that the petitioner failed
to support his claim that he suffered the claimed damages as a result of respondent
Macasaet's failure to return Stock Certificate Nos. 002 and 026 upon demand. The
alleged "unrealized profits" representing actual and compensatory damages must be
supported by substantial and convincing proof. The records are bereft of such kind of
proof. Mere allegation that there was a "ready and willing buyer' of all the petitioners
shares covered by Stock Certificate Nos. 002 and 026 for P0.014 per share at the time
the demand for the return of the said certificates was made cannot suffice to allow the
petitioners claim for unrealized profits to prosper. Such claim is clearly speculative in
nature.
Actual or compensatory damages are those recoverable because of pecuniary loss in
business, trade, property, profession, job or occupation, and the same must be proved;
otherwise, if the proof is flimsy and non-substantial, no damages will be given (Danao v.
Court of Appeal, 154 SCRA 447 [19871]; Rubio v. Court of Appeals, 141 SCRA 488
[1986]; Perfecto v. Gonzales, 128 SCRA 635 [1984]). Actual and compensatory damages

require evidentiary proof. They cannot be presumed. (Dee Hua Liong Electrical
Equipment Corporation v. Reyes, 145 SCRA 713 [1986])
The good faith of respondent Macasaet is shown by the fact that after trying to recover
the missing certificates, he immediately substituted Stock Certificate No. 026 with his
own Stock Certificate No. 025 which covered more shares than the petitioner's replaced
certificate. The petitioner's other Stock Certificate No. 002 was subsequently returned
and received by the petitioner with the notation "All Cleared" on the acknowledgment
receipt duly signed and personally written by him. We agree with the respondent court's
ruling that the said notation meant to discharge respondent Macasaet' together with his
co-respondent Feliciano) from any liability with respect to the stock certificates in
question as there can be no other plausible interpretation therefor. He would not have
written "all cleared" if he was unhappy at that time about the substitution of the higher
value certificate for his other certificate.
In fine, considering that in the absence of malice and bad faith, moral damages cannot
be awarded (Philippine National Bank v. Court of Appeals, 159 SCRA 433 [19881) and
that the grant of moral and exemplary damages has no basis if not predicated upon any
of the cases enumerated in the Civil Code (Bagumbayan Corporation v. Intermediate
Appellate Court, 132 SCRA 441 [19841), we hold that the respondent court properly set
aside the award of actual, moral and exemplary damages given by the trial court in favor
of the petitioner.
WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The
assailed decision dated June 19, 1989 and the resolution dated October 23, 1989 of the
Court of Appeals are AFFIRMED.
SO ORDERED.
Bidin and Cortes, JJ., concur.
Fernan (Chairman), is on leave.

Separate Opinions

FELICIANO, J., concurring:


I concur in the result reached by Mr. Justice Hugo E. Gutierrez, Jr. I should merely like
to render a brief note in respect of his statement that: "it is hard to believe that
petitioners' delivery of the subject stock certificates to respondent Macasaet was strictly
for safekeeping purposes only because if that were his real and only intention. there is
neither logic nor reason for the indorsement of the said certificates.
Petitioner was very probably not unaware of the consequences of delivering stock
certificates which had been indorsed in blank. However, awareness of such
consequences may precisely explain why the Acknowledgment Receipt executed by
private respondent Macasaet specifically stated that he had received the stock certificates
in question "for safekeeping only to be delivered and/or surrendered to him ... on demand". In
other words, there was here no unrestricted delivery of the stock certificates. On the
contrary, the delivery of the stock certificates to private respondent Macasaet was clearly
a limited or qualified delivery, for a specified purpose only. If the Acknowledgment
Receipt had not been a restricted receipt, full authority or absolute ownership over the
stock certificates would have been transferred to private respondent Macasaet. The
restricted Acknowledgment Receipt thus had a qualifying and countervailing effect upon
the indorsement in blank of the stock certificates involved. Although indorsed in blank,
the stock certificates are not then intended to be transferred to and cannot be disposed of
by petitioner-holder.
There are a number of possible reasons why petitioner should have wanted to indorse
the stock certificates in blank while delivering them to private respondent under a
restricted receipt: for one thing, the petitioner could go out of town or out of the
country on business or otherwise; during his trip, he would be in a position to instruct
private respondent to sell the shares already indorsed in blank when it might be
profitable or convenient to do so without need of executing and sending back a special
power of attorney, by the simple expedient of lifting the restriction found in the
Acknowledgment Receipt. Indorsement in blank of stock certificates facilitates the ready
transferability of the stock certificates; at the same time, the restricted Acknowledgment
Receipt effectively constituted private respondent a bailee or trustee vis-a-vis petitioner.
The arrangement may be seen to have both a judiciary quality and a certain flexibility, a
combination of substantial utility in the trading of corporate securities.

G.R. No. 74917 January 20, 1988


BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING
HOUSE CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON
CITY, BRANCH XCII (92), respondents.

GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of
Quezon City promulgated on March 24, 1986 in Civil Case No. Q-46517 entitled Banco
de Oro Savings and Mortgage Bank versus Equitable Banking Corporation and the
Philippine Clearing House Corporation after a review of the Decision of the Board of
Directors of the Philippine Clearing House Corporation (PCHC) in the case of
Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage (BCO),
ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983,
plaintiff through its Visa Card Department, drew six crossed
Manager's check (Exhibits "A" to "F", and herein referred to as
Checks) having an aggregate amount of Forty Five Thousand Nine
Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable
to certain member establishments of Visa Card. Subsequently, the
Checks were deposited with the defendant to the credit of its
depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the back of the
Checks the usual endorsements. All prior and/or lack of
endorsement guaranteed the defendant sent the checks for clearing
through the Philippine Clearing House Corporation (PCHC).
Accordingly, plaintiff paid the Checks; its clearing account was
debited for the value of the Checks and defendant's clearing account
was credited for the same amount,

Thereafter, plaintiff discovered that the endorsements appearing at


the back of the Checks and purporting to be that of the payees were
forged and/or unauthorized or otherwise belong to persons other
than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff
presented the Checks directly to the defendant for the purpose of
claiming reimbursement from the latter. However, defendant refused
to accept such direct presentation and to reimburse the plaintiff for
the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the
defendant to pay the plaintiff the sum of P45,982.23 with interest at
the rate of 12% per annum from the date of the complaint plus
attorney's fees in the amount of P10,000.00 as well as the cost of the
suit.
In accordance with Section 38 of the Clearing House Rules and
Regulations, the dispute was presented for Arbitration; and Atty.
Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a
decision in favor of the plaintiff and against the defendant ordering
the PCHC to debit the clearing account of the defendant, and to
credit the clearing account of the plaintiff of the amount of
P45,982.23 with interest at the rate of 12% per annum from date of
the complaint and Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the
PCHC affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed;
and the Philippine Clearing House Corporation is hereby ordered to
debit the clearing account of the defendant and credit the clearing
account of plaintiff the amount of Forty Five Thousand Nine
Hundred Eighty Two & 23/100 (P45,982.23) Pesos with interest at
the rate of 12% per annum from date of the complaint, and the
Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.

Thus, a petition for review was filed with the Regional Trial Court of Quezon City,
Branch XCII, wherein in due course a decision was rendered affirming in toto the
decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom
Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the
power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies
of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing
House Rules and Regulations of PCHC cover and apply only to checks that are
genuinely negotiable. Emphasis is laid on the primary purpose of the PCHC in the
Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient,
economical and relevant exchange and facilitate service limited to
check processing and sorting by way of assisting member banks,
entities inclearing checks and other clearing items as defined in existing and
in future Central Bank of the Philippines circulars, memoranda,
circular letters, rules and regulations and policies in pursuance to the
provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx

The deposit reserves maintained by the banks in the Central Bank, in


accordance with the provisions of Section 1000 shall serve as a basis
for the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted
as one that fits the articles of incorporation of the PCHC, the Central Bank and the
Clearing House Rules stating that it is a negotiable instrument citing the definition of a
"check" as basically a "bill of exchange" under Section 185 of the NIL and that it should
be payable to "order" or to "bearer" under Section 126 of game law. Petitioner alleges
that with the cancellation of the printed words "or bearer from the face of the check, it
becomes non-negotiable so the PCHC has no jurisdiction over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the
herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC
makes no distinction as to the character or nature of the checks
subject of its jurisdiction. The pertinent provisions quoted in
petitioners memorandum simply refer to check(s). Where the law
does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5,
1962) the Appellate Court categorically stated that there are four
kinds of checks in this jurisdiction; the regular check; the cashier's
check; the traveller's check; and the crossed check. The Court, further
elucidated, that while the Negotiable Instruments Law does not
contain any provision on crossed checks, it is coon practice in
commercial and banking operations to issue checks of this character,
obviously in accordance with Article 541 of the Code of Commerce.
Attention is likewise called to Section 185 of the Negotiable
Instruments Law:
Sec. 185. Check defined. A check is a bill of
exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the
provisions of this act applicable to a bill of
exchange payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in
the instrument an express stipulation negating or limiting his own

liability to the holder. Consequently, it appears that the use of the


term "check" in the Articles of Incorporation of PCHC is to be
perceived as not limited to negotiable checks only, but to checks as is
generally known in use in commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full
accord with the ruling of the PCHC Board of Directors that:
In presenting the Checks for clearing and for
payment, the defendant made an express guarantee
on the validity of "all prior endorsements." Thus,
stamped at the back of the checks are the
defendant's clear warranty; ALL PRIOR
ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. With. out
such warranty, plaintiff would not have paid on the
checks.
No amount of legal jargon can reverse the clear
meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the
defendant is liable for any damage arising out of
the falsity of its representation.
The principle of estoppel, effectively prevents the
defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an
action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively
prevents the defendant from denying the existence
of the Checks. (Pp. 1011 Decision; pp. 4344,
Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to
"clearing checks and other clearing items." No doubt transactions on non-negotiable
checks are within the ambit of its jurisdiction.

In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos
distinguere debemos." 2 It was enunciated in Loc Cham v. Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general
words and phrases in a statute should ordinarily be accorded their
natural and general significance. In other words, there should be no
distinction in the application of a statute where none is indicated.
There should be no distinction in the application of a statute where none is indicated for
courts are not authorized to distinguish where the law makes no distinction. They
should instead administer the law not as they think it ought to be but as they find it and
without regard to consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote
checks in general use in commercial and business activities. It cannot be conceived to be
limited to negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to
facilitate banking operations. It is of the essence to be payable on demand, because the
contract between the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing
operations of PCHC is a manifestation of their submission to its jurisdiction. Sec. 3 and
36.6 of the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general
agreement and understanding that any participant in the Philippine
Clearing House Corporation, MICR clearing operations by the mere
fact of their participation, thereby manifests its agreement to these
Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank participates in
the clearing operations of the PCHC shall be deemed its written and
subscribed consent to the binding effect of this arbitration agreement
as if it had done so in accordance with section 4 of the Republic Act
No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:

Two or more persons or parties may submit to the arbitration of one


or more arbitrators any controversy existing between them at the
time of the submission and which may be the subject of an action, or
the parties of any contract may in such contract agree to settle by
arbitration a controversy thereafter arising between them. Such
submission or contract shall be valid and irrevocable, save upon
grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of
valuations, appraisals or other controversies which may be collateral,
incidental, precedent or subsequent to any issue between the parties.
...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged
endorsement when such endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting Bank and not through the
regular clearing house facilities within the period prescribed by law
for the filing of a legal action by the returning bank/branch,
institution or entity sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations
should not be interpreted to be applicable only to checks which are negotiable
instruments but also to non-negotiable instruments and that the PCHC has jurisdiction
over this case even as the checks subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the
checks in question. It stamped its guarantee on the back of the checks and subsequently
presented these checks for clearing and it was on the basis of these endorsements by the
petitioner that the proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it
assumed the liabilities of an endorser by stamping its guarantee at the back of the
checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of
endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by

the petitioner stamping thereon its guarantee, in order that it can clear the said checks
with the respondent bank. By such deliberate and positive attitude of the petitioner it
has for all legal intents and purposes treated the said cheeks as negotiable instruments
and accordingly assumed the warranty of the endorser when it stamped its guarantee of
prior endorsements at the back of the checks. It led the said respondent to believe that
it was acting as endorser of the checks and on the strength of this guarantee said
respondent cleared the checks in question and credited the account of the petitioner.
Petitioner is now barred from taking an opposite posture by claiming that the disputed
checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to
the issue when it stated the doctrine of estoppel is based upon the grounds of public
policy, fair dealing, good faith and justice and its purpose is to forbid one to speak
against his own act, representations or commitments to the injury of one to whom they
were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may
turn out to be a forged endorsement. Whenever any bank treats the signature at the
back of the checks as endorsements and thus logically guarantees the same as such there
can be no doubt said bank has considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized
that the collecting bank or last endorser generally suffers the loss because it has the duty
to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. This is
laid down in the case of PNB vs. National City Bank. 6 In another case, this court held
that if the drawee-bank discovers that the signature of the payee was forged after it has
paid the amount of the check to the holder thereof, it can recover the amount paid from
the collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes a party
from repudiating an obligation voluntarily assumed after having accepted benefits
therefrom. To countenance such repudiation would be contrary to equity and put
premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank
of NY & Motor Service Co. that:

Where a check is accepted or certified by the bank on which it is


drawn, the bank is estopped to deny the genuineness of the drawers
signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted
or certified by the said bank, it can not recover from a holder who
did not participate in the forgery and did not have actual notice
thereof.
The payment of a check does not include or imply its acceptance in
the sense that this word is used in Section 62 of the Negotiable
Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to
discover the alteration or the forgery. Very akin to the case at bar is one which involves
a suit filed by the drawer of checks against the collecting bank and this came about in
Farmers State Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the appellee
(the drawer) accrued as a result of the bank breaching its implied
warranty of the genuineness of the indorsements of the name of the
payee by bringing about the presentation of the checks (to the drawee
bank) and collecting the amounts thereof, the right to enforce that
cause of action was not destroyed by the circumstance that another
cause of action for the recovery of the amounts paid on the checks
would have accrued in favor of the appellee against another or to
others than the bank if when the checks were paid they have been
indorsed by the payee. (United States vs. National Exchange Bank,
214 US, 302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84;
Onondaga County Savings Bank vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants to all
subsequent holders in due course' (a) that the instrument is genuine
and in all respects what it purports to be; (b) that he has good title to
it; (c) that all prior parties have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and subsisting. 11

It has been enunciated in an American case particularly in American Exchange National


Bank vs. Yorkville Bank 12 that: "the drawer owes no duty of diligence to the collecting
bank (one who had accepted an altered check and had paid over the proceeds to the
depositor) except of seasonably discovering the alteration by a comparison of its
returned checks and check stubs or other equivalent record, and to inform the drawee
thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer
constitutes no defense to the collecting bank are that there is no
privity between the drawer and the collecting bank (Corn Exchange
Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that
bank no duty of vigilance (New York Produce Exchange Bank vs.
Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank
is induced by any act or representation or admission of the drawer
(Seaboard National Bank vs. Bank of America (supra) and it follows
that negligence on the part of the drawer cannot create any liability
from it to the collecting bank, and the drawer thus is neither a
necessary nor a proper party to an action by the drawee bank against
such bank. It is quite true that depositors in banks are under the
obligation of examining their passbooks and returned vouchers as a
protection against the payment by the depository bank against forged
checks, and negligence in the performance of that obligation may
relieve that bank of liability for the repayment of amounts paid out
on forged checks, which but for such negligence it would be bound
to repay. A leading case on that subject is Morgan vs. United States
Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas.
1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the
collecting bank, the law imposes a duty of diligence on the collecting bank to scrutinize
checks deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in banking holds itself out to the
public as the expert and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as
indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to
equity and would deal a negative blow to the whole banking system of this country.

The court reproduces with approval the following disquisition of the PCHC in its
decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor
the defendant is entitled to receive payment payable for the Checks.
As the checks are not payable to defendant's depositor, payments to
persons other than payees named therein, their successor-in-interest
or any person authorized to receive payment are not valid. Article
1240, New Civil Code of the Philippines unequivocably provides
that:
"Art. 1240. Payment shall be made to the person in
whose favor the obligation has been constituted,
or his successo-in-interest, or any person
authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant
is entitled to receive payments for the Checks, payments to any of
them give rise to an obligation to return the amounts received.
Section 2154 of the New Civil Code mandates that:
Article 2154. If something is received when there
is no right to demand it, and it was unduly
delivered through mistake, the obligation to return
it arises.
It is contended that plaintiff should be held responsible for issuing
the Checks notwithstanding that the underlying transactions were
fictitious This contention has no basis in our jurisprudence.

The nullity of the underlying transactions does not diminish, but in


fact strengthens, plaintiffs right to recover from the defendant. Such
nullity clearly emphasizes the obligation of the payees to return the
proceeds of the Checks. If a failure of consideration is sufficient to
warrant a finding that a payee is not entitled to payment or must
return payment already made, with more reason the defendant, who
is neither the payee nor the person authorized by the payee, should
be compelled to surrender the proceeds of the Checks received by it.
Defendant does not have any title to the Checks; neither can it claim
any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant
made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the bank of the checks are the
defendant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
The principle of estoppel effectively prevents the defendant from
denying liability for any damages sustained by the plaintiff which,
relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the
defendant from denying the existence of the Checks.

Whether the Checks have been issued for valuable considerations or


not is of no serious moment to this case. These Checks have been
made the subject of contracts of endorsement wherein the defendant
made expressed warranties to induce payment by the drawer of the
Checks; and the defendant cannot now refuse liability for breach of
warranty as a consequence of such forged endorsements. The
defendant has falsely warranted in favor of plaintiff the validity of all
endorsements and the genuineness of the cheeks in all respects what
they purport to be.
The damage that will result if judgment is not rendered for the
plaintiff is irreparable. The collecting bank has privity with the
depositor who is the principal culprit in this case. The defendant
knows the depositor; her address and her history, Depositor is
defendant's client. It has taken a risk on its depositor when it allowed
her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the
payees, the defendant is guilty of negligence; the risk of wrongful
payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the
Board of Directors finds no reason to reverse the decision of the
Arbiter. The defendant's failure to reimburse the plaintiff has
constrained the plaintiff to regular the services of counsel in order to
protect its interest notwithstanding that plaintiffs claim is plainly valid
just and demandable. In addition, defendant's clear obligation is to
reimburse plaintiff upon direct presentation of the checks; and it is
undenied that up to this time the defendant has failed to make such
reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement
as to costs. The decision of the respondent court of 24 March 1986 and its order of 3
June 1986 are hereby declared to be immediately executory.
SO ORDERED.

G.R. No. 45625


MARGARITA VILLANUEVA, as judicial administratrix of the deceased
Lorenzo Villanueva, plaintiff-appellant,
vs.
JUAN SANTOS, defendant-appellee.
J. Fernando Rodrigo for appellant.
Magno S. Gatmaitan and Jose C. Borlogan for appellee.
IMPERIAL, J.:
This appeal was taken by the plaintiff from the order of the Court of First Instance of
Bulacan, holding that the consignation made by said plaintiff was invalid and that the
sale with the right of repurchase of the parcels of land in litigation was final, and
ordering her to yield possession thereof to the defendant within ten days from receipt of
notice of the said order.
The plaintiff, as judicial administratrix of the deceased Lorenzo Villanueva, commenced
in the Court of First Instance of Bulacan civil case No. 5249 against the defendant to
annul the deed of sale with the right of repurchase of two parcels of land executed by
the said Lorenzo Villanueva while living in favor of the defendant. The following
decision was rendered in the said case:
When this case was called for trial, the parties through their respective attorneys
submitted the following stipulation for the decision of the court:
"Both parties, assisted by their respective attorneys, agree that the plaintiff shall pay on
December 4, 1936, to the defendant to repurchase the two parcels of land described in
the complaint, the sum of three hundred fifty-nine pesos and sixty centavos (P356.60),
with legal interest thereon from January 8, 1934 until the said date, December 4, 1936;
and that should she fail to pay the said sum of P359.60, or a part thereof, or the interest
thereon, wholly or partially, then the sale with the right of repurchase of said parcels, as
they appear in the deed of sale Exhibit A of the complaint, shall be deemed final; and
that the plaintiff shall deliver the possession of said parcels.
"They likewise agree that should the plaintiff pay the aforesaid sums within the
stipulated period, the expenses for the execution of the corresponding deed and the
transfer of certificates shall be defrayed by the plaintiff.
"They also agree that the plaintiff shall on this very date ask the authority of the court to
enter into this stipulation in the intestate of the deceased Lorenzo Villanueva; and to
render a decision in accordance therewith."

Wherefore, the court approves this stipulation and orders the parties to observe and
comply strictly with the conditions thereof, without pronouncement as to the costs. So
ordered.
Malolos, Bulacan, today November 5, 1936.
(Sgd.) PEDRO MA. SISON
Judge (B. E., p. 7.)
On the night of December 4, 1936, the date of the expiration of the period granted to
the plaintiff to pay the repurchase price, the latter offered to the defendant the check
No. D-8695 for P421.04, issued by Ramon Meneses against the Bank of the Philippines
Islands in payment of the repurchase price. As the defendant refused to accept the
check on the allegation that the payment should be made in money or legal tender, the
plaintiff, through counsel, deposited the check with the clerk of court who received the
same, and at the same time put in a motion asking that the payment be deemed effected
and the two parcels of land redeemed, and, further, that the defendant be ordered to pay
her the sum of P120 as damages. After hearing the motion, the court on April 30, 1937,
issued the aforementioned order from which the plaintiff appealed.
In her sole assigned error the plaintiff contends that the court erred in holding that the
consignation of the check with the clerk of court was invalid and that it did not have the
effect of paying her obligation. The court correctly held that the consignation was
unavailing and that it did not produce any legal effect because the defendant did not
accept it and it was not in the form of money or legal tender. Article 1170 of the Civil
Code provides that payment of debts of money shall be made in the specie stipulation
and, should it not be possible to deliver such specie, in silver or gold coin legally
current; and provides, further, that the delivery of promissory notes payable to order, or
drafts or other commercial paper, shall produce the effects of payment only when
realized or when, by the fault of the creditor, the privileges inherent in their negotiable
character have been lost. Under this legal provision the defendant was not under a duty
to accept the check because it is known that it does not constitute legal tender, and the
consignation having been refused, it did not produce any legal effect and could not be
considered as payment made by the plaintiff of the repurchase price. In Belisario vs.
Natividad ([1934]), 60 Phil., 156), it was held that a creditor is not bound to accept a
check in satisfaction of his demand, because a check, even if good when offered, does
not meet the requirements of a legal tender.
The defendant, in turn, alleges that the court erred in concluding that he testified that
the plaintiff's indebtedness was P421.04, and in not holding that the consignation was
invalid because the plaintiff's debt was P422.29 and the check only amounted to

P421.04. These assigned errors can neither be considered nor passed for the simple
reason that the defendant did not appeal from any part of the court's order.
In view of the foregoing, the appealed order is affirmed, with the costs of this instance
to the plaintiff-appellant. So ordered.

Citibank NA v. Sabeniano G.R. No. 156132 October 16, 2006


Before this Court is a Petition for Review on Certiorari,[1] under Rule 45 of the
Revised Rules of Court, of the Decision[2] of the Court of Appeals in CA-G.R. CV No.
51930, dated 26 March 2002, and the Resolution,[3] dated 20 November 2002, of the
same court which, although modifying its earlier Decision, still denied for the most part
the Motion for Reconsideration of herein petitioners.

Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a
banking corporation duly authorized and existing under the laws of the United States of
America and licensed to do commercial banking activities and perform trust functions
in the Philippines.
Petitioner Investors Finance Corporation, which did business under the name
and style of FNCB Finance, was an affiliate company of petitioner Citibank, specifically
handling money market placements for its clients. It is now, by virtue of a merger,
doing business as part of its successor-in-interest, BPI Card Finance
Corporation. However, so as to consistently establish its identity in the Petition at bar,
the said petitioner shall still be referred to herein as FNCB Finance. [4]
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank
and FNCB Finance. Regrettably, the business relations among the parties subsequently
went awry.
On 8 August 1985, respondent filed a Complaint[5] against petitioners,
docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati
City. Respondent claimed to have substantial deposits and money market placements
with the petitioners, as well as money market placements with the Ayala Investment and
Development Corporation (AIDC), the proceeds of which were supposedly deposited
automatically and directly to respondents accounts with petitioner
Citibank. Respondent alleged that petitioners refused to return her deposits and the
proceeds of her money market placements despite her repeated demands, thus,
compelling respondent to file Civil Case No. 11336 against petitioners for Accounting,
Sum of Money and Damages. Respondent eventually filed an Amended
Complaint[6] on 9 October 1985 to include additional claims to deposits and money
market placements inadvertently left out from her original Complaint.
In their joint Answer[7] and Answer to Amended Complaint,[8] filed on 12
September 1985 and 6 November 1985, respectively, petitioners admitted that
respondent had deposits and money market placements with them, including dollar

accounts in the Citibank branch in Geneva, Switzerland (Citibank-Geneva). Petitioners


further alleged that the respondent later obtained several loans from petitioner Citibank,
for which she executed Promissory Notes (PNs), and secured by (a) a Declaration of
Pledge of her dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of her
money market placements with petitioner FNCB Finance. When respondent failed to
pay her loans despite repeated demands by petitioner Citibank, the latter exercised its
right to off-set or compensate respondents outstanding loans with her deposits and
money market placements, pursuant to the Declaration of Pledge and the Deeds of
Assignment executed by respondent in its favor. Petitioner Citibank supposedly
informed respondent Sabeniano of the foregoing compensation through letters, dated
28 September 1979 and 31 October 1979. Petitioners were therefore surprised when six
years later, in 1985, respondent and her counsel made repeated requests for the
withdrawal of respondents deposits and money market placements with petitioner
Citibank, including her dollar accounts with Citibank-Geneva and her money market
placements with petitioner FNCB Finance. Thus, petitioners prayed for the dismissal
of the Complaint and for the award of actual, moral, and exemplary damages, and
attorneys fees.
When the parties failed to reach a compromise during the pre-trial
hearing,[9] trial proper ensued and the parties proceeded with the presentation of their
respective evidence. Ten years after the filing of the Complaint on 8 August 1985, a
Decision[10] was finally rendered in Civil Case No. 11336 on 24 August 1995 by the
fourth Judge[11] who handled the said case, Judge Manuel D. Victorio, the dispositive
portion of which reads
WHEREFORE, in view of all the foregoing, decision is
hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by
the defendant Bank [petitioner Citibank] of plaintiffs [respondent
Sabeniano] dollar deposit with Citibank, Switzerland, in the amount
of US$149,632.99, and ordering the said defendant [petitioner
Citibank] to refund the said amount to the plaintiff with legal interest
at the rate of twelve percent (12%) per annum, compounded yearly,
from 31 October 1979 until fully paid, or its peso equivalent at the
time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted
to the defendant Bank [petitioner Citibank] in the amount
of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff
[respondent Sabeniano] to pay said amount, however, there shall be

no interest and penalty charges from the time the illegal setoff was
effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed
by the parties against each other.
Costs against the defendant Bank.
All the parties appealed the foregoing Decision of the RTC to the Court of
Appeals, docketed as CA-G.R. CV No. 51930. Respondent questioned the findings of
the RTC that she was still indebted to petitioner Citibank, as well as the failure of the
RTC to order petitioners to render an accounting of respondents deposits and money
market placements with them. On the other hand, petitioners argued that petitioner
Citibank validly compensated respondents outstanding loans with her dollar accounts
with Citibank-Geneva, in accordance with the Declaration of Pledge she executed in its
favor. Petitioners also alleged that the RTC erred in not declaring respondent liable for
damages and interest.
On 26 March 2002, the Court of Appeals rendered its Decision[12] affirming with
modification the RTC Decision in Civil Case No. 11336, dated 24 August 1995, and
ruling entirely in favor of respondent in this wise
Wherefore, premises considered, the assailed 24 August
1995 Decision of the court a quo is hereby AFFIRMED with
MODIFICATION, as follows:
1.
Declaring as illegal, null and void the set-off effected
by the defendant-appellant Bank of the plaintiff-appellants dollar
deposit with Citibank, Switzerland, in the amount of US$149,632.99,
and ordering defendant-appellant Citibank to refund the said amount
to the plaintiff-appellant with legal interest at the rate of twelve
percent (12%) per annum, compounded yearly, from 31 October
1979 until fully paid, or its peso equivalent at the time of payment;
2.
As defendant-appellant Citibank failed to establish
by competent evidence the alleged indebtedness of plaintiff-appellant,
the set-off ofP1,069,847.40 in the account of Ms. Sabeniano is hereby
declared as without legal and factual basis;

3.
As defendants-appellants failed to account the
following plaintiff-appellants money market placements, savings
account and current accounts, the former is hereby ordered to return
the same, in accordance with the terms and conditions agreed upon
by the contending parties as evidenced by the certificates of
investments, to wit:
(i)
Citibank NNPN Serial No.
023356 (Cancels and Supersedes NNPN No.
22526) issued on 17 March 1977,P318,897.34 with
14.50% interest p.a.;
(ii)
Citibank NNPN Serial No. 23357
(Cancels and Supersedes NNPN No. 22528)
issued on 17 March 1977, P203,150.00 with 14.50
interest p.a.;
(iii) FNCB NNPN Serial No. 05757
(Cancels and Supersedes NNPN No. 04952),
issued on 02 June 1977, P500,000.00 with 17%
interest p.a.;
(iv) FNCB NNPN Serial No. 05758
(Cancels and Supersedes NNPN No. 04962),
issued on 02 June 1977, P500,000.00 with 17%
interest per annum;
(v)
The Two Million (P2,000,000.00)
money market placements of Ms. Sabeniano with
the Ayala Investment & Development Corporation
(AIDC) with legal interest at the rate of twelve
percent (12%) per annum compounded yearly,
from 30 September 1976 until fully paid;
4.
Ordering defendants-appellants to jointly and
severally pay the plaintiff-appellant the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) by way of moral damages,
FIVE HUNDRED THOUSAND PESOS (P500,000.00) as
exemplary damages, and ONE HUNDRED THOUSAND PESOS
(P100,000.00) as attorneys fees.

Apparently, the parties to the case, namely, the respondent, on one hand, and the
petitioners, on the other, made separate attempts to bring the aforementioned Decision
of the Court of Appeals, dated 26 March 2002, before this Court for review.
G.R. No. 152985
Respondent no longer sought a reconsideration of the Decision of the Court of
Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead, filed
immediately with this Court on 3 May 2002 a Motion for Extension of Time to File a
Petition for Review,[13] which, after payment of the docket and other lawful fees, was
assigned the docket number G.R. No. 152985. In the said Motion, respondent alleged
that she received a copy of the assailed Court of Appeals Decision on 18 April 2002 and,
thus, had 15 days therefrom or until 3 May 2002 within which to file her Petition for
Review. Since she informed her counsel of her desire to pursue an appeal of the Court
of Appeals Decision only on 29 April 2002, her counsel neither had enough time to file
a motion for reconsideration of the said Decision with the Court of Appeals, nor a
Petition forCertiorari with this Court. Yet, the Motion failed to state the exact extension
period respondent was requesting for.
Since this Court did not act upon respondents Motion for Extension of Time
to file her Petition for Review, then the period for appeal continued to run and still
expired on 3 May 2002.[14] Respondent failed to file any Petition for Review within the
prescribed period for appeal and, hence, this Court issued a Resolution,[15] dated 13
November 2002, in which it pronounced that

G.R. No. 152985 (Modesta R. Sabeniano vs. Court of


Appeals, et al.). It appearing that petitioner failed to file the

intended petition for review on certiorari within the period which


expired on May 3, 2002, the Court Resolves to DECLARE THIS
CASE TERMINATED andDIRECT the Division Clerk of Court
to INFORM the parties that the judgment sought to be reviewed has
become final and executory.
The said Resolution was duly recorded in the Book of Entries of Judgments on 3
January 2003.
G.R. No. 156132

Meanwhile, petitioners filed with the Court of Appeals a Motion for


Reconsideration of its Decision in CA-G.R. CV No. 51930, dated 26 March
2002. Acting upon the said Motion, the Court of Appeals issued the
Resolution,[16] dated 20 November 2002, modifying its Decision of 26 March 2002, as
follows
WHEREFORE, premises considered, the instant Motion for
Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V)
paragraph 3 of the assailed Decisions dispositive portion is hereby
ordered DELETED.
The challenged 26 March 2002 Decision of the Court
is AFFIRMED with MODIFICATION.
Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 51930, dated 26 March 2002 and 20 November 2002, respectively, petitioners filed
the present Petition, docketed as G.R. No. 156132. The Petition was initially
denied[17] by this Court for failure of the petitioners to attach thereto a Certification
against Forum Shopping. However, upon petitioners Motion and compliance with the
requirements, this Court resolved[18] to reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly
committed by the Court of Appeals in its Decision, dated 26 March 2002, involving
both questions of fact and questions of law which this Court, for the sake of expediency,
discusses jointly, whenever possible, in the succeeding paragraphs.
I

The Resolution of this Court,


dated 13 November 2002, in
G.R. No. 152985, declaring
the Decision of the Court of
Appeals, dated 26 March 2002,
final and executory, pertains
to respondent Sabeniano
alone.
Before proceeding to a discussion of the merits of the instant Petition, this
Court wishes to address first the argument, persistently advanced by respondent in her

pleadings on record, as well as her numerous personal and unofficial letters to this
Court which were no longer made part of the record, that the Decision of the Court of
Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, had already become final and
executory by virtue of the Resolution of this Court in G.R. No. 152985, dated 13
November 2002.
G.R. No. 152985 was the docket number assigned by this Court to
respondents Motion for Extension of Time to File a Petition for Review. Respondent,
though, did not file her supposed Petition. Thus, after the lapse of the prescribed
period for the filing of the Petition, this Court issued the Resolution, dated 13
November 2002, declaring the Decision of the Court of Appeals, dated 26 March 2002,
final and executory. It should be pointed out, however, that the Resolution, dated 13
November 2002, referred only to G.R. No. 152985, respondents appeal, which she
failed to perfect through the filing of a Petition for Review within the prescribed
period. The declaration of this Court in the same Resolution would bind respondent
solely, and not petitioners which filed their own separate appeal before this Court,
docketed as G.R. No. 156132, the Petition at bar. This would mean that respondent, on
her part, should be bound by the findings of fact and law of the Court of Appeals,
including the monetary amounts consequently awarded to her by the appellate court in
its Decision, dated 26 March 2002; and she can no longer refute or assail any part
thereof. [19]
This Court already explained the matter to respondent when it issued a
Resolution[20] in G.R. No. 156132, dated 2 February 2004, which addressed her Urgent
Motion for the Release of the Decision with the Implementation of the Entry of
Judgment in the following manner
[A]cting on Citibanks and FNCB Finances Motion for Reconsideration,
we resolved to grant the motion, reinstate the petition and require
Sabeniano to file a comment thereto in our Resolution of June 23,
2003. Sabeniano filed a Comment dated July 17, 2003 to which
Citibank and FNCB Finance filed a Reply dated August 20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge
of, and in fact participated in, the proceedings in G.R. No.
156132. She cannot feign ignorance of the proceedings therein and
claim that the Decision of the Court of Appeals has become final and
executory. More
precisely,
the Decision became
final
and
executory only with regard to Sabeniano in view of her failure to
file a petition for review within the extended period granted by the

Court, and not to Citibank and FNCB Finance whose Petition for
Review was duly reinstated and is now submitted for decision.
Accordingly, the instant Urgent Motion is hereby DENIED.
(Emphasis supplied.)
To sustain the argument of respondent would result in an unjust and incongruous
situation wherein one party may frustrate the efforts of the opposing party to appeal the
case by merely filing with this Court a Motion for Extension of Time to File a Petition
for Review, ahead of the opposing party, then not actually filing the intended
Petition.[21] The party who fails to file its intended Petition within the reglementary or
extended period should solely bear the consequences of such failure.

Respondent Sabeniano did


not commit forum shopping.
Another issue that does not directly involve the merits of the present Petition, but
raised by petitioners, is whether respondent should be held liable for forum shopping.
Petitioners contend that respondent committed forum shopping on the basis of
the following facts:
While petitioners Motion for Reconsideration of the Decision in CA-G.R. CV
No. 51930, dated 26 March 2002, was still pending before the Court of Appeals,
respondent already filed with this Court on 3 May 2002 her Motion for Extension of
Time to File a Petition for Review of the same Court of Appeals Decision, docketed as
G.R. No. 152985. Thereafter, respondent continued to participate in the proceedings
before the Court of Appeals in CA-G.R. CV No. 51930 by filing her Comment, dated
17 July 2002, to petitioners Motion for Reconsideration; and a Rejoinder, dated 23
September 2002, to petitioners Reply. Thus, petitioners argue that by seeking relief
concurrently from this Court and the Court of Appeals, respondent is undeniably guilty
of forum shopping, if not indirect contempt.
This Court, however, finds no sufficient basis to hold respondent liable for forum
shopping.
Forum shopping has been defined as the filing of two or more suits involving the
same parties for the same cause of action, either simultaneously or successively, for the
purpose of obtaining a favorable judgment.[22] The test for determining forum shopping

is whether in the two (or more) cases pending, there is an identity of parties, rights or
causes of action, and relief sought.[23] To guard against this deplorable practice, Rule 7,
Section 5 of the revised Rules of Court imposes the following requirement

terminated, and the therein assailed Court of Appeals Decision final and
executory. G.R. No. 152985, therefore, did not progress and respondents appeal was
unperfected.

SEC. 5. Certification against forum shopping. The plaintiff or


principal party shall certify under oath in the complaint or other
initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed therewith: (a)
that he has not theretofore commenced any action or filed any claim
involving the same issues in any court, tribunal or quasi-judicial
agency and, to the best of his knowledge, no such other action or
claim is pending therein; (b) if there is such other pending action or
claim, a complete statement of the present status thereof; and (c) if he
should thereafter learn that the same or similar action or claim has
been filed or is pending, he shall report that fact within five (5) days
therefrom to the court wherein his aforesaid complaint or initiatory
pleading has been filed.

The Petition for Review would constitute the initiatory pleading before this
Court, upon the timely filing of which, the case before this Court commences; much in
the same way a case is initiated by the filing of a Complaint before the trial court. The
Petition for Review establishes the identity of parties, rights or causes of action, and
relief sought from this Court, and without such a Petition, there is technically no case
before this Court. The Motion filed by respondent seeking extension of time within
which to file her Petition for Review does not serve the same purpose as the Petition
for Review itself. Such a Motion merely presents the important dates and the
justification for the additional time requested for, but it does not go into the details of
the appealed case.

Failure to comply with the foregoing requirements shall not


be curable by mere amendment of the complaint or other initiatory
pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after
hearing. The submission of a false certification or non-compliance
with any of the undertakings therein shall constitute indirect
contempt of court, without prejudice to the corresponding
administrative and criminal actions. If the acts of the party or his
counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall
constitute direct contempt, as well as cause for administrative
sanctions.
Although it may seem at first glance that respondent was simultaneously seeking
recourse from the Court of Appeals and this Court, a careful and closer scrutiny of the
details of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985
than to file with this Court a Motion for Extension of Time within which to file her
Petition for Review. For unexplained reasons, respondent failed to submit to this Court
her intended Petition within the reglementary period. Consequently, this Court was
prompted to issue a Resolution, dated 13 November 2002, declaring G.R. No. 152985

Without any particular idea as to the assignments of error or the relief


respondent intended to seek from this Court, in light of her failure to file her Petition
for Review, there is actually no second case involving the same parties, rights or causes
of action, and relief sought, as that in CA-G.R. CV No. 51930.
It should also be noted that the Certification against Forum Shopping is
required to be attached to the initiatory pleading, which, in G.R. No. 152985, should
have been respondents Petition for Review. It is in that Certification wherein
respondent certifies, under oath, that: (a) she has not commenced any action or filed any
claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the
best of her knowledge, no such other action or claim is pending therein; (b) if there is
such other pending action or claim, that she is presenting a complete statement of the
present status thereof; and (c) if she should thereafter learn that the same or similar
action or claim has been filed or is pending, she shall report that fact within five days
therefrom to this Court. Without her Petition for Review, respondent had no obligation
to execute and submit the foregoing Certification against Forum Shopping. Thus,
respondent did not violate Rule 7, Section 5 of the Revised Rules of Court; neither did
she mislead this Court as to the pendency of another similar case.
Lastly, the fact alone that the Decision of the Court of Appeals, dated 26
March 2002, essentially ruled in favor of respondent, does not necessarily preclude her
from appealing the same. Granted that such a move is ostensibly irrational, nonetheless,
it does not amount to malice, bad faith or abuse of the court processes in the absence of
further proof. Again, it should be noted that the respondent did not file her intended
Petition for Review. The Petition for Review would have presented before this Court
the grounds for respondents appeal and her arguments in support thereof. Without

said Petition, any reason attributed to the respondent for appealing the 26 March 2002
Decision would be grounded on mere speculations, to which this Court cannot give
credence.
II

As an exception to the
general rule, this Court takes
cognizance of questions of
fact raised in the Petition at
bar.
It is already a well-settled rule that the jurisdiction of this Court in cases
brought before it from the Court of Appeals by virtue of Rule 45 of the Revised Rules
of Court is limited to reviewing errors of law. Findings of fact of the Court of Appeals
are conclusive upon this Court. There are, however, recognized exceptions to the
foregoing rule, namely: (1) when the findings are grounded entirely on speculation,
surmises, or conjectures; (2) when the interference made is manifestly mistaken, absurd,
or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6)
when in making its findings, the Court of Appeals went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to those of the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when the
facts set forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; and (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record.[24]
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual findings that are
contrary to those of the RTC,[25] thus, resulting in its substantial modification of the trial
courts Decision, and a ruling entirely in favor of the respondent. In addition,
petitioners invoked in the instant Petition for Review several exceptions that would
justify this Courts review of the factual findings of the Court of Appeals, i.e., the Court
of Appeals made conflicting findings of fact; findings of fact which went beyond the
issues raised on appeal before it; as well as findings of fact premised on the supposed
absence of evidence and contradicted by the evidence on record.

On the basis of the foregoing, this Court shall proceed to reviewing and reevaluating the evidence on record in order to settle questions of fact raised in the
Petition at bar.

The fact that the trial judge


who rendered the RTC
Decision in Civil Case No.
11336, dated 24 August 1995,
was not the same judge who
heard and tried the case, does
not, by itself, render the said
Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years from the
institution of the said case. In the course of its trial, the case was presided over by four
(4) different RTC judges.[26] It was Judge Victorio, the fourth judge assigned to the case,
who wrote the RTC Decision, dated 24 August 1995. In his Decision,[27] Judge Victorio
made the following findings
After carefully evaluating the mass of evidence adduced by
the parties, this Court is not inclined to believe the plaintiffs
assertion that the promissory notes as well as the deeds of
assignments of her FNCB Finance money market placements were
simulated. The evidence is overwhelming that the plaintiff received
the proceeds of the loans evidenced by the various promissory notes
she had signed. What is more, there was not an iota of proof save
the plaintiffs bare testimony that she had indeed applied for loan
with the Development Bank of the Philippines.
More importantly, the two deeds of assignment were
notarized, hence they partake the nature of a public document. It
makes more than preponderant proof to overturn the effect of a
notarial attestation. Copies of the deeds of assignments were actually
filed with the Records Management and Archives Office.
Finally, there were sufficient evidence wherein the plaintiff
had admitted the existence of her loans with the defendant Bank in
the total amount ofP1,920,000.00 exclusive of interests and penalty
charges (Exhibits 28, 31, 32, and 33).
In fine, this Court hereby finds that the defendants had
established the genuineness and due execution of the various

promissory notes heretofore identified as well as the two deeds of


assignments of the plaintiffs money market placements with
defendant FNCB Finance, on the strength of which the said money
market placements were applied to partially pay the plaintiffs past
due obligation with the defendant Bank. Thus, the total sum
ofP1,053,995.80 of the plaintiffs past due obligation was partially
offset by the said money market placement leaving a balance
of P1,069,847.40 as of 5 September 1979 (Exhibit 34).
Disagreeing in the foregoing findings, the Court of Appeals stressed, in its
Decision in CA-G.R. CV No. 51930, dated 26 March 2002, that the ponente of the
herein assailed Decision is not the Presiding Judge who heard and tried the case.[28] This
brings us to the question of whether the fact alone that the RTC Decision was rendered
by a judge other than the judge who actually heard and tried the case is sufficient
justification for the appellate court to disregard or set aside the findings in the Decision
of the court a quo?
This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable
presumption that the RTC Decision was rendered by the judge in the regular
performance of his official duties. While the said presumption is only disputable, it is
satisfactory unless contradicted or overcame by other evidence.[29] Encompassed in this
presumption of regularity is the presumption that the RTC judge, in resolving the case
and drafting his Decision, reviewed, evaluated, and weighed all the evidence on
record. That the said RTC judge is not the same judge who heard the case and received
the evidence is of little consequence when the records and transcripts of stenographic
notes (TSNs) are complete and available for consideration by the former.
In People v. Gazmen,[30] this Court already elucidated its position on such an issue
Accused-appellant makes an issue of the fact that the judge
who penned the decision was not the judge who heard and tried the
case and concludes therefrom that the findings of the former are
erroneous. Accused-appellants argument does not merit a lengthy
discussion. It is well-settled that the decision of a judge who did not
try the case is not by that reason alone erroneous.
It is true that the judge who ultimately decided the case had
not heard the controversy at all, the trial having been conducted by

then Judge Emilio L. Polig, who was indefinitely suspended by this


Court. Nonetheless, the transcripts of stenographic notes taken
during the trial were complete and were presumably examined and
studied by Judge Baguilat before he rendered his decision. It is not
unusual for a judge who did not try a case to decide it on the basis of
the record. The fact that he did not have the opportunity to observe
the demeanor of the witnesses during the trial but merely relied on
the transcript of their testimonies does not for that reason alone
render the judgment erroneous.
(People vs. Jaymalin, 214 SCRA 685, 692 [1992])
Although it is true that the judge who heard the witnesses
testify is in a better position to observe the witnesses on the stand
and determine by their demeanor whether they are telling the truth or
mouthing falsehood, it does not necessarily follow that a judge who
was not present during the trial cannot render a valid decision since
he can rely on the transcript of stenographic notes taken during the
trial as basis of his decision.
Accused-appellants contention that the trial judge did not
have the opportunity to observe the conduct and demeanor of the
witnesses since he was not the same judge who conducted the
hearing is also untenable. While it is true that the trial judge who
conducted the hearing would be in a better position to ascertain the
truth and falsity of the testimonies of the witnesses, it does not
necessarily follow that a judge who was not present during the trial
cannot render a valid and just decision since the latter can also rely on
the transcribed stenographic notes taken during the trial as the basis
of his decision.
(People vs. De Paz, 212 SCRA 56, 63 [1992])
At any rate, the test to determine the value of the testimony
of the witness is whether or not such is in conformity with
knowledge and consistent with the experience of mankind (People vs.
Morre, 217 SCRA 219 [1993]). Further, the credibility of witnesses
can also be assessed on the basis of the substance of their testimony
and the surrounding circumstances (People v. Gonzales, 210 SCRA 44
[1992]). A critical evaluation of the testimony of the prosecution
witnesses reveals that their testimony accords with the

aforementioned tests, and carries with it the ring of truth end


perforce, must be given full weight and credit.
Irrefragably, by reason alone that the judge who penned the RTC Decision was
not the same judge who heard the case and received the evidence therein would not
render the findings in the said Decision erroneous and unreliable. While the conduct
and demeanor of witnesses may sway a trial court judge in deciding a case, it is not, and
should not be, his only consideration. Even more vital for the trial court judges
decision are the contents and substance of the witnesses testimonies, as borne out by
the TSNs, as well as the object and documentary evidence submitted and made part of
the
records
of
the
case.
This Court proceeds to making its own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated
26 March 2002, has become final and executory as to the respondent, due to her failure
to interpose an appeal therefrom within the reglementary period, she is already bound
by the factual findings in the said Decision. Likewise, respondents failure to file, within
the reglementary period, a Motion for Reconsideration or an appeal of the Resolution of
the Court of Appeals in the same case, dated 20 November 2002, which modified its
earlier Decision by deleting paragraph 3(v) of its dispositive portion, ordering
petitioners to return to respondent the proceeds of her money market placement with
AIDC, shall already bar her from questioning such modification before this
Court. Thus, what is for review before this Court is the Decision of the Court of
Appeals, dated 26 March 2002, as modified by the Resolution of the same court, dated
20 November 2002.
Respondent alleged that she had several deposits and money market
placements with petitioners. These deposits and money market placements, as
determined by the Court of Appeals in its Decision, dated 26 March 2002, and as
modified by its Resolution, dated 20 November 2002, are as follows
Deposit/Placement
Dollar deposit with Citibank-Geneva
Money market placement with Citibank, evidenced
by Promissory Note (PN) No. 23356 (which cancels
and supersedes PN No. 22526), earning 14.5%
interest per annum (p.a.)
Money market placement with Citibank, evidenced
by PN No. 23357 (which cancels and supersedes PN

No. 22528), earning 14.5% interest p.a.


Money market placement with FNCB Finance,
evidenced by PN No. 5757 (which cancels and
supersedes PN No. 4952), earning 17% interest p.a.
Money market placement with FNCB Finance,
evidenced by PN No. 5758 (which cancels and
supersedes PN No. 2962), earning 17% interest p.a.

149,632.99

318,897.34

203,150.00

500,000.00

500,000.00

This Court is tasked to determine whether petitioners are indeed liable to return the
foregoing amounts, together with the appropriate interests and penalties, to
respondent. It shall trace respondents transactions with petitioners, from her money
market placements with petitioner Citibank and petitioner FNCB Finance, to her
savings and current accounts with petitioner Citibank, and to her dollar accounts with
Citibank-Geneva.
Money market placements with petitioner Citibank
The history of respondents money market placements with petitioner Citibank
began on 6 December 1976, when she made a placement ofP500,000.00 as principal
amount, which was supposed to earn an interest of 16% p.a. and for which PN No.
20773 was issued. Respondent did not yet claim the proceeds of her placement and,
instead, rolled-over or re-invested the principal and proceeds several times in the
succeeding years for which new PNs were issued by petitioner Citibank to replace the
ones which matured. Petitioner Citibank accounted for respondents original placement
and the subsequent roll-overs thereof, as follows
Date
(mm/dd/yyyy)
12/06/1976
01/14/1977
02/09/1977

Amount
$

03/17/1977

PN
No.

Cancels
PN No.

20773
21686
22526
22528
23356
23357

None
20773
21686
21686
22526
22528

Maturity Date
(mm/dd/yyyy)
01/13/1977
02/08/1977
03/16/1977
03/16/1977
04/20/1977
04/20/1977

Amount
(P)

Interest
(p.a.)

500,000.00
508,444.44
313,952.59
200,000.00
318,897.34
203,150.00

16%
15%
15-3/4%
15-3/4%
14-1/2%
14-1/2%

Petitioner Citibank alleged that it had already paid to respondent the principal
amounts and proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner
Citibank further averred that respondent used the P500,000.00 from the payment of
PNs No. 23356 and 23357, plusP600,000.00 sourced from her other funds, to open two

time deposit (TD) accounts with petitioner Citibank, namely, TD Accounts No. 17783
and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity
of PNs No. 23356 and 23357 it issued in favor of respondent for her money market
placements. In fact, it admitted the genuineness and due execution of the said PNs, but
qualified that they were no longer outstanding.[31] In Hibberd v. Rohde and
McMillian,[32] this Court delineated the consequences of such an admission
By the admission of the genuineness and due execution of
an instrument, as provided in this section, is meant that the party
whose signature it bears admits that he signed it or that it was signed
by another for him with his authority; that at the time it was signed it
was in words and figures exactly as set out in the pleading of the
party relying upon it; that the document was delivered; and that any
formal requisites required by law, such as a seal, an acknowledgment,
or revenue stamp, which it lacks, are waived by him. Hence, such
defenses as that the signature is a forgery (Puritan Mfg. Co. vs. Toti &
Gradi, 14 N. M., 425; Cox vs. Northwestern Stage Co., 1 Idaho, 376;
Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479;
Faelnar vs.Escao, 11 Phil. Rep., 92); or that it was unauthorized, as
in the case of an agent signing for his principal, or one signing in
behalf of a partnership (Country Bank vs. Greenberg, 127 Cal., 26;
Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz, 137 Mich., 441) or
of a corporation (Merchant vs. International Banking Corporation, 6
Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer &
Barnes Co., 162 Mich., 509); or that, in the case of the latter, that the
corporation was authorized under its charter to sign the instrument
(Merchant vs. International Banking Corporation, supra); or that the
party charged signed the instrument in some other capacity than that
alleged in the pleading setting it out (Payne vs. National Bank, 16
Kan., 147); or that it was never delivered (Hunt vs. Weir, 29 Ill., 83;
Elbring vs. Mullen, 4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y.,
253; Fire Association of Philadelphia vs.Ruby, 60 Neb., 216) are cut
off by the admission of its genuineness and due execution.
The effect of the admission is such that in the case of a
promissory note a prima facie case is made for the plaintiff which
dispenses with the necessity of evidence on his part and entitles him
to a judgment on the pleadings unless a special defense of new matter,
such as payment, is interposed by the defendant (Papa vs. Martinez,

12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To Ching,


14 Phil. Rep., 222; Banco Espaol-Filipino vs.McKay & Zoeller, 27
Phil. Rep., 183). x x x
Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested,
respondent was able to establish prima facie that petitioner Citibank is liable to her for the
amounts stated therein. The assertion of petitioner Citibank of payment of the said
PNs is an affirmative allegation of a new matter, the burden of proof as to such resting
on petitioner Citibank. Respondent having proved the existence of the obligation, the
burden of proof was upon petitioner Citibank to show that it had been discharged. [33] It
has already been established by this Court that
As a general rule, one who pleads payment has the burden
of proving it. Even where the plaintiff must allege non-payment, the
general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment. The
debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.
When the existence of a debt is fully established by the
evidence contained in the record, the burden of proving that it has
been extinguished by payment devolves upon the debtor who offers
such defense to the claim of the creditor. Where the debtor
introduces some evidence of payment, the burden of going forward
with the evidence as distinct from the general burden of proof
shifts to the creditor, who is then under the duty of producing some
evidence of non-payment.[34]
Reviewing the evidence on record, this Court finds that petitioner Citibank
failed to satisfactorily prove that PNs No. 23356 and 23357 had already been paid, and
that the amount so paid was actually used to open one of respondents TD accounts
with petitioner Citibank.
Petitioner Citibank presented the testimonies of two witnesses to support its
contention of payment: (1) That of Mr. Herminio Pujeda,[35]the officer-in-charge of
loans and placements at the time when the questioned transactions took place; and (2)
that of Mr. Francisco Tan,[36] the former Assistant Vice-President of Citibank, who
directly dealt with respondent with regard to her deposits and loans.

The relevant portion[37] of Mr. Pujedas testimony as to PNs No. 23356 and
23357 (referred to therein as Exhibits No. 47 and 48, respectively) is reproduced
below
Atty. Mabasa:
Okey [sic]. Now Mr. Witness, you were asked to testify in this
case and this case is [sic] consist [sic] of several documents
involving transactions between the plaintiff and the
defendant. Now, were you able to make your own
memorandum regarding all these transactions?
A

Yes, based on my recollection of these facts, I did come up of


[sic] the outline of the chronological sequence of events.

Court:
Are you trying to say that you have personal knowledge or
participation to these transactions?
A

Yes, your Honor, I was the officer-in charge of the unit that
was processing these transactions. Some of the documents
bear my signature.

Court:
And this resume or summary that you have prepared is based
on purely your recollection or documents?
A

Based on documents, your Honor.

Court:

Atty. Mabasa:
Yes, your Honor, that is why your Honor.
Atty. Mabasa:
Q

Now, basing on the notes that you prepared, Mr. Witness,


and according to you basing also on your personal
recollection about all the transactions involved between
Modesta Sabeniano and defendant City Bank [sic] in this
case. Now, would you tell us what happened to the money
market placements of Modesta Sabeniano that you have
earlier identified in Exhs. 47 and 48?

The transactions which I said earlier were terminated and


booked to time deposits.

And you are saying time deposits with what bank?

With First National Citibank.

Is it the same bank as Citibank, N.A.?

Yes, sir.

And how much was the amount booked as time deposit with
defendant Citibank?

In the amount of P500,000.00.

And outside this P500,000.00 which you said was booked out
of the proceeds of Exhs. 47 and 48, were there other
time deposits opened by Mrs. Modesta Sabeniano at that
time.

Yes, she also opened another time deposit for P600,000.00.

So all in all Mr. Witness, sometime in April of 1978 Mrs.


Modesta Sabeneano [sic] had time deposit placements with
Citibank in the amount ofP500,000.00 which is the proceeds
of Exh. 47 and 48 and another P600,000.00, is it not?

Are these documents still available now?


A

Yes, your honor.

Court:
Better present the documents.

Yes, sir.

And would you know where did the other P600,000 placed by
Mrs. Sabeneano [sic] in a time deposit with Citibank, N.A.
came [sic] from?

She funded it directly.

What are you saying Mr. Witness is that the P600,000 is a [sic]
fresh money coming from Mrs. Modesta Sabeneano [sic]?

That is right.

In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs
No. 23356 and 23357 (referred to therein as Exhibits E and F, respectively), as
follows
Atty. Mabasa :

Now from the Exhibits that you have identified


Mr. Tan from Exhibits A to F, which are
Exhibits of the plaintiff. Now, do I
understand from you that the original amount
is Five Hundred Thousand and thereafter
renewed in the succeeding exhibits?

Mr. Tan :

Yes, Sir.

Atty. Mabasa :

Alright, after these Exhibits E and F matured,


what happened thereafter?

Mr. Tan :

Split into two time deposits.

Atty. Mabasa :

Exhibits E and F?

Before anything else, it should be noted that when Mr. Pujedas testimony
before the RTC was made on 12 March 1990 and Mr. Tans deposition in Hong Kong
was conducted on 3 September 1990, more than a decade had passed from the time the
transactions they were testifying on took place. This Court had previously recognized
the frailty and unreliability of human memory with regards to figures after the lapse of
five years.[38] Taking into consideration the substantial length of time between the

transactions and the witnesses testimonies, as well as the undeniable fact that bank
officers deal with multiple clients and process numerous transactions during their tenure,
this Court is reluctant to give much weight to the testimonies of Mr. Pujeda and Mr.
Tan regarding the payment of PNs No. 23356 and 23357 and the use by respondent of
the proceeds thereof for opening TD accounts. This Court finds it implausible that
they should remember, after all these years, this particular transaction with respondent
involving her PNs No. 23356 and 23357 and TD accounts. Both witnesses did not give
any reason as to why, from among all the clients they had dealt with and all the
transactions they had processed as officers of petitioner Citibank, they specially
remembered respondent and her PNs No. 23356 and 23357. Their testimonies likewise
lacked details on the circumstances surrounding the payment of the two PNs and the
opening of the time deposit accounts by respondent, such as the date of payment of the
two PNs, mode of payment, and the manner and context by which respondent relayed
her instructions to the officers of petitioner Citibank to use the proceeds of her two
PNs in opening the TD accounts.
Moreover, while there are documentary evidences to support and trace
respondents money market placements with petitioner Citibank, from the original PN
No. 20773, rolled-over several times to, finally, PNs No. 23356 and 23357, there is an
evident absence of any documentary evidence on the payment of these last two PNs
and the use of the proceeds thereof by respondent for opening TD accounts. The
paper trail seems to have ended with the copies of PNs No. 23356 and
23357. Although both Mr. Pujeda and Mr. Tan said that they based their testimonies,
not just on their memories but also on the documents on file, the supposed documents
on which they based those portions of their testimony on the payment of PNs No.
23356 and 23357 and the opening of the TD accounts from the proceeds thereof, were
never presented before the courts nor made part of the records of the
case. Respondents money market placements were of substantial amounts consisting
of the principal amount of P500,000.00, plus the interest it should have earned during
the years of placement and it is difficult for this Court to believe that petitioner
Citibank would not have had documented the payment thereof.
When Mr. Pujeda testified before the RTC on 6 February 1990,[39] petitioners
counsel attempted to present in evidence a document that would supposedly support
the claim of petitioner Citibank that the proceeds of PNs No. 23356 and 23357 were
used by respondent to open one of her two TD accounts in the amount
of P500,000.00. Respondents counsel objected to the presentation of the document
since it was a mere xerox" copy, and was blurred and hardly readable. Petitioners
counsel then asked for a continuance of the hearing so that they can have time to
produce a better document, which was granted by the court. However, during the next

hearing and continuance of Mr. Pujedas testimony on 12 March 1990, petitioners


counsel no longer referred to the said document.
As respondent had established a prima facie case that petitioner Citibank is
obligated to her for the amounts stated in PNs No. 23356 and 23357, and as petitioner
Citibank failed to present sufficient proof of payment of the said PNs and the use by
the respondent of the proceeds thereof to open her TD accounts, this Court finds
that PNs No. 23356 and 23357 are still outstanding and petitioner Citibank is still
liable to respondent for the amounts stated therein.
The significance of this Courts declaration that PNs No. 23356 and 23357 are
still outstanding becomes apparent in the light of petitioners next contentions that
respondent used the proceeds of PNs No. 23356 and 23357, together with additional
money, to open TD Accounts No. 17783 and 17784 with petitioner Citibank; and,
subsequently, respondent pre-terminated these TD accounts and transferred the
proceeds thereof, amounting to P1,100,000.00, to petitioner FNCB Finance for money
market placements. While respondents money market placements with petitioner
FNCB Finance may be traced back with definiteness to TD Accounts No. 17783 and
17784, there is only flimsy and unsubstantiated connection between the said TD
accounts and the supposed proceeds paid from PNs No. 23356 and 23357. With PNs
No. 23356 and 23357 still unpaid, then they represent an obligation of petitioner
Citibank separate and distinct from the obligation of petitioner FNCB Finance arising
from respondents money market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondents TD Accounts No. 17783 and 17784, in the
total amount of P1,100,000.00, were supposed to mature on 15 March 1978. However,
respondent, through a letter dated 28 April 1977,[40] pre-terminated the said TD
accounts and transferred all the proceeds thereof to petitioner FNCB Finance for
money market placement. Pursuant to her instructions, TD Accounts No. 17783 and
17784 were pre-terminated and petitioner Citibank (then still named First National City
Bank) issued Managers Checks (MC) No. 199253[41] and 199251[42] for the amounts
of P500,000.00 and P600,00.00, respectively. Both MCs were payable to
Citifinance (which, according to Mr. Pujeda,[43] was one with and the same as petitioner
FNCB Finance), with the additional notation that A/C MODESTA R.
SABENIANO. Typewritten on MC No. 199253 is the phrase Ref. Proceeds of TD
17783, and on MC No. 199251 is a similar phrase, Ref. Proceeds of TD
17784. These phrases purportedly established that the MCs were paid from the
proceeds of respondents pre-terminated TD accounts with petitioner Citibank. Upon
receipt of the MCs, petitioner FNCB Finance deposited the same to its account with

Feati Bank and Trust Co., as evidenced by the rubber stamp mark of the latter found at
the back of both MCs. In exchange, petitioner FNCB Finance booked the amounts
received as money market placements, and accordingly issued PNs No. 4952 and 4962,
for the amounts of P500,000.00 and P600,000.00, respectively, payable to respondents
savings account with petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1
June 1977. Once again, respondent rolled-over several times the principal amounts of
her money market placements with petitioner FNCB Finance, as follows
Date
(mm/dd/yyyy)
04/29/1977
06/02/1977
08/31/1977

PN
No.

Cancels
PN No.

4952
4962
5757
5758
8167
8169

None
None
4952
4962
5757
5752

Maturity Date
(mm/dd/yyyy)
06/01/1977
06/01/1977
08/31/1977
08/31/1977
08/25/1978
08/25/1978

Amount
(P)

Interest
(p.a.)

500,000.00
600,000.00
500,000.00
500,000.00
500,000.00
500,000.00

17%
17%
17%
17%
14%
14%

As presented by the petitioner FNCB Finance, respondent rolled-over only the principal
amounts of her money market placements as she chose to receive the interest income
therefrom. Petitioner FNCB Finance also pointed out that when PN No. 4962, with
principal amount of P600,000.00, matured on 1 June 1977, respondent received a partial
payment of the principal which, together with the interest, amounted
to P102,633.33;[44]thus, only the amount of P500,000.00 from PN No. 4962 was rolledover to PN No. 5758.
Based on the foregoing records, the principal amounts of PNs No. 5757 and
5758, upon their maturity, were rolled over to PNs No. 8167 and 8169,
respectively. PN No. 8167[45] expressly canceled and superseded PN No. 5757, while
PN No. 8169[46] also explicitly canceled and superseded PN No. 5758. Thus, it is
patently erroneous for the Court of Appeals to still award to respondent the principal
amounts and interests covered by PNs No. 5757 and 5758 when these were already
canceled and superseded. It is now incumbent upon this Court to determine what
subsequently happened to PNs No. 8167 and 8169.
Petitioner FNCB Finance presented four checks as proof of payment of the
principal amounts and interests of PNs No. 8167 and 8169 upon their maturity. All the
checks were payable to respondents savings account with petitioner Citibank, with the
following details

Date of Issuance
(mm/dd/yyyy)
09/01/1978

Check
No.
76962

09/01/1978

Amount
(P)

Notation

12,833.34

Interest payment on PN#08167

76961

12,833.34

Interest payment on PN#08169

09/05/1978

77035

500,000.00

09/05/ 1978

77034

500,000.00

Full payment of principal on


PN#08167 which is hereby
cancelled
Full payment of principal on
PN#08169 which is hereby
cancelled

Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB
Finance together with a memo,[47] dated 6 September 1978, from Mr. Tan of petitioner
Citibank, to a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the
memo, the two checks, in the total amount of P1,000,000.00, were to be returned to
respondents account with instructions to book the said amount in money market
placements for one more year. Pursuant to the said memo, Checks No. 77035 and
77034 were invested by petitioner FNCB Finance, on behalf of respondent, in money
market placements for which it issued PNs No. 20138 and 20139. The PNs each
covered P500,000.00, to earn 11% interest per annum, and to mature on 3 September
1979.
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay
to the order of Citibank N.A. A/C Modesta Sabeniano, in the amount
of P1,022,916.66, as full payment of the principal amounts and interests of both PNs
No. 20138 and 20139 and, resultantly, canceling the said PNs. [48] Respondent actually
admitted the issuance and existence of Check No. 100168, but with the qualification
that the proceeds thereof were turned over to petitioner Citibank.[49] Respondent did
not clarify the circumstances attending the supposed turn over, but on the basis of the
allegations of petitioner Citibank itself, the proceeds of PNs No. 20138 and 20139,
amounting to P1,022,916.66, was used by it to liquidate respondents outstanding
loans. Therefore, the determination of whether or not respondent is still entitled to the
return of the proceeds of PNs No. 20138 and 20139 shall be dependent on the
resolution of the issues raised as to the existence of the loans and the authority of
petitioner Citibank to use the proceeds of the said PNs, together with respondents
other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank

Respondent presented and submitted before the RTC deposit slips and bank
statements to prove deposits made to several of her accounts with petitioner Citibank,
particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted
to a total of P3,812,712.32, had there been no withdrawals or debits from the said
accounts from the time the said deposits were made.
Although the RTC and the Court of Appeals did not make any definitive findings
as to the status of respondents savings and current accounts with petitioner Citibank,
the Decisions of both the trial and appellate courts effectively recognized only
the P31,079.14 coming from respondents savings account which was used to off-set
her alleged outstanding loans with petitioner Citibank.[50]
Since both the RTC and the Court of Appeals had consistently recognized only
the P31,079.14 of respondents savings account with petitioner Citibank, and that
respondent failed to move for reconsideration or to appeal this particular finding of fact
by the trial and appellate courts, it is already binding upon this Court. Respondent is
already precluded from claiming any greater amount in her savings and current accounts
with petitioner Citibank. Thus, this Court shall limit itself to determining whether or
not respondent is entitled to the return of the amount of P31,079.14 should the off-set
thereof by petitioner Citibank against her supposed loans be found invalid.
Dollar accounts with Citibank-Geneva
Respondent made an effort of preparing and presenting before the RTC her own
computations of her money market placements and dollar accounts with CitibankGeneva, purportedly amounting to a total of United States (US) $343,220.98, as of 23
June 1985.[51] In her Memorandum filed with the RTC, she claimed a much bigger
amount of deposits and money market placements with Citibank-Geneva, totaling
US$1,336,638.65.[52] However, respondent herself also submitted as part of her formal
offer of evidence the computation of her money market placements and dollar accounts
with Citibank-Geneva as determined by the latter.[53] Citibank-Geneva accounted for
respondents money market placements and dollar accounts as follows
MODESTA SABENIANO &/OR
==================
US$
+ US$
- US$

30000.-339.06
95.--

Principal Fid. Placement


Interest at 3,875% p.a. from 12.07. 25.10.79
Commission (minimum)

US$

30244.06

Total proceeds on 25.10.1979

US$
+ US$
- US$

114000.-1358.50
41.17

Principal Fid. Placement


Interest at 4,125% p.a. from 12.07. 25.10.79
Commission

US$

115317.33

Total proceeds on 25.10.1979

US$
+ US$

145561.39
11381.31

Total proceeds of both placements on 25.10.1979


total of both current accounts

US$

156942.70

Total funds available

- US$

149632.99

Transfer to Citibank Manila on 26.10.1979


(counter value of Pesos 1102944.78)

US$

7309.71

Balance in current accounts

- US$

6998.84

Transfer to Citibank Zuerich ac no. 121359 on


March
13, 1980

US$

310.87

various charges including closing charges

According to the foregoing computation, by 25 October 1979, respondent had a


total of US$156,942.70, from which, US$149,632.99 was transferred by CitibankGeneva to petitioner Citibank in Manila, and was used by the latter to off-set
respondents outstanding loans. The balance of respondents accounts with CitibankGeneva, after the remittance to petitioner Citibank in Manila, amounted to US$7,309.71,
which was subsequently expended by a transfer to another account with CitibankZuerich, in the amount of US$6,998.84, and by payment of various bank charges,
including closing charges, in the amount of US$310.87. Rightly so, both the RTC and
the Court of Appeals gave more credence to the computation of Citibank-Geneva as to
the status of respondents accounts with the said bank, rather than the one prepared by
respondent herself, which was evidently self-serving. Once again, this Court shall limit
itself to determining whether or not respondent is entitled to the return of the amount
of US$149,632.99 should the off-set thereof by petitioner Citibank against her alleged
outstanding loans be found invalid. Respondent cannot claim any greater amount since

she did not perfect an appeal of the Decision of the Court of Appeals, dated 26 March
2002, which found that she is entitled only to the return of the said amount, as far as her
accounts with Citibank-Geneva is concerned.
III

Petitioner Citibank was able


to
establish
by
preponderance of evidence
the existence of respondents
loans.
Petitioners version of events
In sum, the following amounts were used by petitioner Citibank to liquidate
respondents purported outstanding loans
Description
Principal and interests of PNs No. 20138 and 20139
(money market placements with petitioner FNCB
Finance)
Savings account with petitioner Citibank
Dollar remittance from Citibank-Geneva (peso
equivalent
Of US$149,632.99)
Total

Amount
P

1,022,916.66
31,079.14
1,102,944.78

2,156,940.58

According to petitioner Citibank, respondent incurred her loans under the


circumstances narrated below.
As early as 9 February 1978, respondent obtained her first loan from petitioner
Citibank in the principal amount of P200,000.00, for which she executed PN No.
31504.[54] Petitioner Citibank extended to her several other loans in the succeeding
months. Some of these loans were paid, while others were rolled-over or renewed.
Significant to the Petition at bar are the loans which respondent obtained from July
1978 to January 1979, appropriately covered by PNs (first set). [55] The aggregate
principal amount of these loans was P1,920,000.00, which could be broken down as
follows

PN No.

Date of Issuance
(mm/dd/yyyy)

Date of Maturity
(mm/dd/yyyy)

Principal
Amount
P 400,000.00
100,000.00
100,000.00
150,000.00
250,000.00
100,000.00
300,000.00
150,000.00
150,000.00
220,000.00

All the PNs stated that the purpose of the loans covered thereby is To liquidate
Date of Release existing obligation, except for PN No. 34534, which stated for its purpose personal
(mm/dd/yyyy) investment.
MC No.

Respondent secured her foregoing loans with petitioner Citibank by executing


07/20/1978
220701
Deeds of Assignment of her money market placements with petitioner FNCB
Unrecovered
On 2 March 1978, respondent executed in favor of petitioner Citibank a Deed
10/19/1978 Finance.
226285
of Assignment[57] of PN No. 8169, which was issued by petitioner FNCB Finance, to
11/16/1978
226439
secure payment of the credit and banking facilities extended to her by petitioner
11/21/1978
226467
Citibank, in the aggregate principal amount of P500,000.00. On 9 March 1978,
12/05/1978 respondent
228057executed in favor of petitioner Citibank another Deed of Assignment,[58] this
12/26/1978 time, 228203
of PN No. 8167, also issued by petitioner FNCB Finance, to secure payment of
01/09/1979 the credit
228270
and banking facilities extended to her by petitioner Citibank, in the aggregate
01/17/1979 amount
228357
of P500,000.00. When PNs No. 8167 and 8169, representing respondents
01/30/1979 money
228400
market placements with petitioner FNCB Finance, matured and were rolled-over
to PNs No. 20138 and 20139, respondent executed new Deeds of Assignment,[59] in
favor of petitioner Citibank, on 25 August 1978. According to the more recent Deeds,
Total
P 1,920,000.00
respondent assigned PNs No. 20138 and 20139, representing her rolled-over money
market placements with petitioner FNCB Finance, to petitioner Citibank as security for
When respondent was unable to pay the first set of PNs upon their maturity, these were
the banking and credit facilities it extended to her, in the aggregate principal amount
rolled-over or renewed several times, necessitating the execution by respondent of new
of P500,000.00 per Deed.
PNs in favor of petitioner Citibank. As of 5 April 1979, respondent had the following
outstanding PNs (second set),[56] the principal amount of which remained
In addition to the Deeds of Assignment of her money market placements with
at P1,920,000.00
petitioner FNCB Finance, respondent also executed a Declaration of Pledge,[60] in which
she supposedly pledged [a]ll present and future fiduciary placements held in my
Date of Issuance
Date of Maturity
personal and/or joint name with Citibank, Switzerland, to secure all claims the
PN No.
(mm/dd/yyyy)
(mm/dd/yyyy)
Principal Amount
petitioner Citibank may have or, in the future, acquire against respondent. The
34510
01/01/1979
03/02/1979
P
400,000.00
petitioners copy of the Declaration of Pledge is undated, while that of the respondent, a
34509
01/02/1979
03/02/1979
100,000.00
copy certified by a Citibank-Geneva officer, bore the date 24 September 1979.[61]
34534
01/09/1979
03/09/1979
150,000.00
32935
33751
33798
34025
34079
34192
34402
34534
34609
34740

34612
34741
35689
35694
35695
356946
35697
Total

07/20/1978
10/13/1978
10/19/1978
11/15/1978
11/21/1978
12/04/1978
12/26/1978
01/09/1979
01/17/1979
01/30/1979

01/19/1979
01/26/1979
02/23/1979
03/19/1979
03/19/1979
03/20/1979
03/30/1979

09/18/1978
12/12/1978
11/03/1978
01/15/1979
01/19/1979
01/18/1979
02/23/1979
03/09/1979
03/19/1979
03/30/1979

03/16/1979
03/12/1979
05/29/1979
05/29/1979
05/29/1979
05/29/1979
05/29/1979

150,000.00
100,000.00
300,000.00
150,000.00
100,000.00
250,000.00
220,000.00
P

1,920,000.00

When respondent failed to pay the second set of PNs upon their maturity, an
exchange of letters ensued between respondent and/or her representatives, on one hand,
and the representatives of petitioners, on the other.
The first letter[62] was dated 5 April 1979, addressed to respondent and signed by
Mr. Tan, as the manager of petitioner Citibank, which stated, in part, that
Despite our repeated requests and follow-up, we regret you have not
granted us with any response or payment.

We, therefore, have no alternative but to call your loan


of P1,920,000.00 plus interests and other charges due and
demandable. If you still fail to settle this obligation by 4/27/79, we
shall have no other alternative but to refer your account to our
lawyers for legal action to protect the interest of the bank.
Respondent sent a reply letter[63] dated 26 April 1979, printed on paper bearing
the letterhead of respondents company, MC Adore International Palace, the body of
which reads
This is in reply to your letter dated April 5, 1979 inviting my attention
to my loan which has become due. Pursuant to our representation
with you over the telephone through Mr. F. A. Tan, you allow us to
pay the interests due for the meantime.
Please accept our Comtrust Check in the amount of P62,683.33.
Please bear with us for a little while, at most ninety days. As you
know, we have a pending loan with the Development Bank of the
Philippines in the amount of P11-M. This loan has already been
recommended for approval and would be submitted to the Board of
Governors. In fact, to further facilitate the early release of this loan,
we have presented and furnished Gov. J. Tengco a xerox copy of
your letter.
You will be doing our corporation a very viable service, should you
grant us our request for a little more time.
A week later or on 3 May 1979, a certain C. N. Pugeda, designated as
Executive Secretary, sent a letter[64] to petitioner Citibank, on behalf of
respondent. The letter was again printed on paper bearing the letterhead of MC Adore
International Palace. The pertinent paragraphs of the said letter are reproduced below
Per instructions of Mrs. Modesta R. Sabeniano, we would like to
request for a re-computation of the interest and penalty charges on
her loan in the aggregate amount of P1,920,000.00 with maturity date
of all promissory notes at June 30, 1979. As she has personally
discussed with you yesterday, this date will more or less assure you of
early settlement.

In this regard, please entrust to bearer, our Comtrust check


for P62,683.33 to be replaced by another check with amount resulting
from the new computation. Also, to facilitate the processing of the
same, may we request for another set of promissory notes for the
signature of Mrs. Sabeniano and to cancel the previous ones she has
signed and forwarded to you.
This was followed by a telegram,[65] dated 5 June 1979, and received by
petitioner Citibank the following day. The telegram was sent by a Dewey G. Soriano,
Legal Counsel. The telegram acknowledged receipt of the telegram sent by petitioner
Citibank regarding the re-past due obligation of McAdore International
Palace. However, it reported that respondent, the President and Chairman of MC
Adore International Palace, was presently abroad negotiating for a big loan. Thus, he
was requesting for an extension of the due date of the obligation until respondents
arrival on or before 31 July 1979.
The next letter,[66] dated 21 June 1979, was signed by respondent herself and
addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB Finance. Respondent
wrote therein
Re:

PN No. 20138 for P500,000.00 &


PN No. 20139 for P500,000.00
totalling P1 Million, both PNs
will mature on 9/3/1979.

This is to authorize you to release the accrued quarterly


interests payment from my captioned placements and forward
directly to Citibank, Manila Attention: Mr. F. A. Tan, Manager, to
apply to my interest payable on my outstanding loan with Citibank.
Please note that the captioned two placements are
continuously pledged/hypothecated to Citibank, Manila to support
my personal outstanding loan. Therefore, please do not release the
captioned placements upon maturity until you have received the
instruction from Citibank, Manila.
On even date, respondent sent another letter[67] to Mr. Tan of petitioner
Citibank, stating that

Re:

S/A No. 25-225928


and C/A No. 484-946

1979. She stated therein that the loan obligation shall be paid within 60 days from
receipt of the statement of account.

This letter serves as an authority to debit whatever the


outstanding balance from my captioned accounts and credit
the amount to my loan outstanding account with you.
Unlike respondents earlier letters, both letters, dated 21 June 1979, are printed on plain
paper, without the letterhead of her company, MC Adore International Palace.
By 5 September 1979, respondents outstanding and past due obligations to
petitioner Citibank totaled P2,123,843.20, representing the principal amounts plus
interests. Relying on respondents Deeds of Assignment, petitioner Citibank applied the
proceeds of respondents money market placements with petitioner FNCB Finance, as
well as her deposit account with petitioner Citibank, to partly liquidate respondents
outstanding loan balance,[68] as follows
Respondents outstanding obligation (principal and interest)
Less: Proceeds from respondents money market
placements
with petitioner FNCB Finance (principal and
interest)
Deposits in respondents bank accounts with
petitioner
Citibank

Balance of respondents obligation

2,123,843.20
(1,022,916.66)

(31,079.14)
1,069,847.40

Mr. Tan of petitioner Citibank subsequently sent a letter,[69] dated 28 September


1979, notifying respondent of the status of her loans and the foregoing compensation
which petitioner Citibank effected. In the letter, Mr. Tan informed respondent that she
still had a remaining past-due obligation in the amount of P1,069,847.40, as of 5
September 1979, and should respondent fail to pay the amount by 15 October 1979,
then petitioner Citibank shall proceed to off-set the unpaid amount with respondents
other collateral, particularly, a money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper
bearing the letterhead of MC Adore International Palace, as regards the P1,920,000.00
loan account supposedly of MC Adore Finance & Investment, Inc., and requested for a
statement of account covering the principal and interest of the loan as of 31 October

Almost three weeks later, or on 25 October 1979, a certain Atty. Moises


Tolentino dropped by the office of petitioner Citibank, with a letter, dated 9 October
1979, and printed on paper with the letterhead of MC Adore International Palace, which
authorized the bearer thereof to represent the respondent in settling the overdue
account, this time, purportedly, of MC Adore International Palace Hotel. The letter was
signed by respondent as the President and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of
petitioner Citibank, sent a letter to respondent, dated 31 October 1979, informing her
that petitioner Citibank had effected an off-set using her account with Citibank-Geneva,
in the amount of US$149,632.99, against her outstanding, overdue, demandable and
unpaid obligation to petitioner Citibank. Atty. Agcaoili claimed therein that the
compensation or off-set was made pursuant to and in accordance with the provisions of
Articles 1278 through 1290 of the Civil Code. He further declared that respondents
obligation to petitioner Citibank was now fully paid and liquidated.
Unfortunately, on 7 October 1987, a fire gutted the 7 th floor of petitioner
Citibanks building at Paseo de Roxas St., Makati, Metro Manila. Petitioners submitted a
Certification[70] to this effect, dated 17 January 1991, issued by the Chief of the Arson
Investigation Section, Fire District III, Makati Fire Station, Metropolitan Police
Force. The 7th floor of petitioner Citibanks building housed its Control Division,
which was in charge of keeping the necessary documents for cases in which it was
involved. After compiling the documentary evidence for the present case, Atty. Renato
J. Fernandez, internal legal counsel of petitioner Citibank, forwarded them to the
Control Division. The original copies of the MCs, which supposedly represent the
proceeds of the first set of PNs, as well as that of other documentary evidence related to
the case, were among those burned in the said fire.[71]
Respondents version of events
Respondent disputed petitioners narration of the circumstances surrounding her
loans with petitioner Citibank and the alleged authority she gave for the off-set or
compensation of her money market placements and deposit accounts with petitioners
against her loan obligation.
Respondent denied outright executing the first set of PNs, except for one (PN
No. 34534 in particular). Although she admitted that she obtained several loans from
petitioner Citibank, these only amounted to P1,150,000.00, and she had already paid

them. She secured from petitioner Citibank two loans of P500,000.00 each. She
executed in favor of petitioner Citibank the corresponding PNs for the loans and the
Deeds of Assignment of her money market placements with petitioner FNCB Finance
as security.[72] To prove payment of these loans, respondent presented two provisional
receipts of petitioner Citibank No. 19471,[73] dated 11 August 1978, and No.
12723,[74] dated 10 November 1978 both signed by Mr. Tan, and acknowledging
receipt from respondent of several checks in the total amount of P500,744.00
andP500,000.00, respectively, for liquidation of loan.
She borrowed another P150,000.00 from petitioner Citibank for personal
investment, and for which she executed PN No. 34534, on 9 January 1979. Thus, she
admitted to receiving the proceeds of this loan via MC No. 228270. She invested the
loan amount in another money market placement with petitioner FNCB Finance. In
turn, she used the very same money market placement with petitioner FNCB Finance as
security for her P150,000.00 loan from petitioner Citibank. When she failed to pay the
loan when it became due, petitioner Citibank allegedly forfeited her money market
placement with petitioner FNCB Finance and, thus, the loan was already paid.[75]
Respondent likewise questioned the MCs presented by petitioners, except for
one (MC No. 228270 in particular), as proof that she received the proceeds of the loans
covered by the first set of PNs. As recounted in the preceding paragraph, respondent
admitted to obtaining a loan ofP150,000.00, covered by PN No. 34534, and receiving
MC No. 228270 representing the proceeds thereof, but claimed that she already paid the
same. She denied ever receiving MCs No. 220701 (for the loan of P400,000.00, covered
by PN No. 33935) and No. 226467 (for the loan ofP250,000.00, covered by PN No.
34079), and pointed out that the checks did not bear her indorsements. She did not
deny receiving all other checks but she interposed that she received these checks, not as
proceeds of loans, but as payment of the principal amounts and/or interests from her
money market placements with petitioner Citibank. She also raised doubts as to the
notation on each of the checks that reads RE: Proceeds of PN#[corresponding PN
No.], saying that such notation did not appear on the MCs when she originally received
them and that the notation appears to have been written by a typewriter different from
that used in writing all other information on the checks (i.e., date, payee, and
amount).[76] She even testified that MCs were not supposed to bear notations indicating
the purpose for which they were issued.
As to the second set of PNs, respondent acknowledged having signed them
all. However, she asserted that she only executed these PNs as part of the simulated
loans she and Mr. Tan of petitioner Citibank concocted. Respondent explained that she
had a pending loan application for a big amount with the Development Bank of the
Philippines (DBP), and when Mr. Tan found out about this, he suggested that they

could make it appear that the respondent had outstanding loans with petitioner Citibank
and the latter was already demanding payment thereof; this might persuade DBP to
approve respondents loan application. Mr. Tan made the respondent sign the second
set of PNs, so that he may have something to show the DBP investigator who might
inquire with petitioner Citibank as to respondents loans with the latter. On her own
copies of the said PNs, respondent wrote by hand the notation, This isa (sic) simulated
non-negotiable note, signed copy given to Mr. Tan., (sic) per agreement to be shown to
DBP representative. itwill (sic) be returned to me if the P11=M (sic) loan for MC Adore
Palace Hotel is approved by DBP.[77]
Findings of this Court as to the existence of the loans
After going through the testimonial and documentary evidence presented by both
sides to this case, it is this Courts assessment that respondent did indeed have
outstanding loans with petitioner Citibank at the time it effected the off-set or
compensation on 25 July 1979 (using respondents savings deposit with petitioner
Citibank), 5 September 1979 (using the proceeds of respondents money market
placements with petitioner FNCB Finance) and 26 October 1979 (using respondents
dollar accounts remitted from Citibank-Geneva). The totality of petitioners evidence as
to the existence of the said loans preponderates over respondents. Preponderant
evidence means that, as a whole, the evidence adduced by one side outweighs that of the
adverse party.[78]
Respondents outstanding obligation for P1,920,000.00 had been sufficiently
documented by petitioner Citibank.
The second set of PNs is a mere renewal of the prior loans originally covered by
the first set of PNs, except for PN No. 34534. The first set of PNs is supported, in turn,
by the existence of the MCs that represent the proceeds thereof received by the
respondent.
It bears to emphasize that the proceeds of the loans were paid to respondent in
MCs, with the respondent specifically named as payee. MCs checks are drawn by the
banks manager upon the bank itself and regarded to be as good as the money it
represents.[79] Moreover, the MCs were crossed checks, with the words Payees
Account Only.
In general, a crossed check cannot be presented to the drawee bank for payment
in cash. Instead, the check can only be deposited with the payees bank which, in turn,

must present it for payment against the drawee bank in the course of normal banking
hours. The crossed check cannot be presented for payment, but it can only be
deposited and the drawee bank may only pay to another bank in the payees or
indorsers account.[80] The effect of crossing a check was described by this Court
in Philippine Commercial International Bank v. Court of Appeals[81]
[T]he crossing of a check with the phrase Payees Account Only is
a warning that the check should be deposited in the account of the
payee. Thus, it is the duty of the collecting bank PCI Bank to
ascertain that the check be deposited in payees account only. It is
bound to scrutinize the check and to know its depositors before it
can make the clearing indorsement all prior indorsements and/or
lack of indorsement guaranteed.
The crossed MCs presented by petitioner Bank were indeed deposited in several
different bank accounts and cleared by the Clearing Office of the Central Bank of the
Philippines, as evidenced by the stamp marks and notations on the said checks. The
crossed MCs are already in the possession of petitioner Citibank, the drawee bank,
which was ultimately responsible for the payment of the amount stated in the
checks. Given that a check is more than just an instrument of credit used in commercial
transactions for it also serves as a receipt or evidence for the drawee bank of the
cancellation of the said check due to payment,[82] then, the possession by petitioner
Citibank of the said MCs, duly stamped Paid gives rise to the presumption that the
said MCs were already paid out to the intended payee, who was in this case, the
respondent.
This Court finds applicable herein the presumptions that private transactions
have been fair and regular,[83] and that the ordinary course of business has been
followed.[84] There is no question that the loan transaction between petitioner Citibank
and the respondent is a private transaction. The transactions revolving around the
crossed MCs from their issuance by petitioner Citibank to respondent as payment of
the proceeds of her loans; to its deposit in respondents accounts with several different
banks; to the clearing of the MCs by an independent clearing house; and finally, to the
payment of the MCs by petitioner Citibank as the drawee bank of the said checks are
all private transactions which shall be presumed to have been fair and regular to all the
parties concerned. In addition, the banks involved in the foregoing transactions are also
presumed to have followed the ordinary course of business in the acceptance of the
crossed MCs for deposit in respondents accounts, submitting them for clearing, and
their eventual payment and cancellation.

The afore-stated presumptions are disputable, meaning, they are satisfactory if


uncontradicted, but may be contradicted and overcome by other
evidence.[85] Respondent, however, was unable to present sufficient and credible
evidence to dispute these presumptions.
It should be recalled that out of the nine MCs presented by petitioner Citibank,
respondent admitted to receiving one as proceeds of a loan (MC No. 228270), denied
receiving two (MCs No. 220701 and 226467), and admitted to receiving all the rest, but
not as proceeds of her loans, but as return on the principal amounts and interests from
her money market placements.
Respondent admitted receiving MC No. 228270 representing the proceeds of her
loan covered by PN No. 34534. Although the principal amount of the loan
is P150,000.00, respondent only received P146,312.50, because the interest and handling
fee on the loan transaction were already deducted therefrom.[86] Stamps and notations
at the back of MC No. 228270 reveal that it was deposited at the Bank of the Philippine
Islands (BPI), Cubao Branch, in Account No. 0123-0572-28.[87] The check also bore the
signature of respondent at the back.[88] And, although respondent would later admit that
she did sign PN No. 34534 and received MC No. 228270 as proceeds of the loan
extended to her by petitioner Citibank, she contradicted herself when, in an earlier
testimony, she claimed that PN No. 34534 was among the PNs she executed as
simulated loans with petitioner Citibank.[89]
Respondent denied ever receiving MCs No. 220701 and 226467. However,
considering that the said checks were crossed for payees account only, and that they
were actually deposited, cleared, and paid, then the presumption would be that the said
checks were properly deposited to the account of respondent, who was clearly named
the payee in the checks. Respondents bare allegations that she did not receive the two
checks fail to convince this Court, for to sustain her, would be for this Court to
conclude that an irregularity had occurred somewhere from the time of the issuance of
the said checks, to their deposit, clearance, and payment, and which would have
involved not only petitioner Citibank, but also BPI, which accepted the checks for
deposit, and the Central Bank of the Philippines, which cleared the checks. It falls upon
the respondent to overcome or dispute the presumption that the crossed checks were
issued, accepted for deposit, cleared, and paid for by the banks involved following the
ordinary course of their business.
The mere fact that MCs No. 220701 and 226467 do not bear respondents
signature at the back does not negate deposit thereof in her account. The liability for
the lack of indorsement on the MCs no longer fall on petitioner Citibank, but on the
bank who received the same for deposit, in this case, BPI Cubao Branch. Once again, it

must be noted that the MCs were crossed, for payees account only, and the payee
named in both checks was none other than respondent. The crossing of the MCs was
already a warning to BPI to receive said checks for deposit only in respondents
account. It was up to BPI to verify whether it was receiving the crossed MCs in
accordance with the instructions on the face thereof. If, indeed, the MCs were deposited
in accounts other than respondents, then the respondent would have a cause of action
against BPI.[90]
BPI further stamped its guarantee on the back of the checks to the effect that,
All prior endorsement and/or Lack of endorsement guaranteed. Thus, BPI became
the indorser of the MCs, and assumed all the warranties of an indorser,[91] specifically,
that the checks were genuine and in all respects what they purported to be; that it had a
good title to the checks; that all prior parties had capacity to contract; and that the
checks were, at the time of their indorsement, valid and subsisting.[92] So even if the
MCs deposited by BPI's client, whether it be by respondent herself or some other
person, lacked the necessary indorsement, BPI, as the collecting bank, is bound by its
warranties as an indorser and cannot set up the defense of lack of indorsement as
against petitioner Citibank, the drawee bank.[93]
Furthermore, respondents bare and unsubstantiated denial of receipt of the MCs
in question and their deposit in her account is rendered suspect when MC No. 220701
was actually deposited in Account No. 0123-0572-28 of BPI Cubao Branch, the very
same account in which MC No. 228270 (which respondent admitted to receiving as
proceeds of her loan from petitioner Citibank), and MCs No. 228203, 228357, and
228400 (which respondent admitted to receiving as proceeds from her money market
placements) were deposited. Likewise, MC No. 226467 was deposited in Account No.
0121-002-43 of BPI Cubao Branch, to which MCs No. 226285 and 226439 (which
respondent admitted to receiving as proceeds from her money market placements) were
deposited. It is an apparent contradiction for respondent to claim having received the
proceeds of checks deposited in an account, and then deny receiving the proceeds of
another check deposited in the very same account.
Another inconsistency in respondents denial of receipt of MC No. 226467 and
her deposit of the same in her account, is her presentation of Exhibit HHH, a
provisional receipt which was supposed to prove that respondent turned
over P500,000.00 to Mr. Tan of petitioner Citibank, that the said amount was split into
three money market placements, and that MC No. 226467 represented the return on her
investment from one of these placements.[94] Because of her Exhibit HHH,
respondent effectively admitted receipt of MC No. 226467, although for reasons other
than as proceeds of a loan.

Neither can this Court give credence to respondents contention that the
notations on the MCs, stating that they were the proceeds of particular PNs, were not
there when she received the checks and that the notations appeared to be written by a
typewriter different from that used to write the other information on the checks. Once
more, respondents allegations were uncorroborated by any other evidence. Her and
her counsels observation that the notations on the MCs appear to be written by a
typewriter different from that used to write the other information on the checks hardly
convinces this Court considering that it constitutes a mere opinion on the appearance of
the notation by a witness who does not possess the necessary expertise on the
matter. In addition, the notations on the MCs were written using both capital and small
letters, while the other information on the checks were written using capital letters only,
such difference could easily confuse an untrained eye and lead to a hasty conclusion that
they were written by different typewriters.
Respondents testimony, that based on her experience transacting with banks, the
MCs were not supposed to include notations on the purpose for which the checks were
issued, also deserves scant consideration. While respondent may have extensive
experience dealing with banks, it still does not qualify her as a competent witness on
banking procedures and practices. Her testimony on this matter is even belied by the
fact that the other MCs issued by petitioner Citibank (when it was still named First
National City Bank) and by petitioner FNCB Finance, the existence and validity of
which were not disputed by respondent, also bear similar notations that state the reason
for which they were issued.
Respondent presented several more pieces of evidence to substantiate her claim
that she received MCs No. 226285, 226439, 226467, 226057, 228357, and 228400, not
as proceeds of her loans from petitioner Citibank, but as the return of the principal
amounts and payment of interests from her money market placements with
petitioners. Part of respondents exhibits were personal checks[95] drawn by respondent
on her account with Feati Bank & Trust Co., which she allegedly invested in separate
money market placements with both petitioners, the returns from which were paid to
her via MCs No. 226285 and 228400. Yet, to this Court, the personal checks only
managed to establish respondents issuance thereof, but there was nothing on the face
of the checks that would reveal the purpose for which they were issued and that they
were actually invested in money market placements as respondent claimed.
Respondent further submitted handwritten notes that purportedly computed
and presented the returns on her money market placements, corresponding to the
amount stated in the MCs she received from petitioner Citibank. Exhibit HHH1[96] was a handwritten note, which respondent attributed to Mr. Tan of petitioner
Citibank, showing the breakdown of her BPI Check for P500,000.00 into three different

money market placements with petitioner Citibank. This Court, however, noticed
several factors which render the note highly suspect. One, it was written on the
reversed side of Provisional Receipt No. 12724 of petitioner Citibank which bore the
initials of Mr. Tan acknowledging receipt of respondents BPI Check No. 120989
for P500,000.00; but the initials on the handwritten note appeared to be that of Mr.
Bobby Mendoza of petitioner FNCB Finance.[97] Second, according to Provisional
Receipt No. 12724, BPI Check No. 120989 for P500,000.00 was supposed to be
invested in three money market placements with petitioner Citibank for the period of 60
days. Since all these money market placements were made through one check deposited
on the same day, 10 November 1978, it made no sense that the handwritten note at the
back of Provisional Receipt No. 12724 provided for different dates of maturity for each
of the money market placements (i.e., 16 November 1978, 17 January 1979, and 21
November 1978), and such dates did not correspond to the 60 day placement period
stated on the face of the provisional receipt. And third, the principal amounts of the
money market placements as stated in the handwritten note P145,000.00, P145,000.00
and P242,000.00 totaledP532,000.00, and was obviously in excess of the P500,000.00
acknowledged on the face of Provisional Receipt No. 12724.
Exhibits III and III-1, the front and bank pages of a handwritten note of
Mr. Bobby Mendoza of petitioner FNCB Finance,[98] also did not deserve much
evidentiary weight, and this Court cannot rely on the truth and accuracy of the
computations presented therein. Mr. Mendoza was not presented as a witness during
the trial before the RTC, so that the document was not properly authenticated nor its
contents sufficiently explained. No one was able to competently identify whether the
initials as appearing on the note were actually Mr. Mendozas.
Also, going by the information on the front page of the note, this Court
observes that payment of respondents alleged money market placements with petitioner
FNCB Finance were made using Citytrust Checks; the MCs in question, including MC
No. 228057, were issued by petitioner Citibank. Although Citytrust (formerly Feati
Bank & Trust Co.), petitioner FNCB Finance, and petitioner Citibank may be affiliates
of one another, they each remained separate and distinct corporations, each having its
own financial system and records. Thus, this Court cannot simply assume that one
corporation, such as petitioner Citibank or Citytrust, can issue a check to discharge an
obligation of petitioner FNCB Finance. It should be recalled that when petitioner
FNCB Finance paid for respondents money market placements, covered by its PNs No.
8167 and 8169, as well as PNs No. 20138 and 20139, petitioner FNCB Finance issued
its own checks.
As a last point on this matter, if respondent truly had money market
placements with petitioners, then these would have been evidenced by PNs issued by

either petitioner Citibank or petitioner FNCB Finance, acknowledging the principal


amounts of the investments, and stating the applicable interest rates, as well as the dates
of their of issuance and maturity. After respondent had so meticulously reconstructed
her other money market placements with petitioners and consolidated the documentary
evidence thereon, she came surprisingly short of offering similar details and
substantiation for these particular money market placements.
Since this Court is satisfied that respondent indeed received the proceeds of the
first set of PNs, then it proceeds to analyze her evidence of payment thereof.
In support of respondents assertion that she had already paid whatever loans
she may have had with petitioner Citibank, she presented as evidence Provisional
Receipts No. 19471, dated 11 August 1978, and No. 12723, dated 10 November 1978,
both of petitioner Citibank and signed by Mr. Tan, for the amounts of P500,744.00
and P500,000.00, respectively. While these provisional receipts did state that Mr. Tan,
on behalf of petitioner Citibank, received respondents checks as payment for her loans,
they failed to specifically identify which loans were actually paid. Petitioner Citibank
was able to present evidence that respondent had executed several PNs in the years
1978 and 1979 to cover the loans she secured from the said bank. Petitioner Citibank
did admit that respondent was able to pay for some of these PNs, and what it identified
as the first and second sets of PNs were only those which remained unpaid. It thus
became incumbent upon respondent to prove that the checks received by Mr. Tan were
actually applied to the PNs in either the first or second set; a fact that, unfortunately,
cannot be determined from the provisional receipts submitted by respondent since they
only generally stated that the checks received by Mr. Tan were payment for respondents
loans.
Mr. Tan, in his deposition, further explained that provisional receipts were
issued when payment to the bank was made using checks, since the checks would still
be subject to clearing. The purpose for the provisional receipts was merely to
acknowledge the delivery of the checks to the possession of the bank, but not yet of
payment.[99] This bank practice finds legitimacy in the pronouncement of this Court
that a check, whether an MC or an ordinary check, is not legal tender and, therefore,
cannot constitute valid tender of payment. In Philippine Airlines, Inc. v. Court of
Appeals, [100] this Court elucidated that:
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 (Sec. 189, Act 2031 on Negs. Insts.; Art. 1249,
Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan
Sunco, v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a

manager's check or ordinary check, is not 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. Mere delivery of
checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249,
Civil Code, par. 3).
In the case at bar, the issuance of an official receipt by petitioner Citibank would
have been dependent on whether the checks delivered by respondent were actually
cleared and paid for by the drawee banks.
As for PN No. 34534, respondent asserted payment thereof at two separate
instances by two different means. In her formal offer of exhibits, respondent submitted
a deposit slip of petitioner Citibank, dated 11 August 1978, evidencing the deposit of
BPI Check No. 5785 for P150,000.00.[101] In her Formal Offer of Documentary
Exhibits, dated 7 July 1989, respondent stated that the purpose for the presentation of
the said deposit slip was to prove that she already paid her loan covered by PN No.
34534.[102] In her testimony before the RTC three years later, on 28 November 1991,
she changed her story. This time she narrated that the loan covered by PN No. 34534
was secured by her money market placement with petitioner FNCB Finance, and when
she failed to pay the said PN when it became due, the security was applied to the loan,
therefore, the loan was considered paid.[103] Given the foregoing, respondents assertion
of payment of PN No. 34534 is extremely dubious.
According to petitioner Citibank, the PNs in the second set, except for PN No.
34534, were mere renewals of the unpaid PNs in the first set, which was why the PNs
stated that they were for the purpose of liquidating existing obligations. PN No. 34534,
however, which was part of the first set, was still valid and subsisting and so it was
included in the second set without need for its renewal, and it still being the original PN
for that particular loan, its stated purpose was for personal investment.[104] Respondent
essentially admitted executing the second set of PNs, but they were only meant to cover
simulated loans. Mr. Tan supposedly convinced her that her pending loan application
with DBP would have a greater chance of being approved if they made it appear that
respondent urgently needed the money because petitioner Citibank was already
demanding payment for her simulated loans.
Respondents defense of simulated loans to escape liability for the second set of
PNs is truly a novel one. It is regrettable, however, that she was unable to substantiate
the same. Yet again, respondents version of events is totally based on her own

uncorroborated testimony. The notations on the second set of PNs, that they were
non-negotiable simulated notes, were admittedly made by respondent herself and were,
thus, self-serving. Equally self-serving was respondents letter, written on 7 October
1985, or more than six years after the execution of the second set of PNs, in which she
demanded return of the simulated or fictitious PNs, together with the letters relating
thereto, which Mr. Tan purportedly asked her to execute. Respondent further failed to
present any proof of her alleged loan application with the DBP, and of any
circumstance or correspondence wherein the simulated or fictitious PNs were indeed
used for their supposed purpose.
In contrast, petitioner Citibank, as supported by the testimonies of its officers
and available documentation, consistently treated the said PNs as regular loans
accepted, approved, and paid in the ordinary course of its business.
The PNs executed by the respondent in favor of petitioner Citibank to cover her
loans were duly-filled out and signed, including the disclosure statement found at the
back of the said PNs, in adherence to the Central Bank requirement to disclose the full
finance charges to a loan granted to borrowers.
Mr. Tan, then an account officer with the Marketing Department of petitioner
Citibank, testified that he dealt directly with respondent; he facilitated the loans; and the
PNs, at least in the second set, were signed by respondent in his presence. [105]
Mr. Pujeda, the officer who was previously in charge of loans and placements,
confirmed that the signatures on the PNs were verified against respondents specimen
signature with the bank.[106]
Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan
processor, was responsible for booking respondents loans. Booking the loans means
recording it in the General Ledger. She explained the procedure for booking loans, as
follows: The account officer, in the Marketing Department, deals directly with the
clients who wish to borrow money from petitioner Citibank. The Marketing
Department will forward a loan booking checklist, together with the borrowing clients
PNs and other supporting documents, to the loan pre-processor, who will check
whether the details in the loan booking checklist are the same as those in the PNs. The
documents are then sent to Signature Control for verification of the clients signature in
the PNs, after which, they are returned to the loan pre-processor, to be forwarded
finally to the loan processor. The loan processor shall book the loan in the General
Ledger, indicating therein the client name, loan amount, interest rate, maturity date, and
the corresponding PN number. Since she booked respondents loans personally, Ms.
Dondoyano testified that she saw the original PNs. In 1986, Atty. Fernandez of

petitioner Citibank requested her to prepare an accounting of respondents loans, which


she did, and which was presented as Exhibit 120 for the petitioners. The figures from
the said exhibit were culled from the bookings in the General Ledger, a fact which
respondents counsel was even willing to stipulate.[107]
Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the
Control Department of petitioner Citibank. She was presented by petitioner Citibank to
expound on the microfilming procedure at the bank, since most of the copies of the
PNs were retrieved from microfilm. Microfilming of the documents are actually done by
people at the Operations Department. At the end of the day or during the day, the
original copies of all bank documents, not just those pertaining to loans, are
microfilmed. She refuted the possibility that insertions could be made in the microfilm
because the microfilm is inserted in a cassette; the cassette is placed in the microfilm
machine for use; at the end of the day, the cassette is taken out of the microfilm
machine and put in a safe vault; and the cassette is returned to the machine only the
following day for use, until the spool is full. This is the microfilming procedure
followed everyday. When the microfilm spool is already full, the microfilm is developed,
then sent to the Control Department, which double checks the contents of the
microfilms against the entries in the General Ledger. The Control Department also
conducts a random comparison of the contents of the microfilms with the original
documents; a random review of the contents is done on every role of microfilm. [108]
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the
ranks, initially working as a secretary in the Personnel Group; then as a secretary to the
Personnel Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974,
dealing directly with corporate and individual clients who, among other things, secured
loans from petitioner Citibank; the Head of the Collection Group of the Foreign
Department in 1974 to 1976; the Head of the Money Transfer Unit in 1976 to 1978; the
Head of the Loans and Placements Unit up to the early 1980s; and, thereafter,
she established operations training for petitioner Citibank in the Asia-Pacific Region
responsible for the training of the officers of the bank. She testified on the standard
loan application process at petitioner Citibank. According to Ms. Rubio, the account
officer or marketing person submits a proposal to grant a loan to an individual or
corporation. Petitioner Citibank has a worldwide policy that requires a credit committee,
composed of a minimum of three people, which would approve the loan and amount
thereof. There can be no instance when only one officer has the power to approve the
loan application. When the loan is approved, the account officer in charge will obtain
the corresponding PNs from the client. The PNs are sent to the signature verifier who
would validate the signatures therein against those appearing in the signature cards
previously submitted by the client to the bank. The Operations Unit will check and
review the documents, including the PNs, if it is a clean loan, and securities and deposits,

if it is collateralized. The loan is then recorded in the General Ledger. The Loans and
Placements Department will not book the loans without the PNs. When the PNs are
liquidated, whether they are paid or rolled-over, they are returned to the client.[109] Ms.
Rubio further explained that she was familiar with respondents accounts since, while
she was still the Head of the Loan and Placements Unit, she was asked by Mr. Tan to
prepare a list of respondents outstanding obligations.[110] She thus calculated
respondents outstanding loans, which was sent as an attachment to Mr. Tans letter to
respondent, dated 28 September 1979, and presented before the RTC as Exhibits 34-B
and 34-C.[111]
Lastly, the exchange of letters between petitioner Citibank and respondent, as
well as the letters sent by other people working for respondent, had consistently
recognized that respondent owed petitioner Citibank money.
In consideration of the foregoing discussion, this Court finds that the
preponderance of evidence supports the existence of the respondents loans, in the
principal sum of P1,920,000.00, as of 5 September 1979. While it is well-settled that
the term preponderance of evidence should not be wholly dependent on the number
of witnesses, there are certain instances when the number of witnesses become the
determining factor
The preponderance of evidence may be determined, under
certain conditions, by the number of witnesses testifying to a
particular fact or state of facts. For instance, one or two witnesses
may testify to a given state of facts, and six or seven witnesses of
equal candor, fairness, intelligence, and truthfulness, and equally well
corroborated by all the remaining evidence, who have no greater
interest in the result of the suit, testify against such state of facts.
Then the preponderance of evidence is determined by the number of
witnesses. (Wilcox vs. Hines, 100 Tenn. 524, 66 Am. St. Rep.,
761.)[112]
Best evidence rule
This Court disagrees in the pronouncement made by the Court of Appeals
summarily dismissing the documentary evidence submitted by petitioners based on its
broad and indiscriminate application of the best evidence rule.
In general, the best evidence rule requires that the highest available degree of
proof must be produced. Accordingly, for documentary evidence, the contents of a

document are best proved by the production of the document itself,[113] to the exclusion
of any secondary or substitutionary evidence.[114]
The best evidence rule has been made part of the revised Rules of Court, Rule
130, Section 3, which reads
SEC. 3. Original document must be produced; exceptions. When
the subject of inquiry is the contents of a document, no evidence
shall be admissible other than the original document itself, except in
the following cases:
(a) When the original has been lost or destroyed, or cannot
be produced in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control
of the party against whom the evidence is offered, and the latter fails
to produce it after reasonable notice;
(c) When the original consists of numerous accounts or
other documents which cannot be examined in court without great
loss of time and the fact sought to be established from them is only
the general result of the whole; and
(d) When the original is a public record in the custody of a
public officer or is recorded in a public office.
As the afore-quoted provision states, the best evidence rule applies only when the
subject of the inquiry is the contents of the document. The scope of the rule is more
extensively explained thus
But even with respect to documentary evidence, the best
evidence rule applies only when the content of such document is the
subject of the inquiry. Where the issue is only as to whether such
document was actually executed, or exists, or on the circumstances
relevant to or surrounding its execution, the best evidence rule does
not apply and testimonial evidence is admissible (5 Moran, op. cit., pp.
76-66; 4 Martin, op. cit., p. 78). Any other substitutionary evidence is
likewise admissible without need for accounting for the original.
Thus, when a document is presented to prove its existence
or condition it is offered not as documentary, but as real,
evidence. Parol evidence of the fact of execution of the documents is
allowed (Hernaez, et al. vs. McGrath, etc., et al., 91 Phil 565). x x x [115]
In Estrada v. Desierto,[116] this Court had occasion to rule that

It is true that the Court relied not upon the original but only
copy of the Angara Diary as published in the Philippine Daily Inquirer
on February 4-6, 2001. In doing so, the Court, did not, however, violate the
best evidence rule. Wigmore, in his book on evidence, states that:
Production of the original may be dispensed with, in the
trial courts discretion, whenever in the case in hand the opponent does
not bona fide dispute the contents of the document and no other useful
purpose will be served by requiring production.24
x x x x
In several Canadian provinces, the principle of
unavailability has been abandoned, for certain documents in which
ordinarily no real dispute arised. This measure is a sensible and
progressive one and deserves universal adoption (post, sec. 1233). Its
essential feature is that a copy may be used unconditionally, if the opponent
has been given an opportunity to inspect it. (Emphasis supplied.)
This Court did not violate the best evidence rule when it considered and
weighed in evidence the photocopies and microfilm copies of the PNs, MCs, and letters
submitted by the petitioners to establish the existence of respondents loans. The terms
or contents of these documents were never the point of contention in the Petition at
bar. It was respondents position that the PNs in the first set (with the exception of PN
No. 34534) never existed, while the PNs in the second set (again, excluding PN No.
34534) were merely executed to cover simulated loan transactions. As for the MCs
representing the proceeds of the loans, the respondent either denied receipt of certain
MCs or admitted receipt of the other MCs but for another purpose. Respondent
further admitted the letters she wrote personally or through her representatives to Mr.
Tan of petitioner Citibank acknowledging the loans, except that she claimed that these
letters were just meant to keep up the ruse of the simulated loans. Thus, respondent
questioned the documents as to their existence or execution, or when the former is
admitted, as to the purpose for which the documents were executed, matters which are,
undoubtedly, external to the documents, and which had nothing to do with the contents
thereof.
Alternatively, even if it is granted that the best evidence rule should apply to
the evidence presented by petitioners regarding the existence of respondents loans, it

should be borne in mind that the rule admits of the following exceptions under Rule
130, Section 5 of the revised Rules of Court
SEC. 5. When the original document is unavailable. When the
original document has been lost or destroyed, or cannot be produced
in court, the offeror, upon proof of its execution or existence and the
cause of its unavailability without bad faith on his part, may prove its
contents by a copy, or by a recital of its contents in some authentic
document, or by the testimony of witnesses in the order stated.
The execution or existence of the original copies of the documents was
established through the testimonies of witnesses, such as Mr. Tan, before whom most
of the documents were personally executed by respondent. The original PNs also went
through the whole loan booking system of petitioner Citibank from the account
officer in its Marketing Department, to the pre-processor, to the signature verifier, back
to the pre-processor, then to the processor for booking.[117] The original PNs were seen
by Ms. Dondoyano, the processor, who recorded them in the General Ledger. Mr.
Pujeda personally saw the original MCs, proving respondents receipt of the proceeds of
her loans from petitioner Citibank, when he helped Attys. Cleofe and Fernandez, the
banks legal counsels, to reconstruct the records of respondents loans. The original
MCs were presented to Atty. Cleofe who used the same during the preliminary
investigation of the case, sometime in years 1986-1987. The original MCs were
subsequently turned over to the Control and Investigation Division of petitioner
Citibank.[118]
It was only petitioner FNCB Finance who claimed that they lost the original
copies of the PNs when it moved to a new office. Citibank did not make a similar
contention; instead, it explained that the original copies of the PNs were returned to the
borrower upon liquidation of the loan, either through payment or roll-over. Petitioner
Citibank proffered the excuse that they were still looking for the documents in their
storage or warehouse to explain the delay and difficulty in the retrieval thereof, but not
their absence or loss. The original documents in this case, such as the MCs and letters,
were destroyed and, thus, unavailable for presentation before the RTC only on 7
October 1987, when a fire broke out on the 7thfloor of the office building of petitioner
Citibank. There is no showing that the fire was intentionally set. The fire destroyed
relevant documents, not just of the present case, but also of other cases, since the
7th floor housed the Control and Investigation Division, in charge of keeping the
necessary documents for cases in which petitioner Citibank was involved.

The foregoing would have been sufficient to allow the presentation of


photocopies or microfilm copies of the PNs, MCs, and letters by the petitioners as
secondary evidence to establish the existence of respondents loans, as an exception to
the best evidence rule.
The impact of the Decision of the Court of Appeals in the Dy case
In its assailed Decision, the Court of Appeals made the following
pronouncement
Besides, We find the declaration and conclusions of this
Court in CA-G.R. CV No. 15934 entitled Sps. Dr. Ricardo L. Dy and
Rosalind O. Dy vs. City Bank, N.A., et al, promulgated on 15 January
1990, as disturbing taking into consideration the similarities of the
fraud, machinations, and deceits employed by the defendantappellant Citibank and its Account Manager Francisco Tan.
Worthy of note is the fact that Our declarations and
conclusions against Citibank and the person of Francisco Tan in CAG.R. CV No. 15934 were affirmed in toto by the Highest Magistrate
in a Minute Resolution dated 22 August 1990 entitled Citibank, N.A., vs.
Court of Appeals, G.R. 93350.
As the factual milieu of the present appeal created
reasonable doubts as to whether the nine (9) Promissory Notes were
indeed executed with considerations, the doubts, coupled by the
findings and conclusions of this Court in CA-G.R. CV No.
15934 and the Supreme Court in G.R. No. 93350. should be
construed against herein defendants-appellants Citibank and FNCB
Finance.
What this Court truly finds disturbing is the significance given by the Court of
Appeals in its assailed Decision to the Decision[119] of its Third Division in CA-G.R. CV
No. 15934 (or the Dy case), when there is an absolute lack of legal basis for doing such.
Although petitioner Citibank and its officer, Mr. Tan, were also involved in the
Dy case, that is about the only connection between the Dy case and the one at bar. Not
only did the Dy case tackle transactions between parties other than the parties presently

before this Court, but the transactions are absolutely independent and unrelated to
those in the instant Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein
petitioner Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00
by a Third Party Real Estate Mortgage of the properties of Caedos aunt, Rosalind
Dy. It turned out that Rosalind Dy and her husband were unaware of the said loans and
the mortgage of their properties. The transactions were carried out exclusively between
Caedo and Mr. Tan of petitioner Citibank. The RTC found Mr. Tan guilty of fraud for
his participation in the questionable transactions, essentially because he allowed Caedo
to take out the signature cards, when these should have been signed by the Dy spouses
personally before him. Although the Dy spouses signatures in the PNs and Third Party
Real Estate Mortgage were forged, they were approved by the signature verifier since
the signature cards against which they were compared to were also forged. Neither the
RTC nor the Court of Appeals, however, categorically declared Mr. Tan personally
responsible for the forgeries, which, in the narration of the facts, were more likely
committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third
party involved who could have perpetrated any fraud or forgery in her loan
transactions. Although respondent attempted to raise suspicion as to the authenticity of
her signatures on certain documents, these were nothing more than naked allegations
with no corroborating evidence; worse, even her own allegations were replete with
inconsistencies. She could not even establish in what manner or under what
circumstances the fraud or forgery was committed, or how Mr. Tan could have been
directly responsible for the same.
While the Court of Appeals can take judicial notice of the Decision of its Third
Division in the Dy case, it should not have given the said case much weight when it
rendered the assailed Decision, since the former does not constitute a precedent. The
Court of Appeals, in the challenged Decision, did not apply any legal argument or
principle established in the Dy case but, rather, adopted the findings therein of
wrongdoing or misconduct on the part of herein petitioner Citibank and Mr. Tan. Any
finding of wrongdoing or misconduct as against herein petitioners should be made
based on the factual background and pieces of evidence submitted in this case, not
those in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case not as
a legal precedent for the present case, but rather as evidence of similar acts committed
by petitioner Citibank and Mr. Tan. A basic rule of evidence, however, states that,
Evidence that one did or did not do a certain thing at one time is not admissible to

prove that he did or did not do the same or similar thing at another time; but it may be
received to prove a specific intent or knowledge, identity, plan, system, scheme, habit,
custom or usage, and the like.[120] The rationale for the rule is explained thus
The rule is founded upon reason, public policy, justice and
judicial convenience. The fact that a person has committed the same
or similar acts at some prior time affords, as a general rule, no logical
guaranty that he committed the act in question. This is so because,
subjectively, a mans mind and even his modes of life may change;
and, objectively, the conditions under which he may find himself at a
given time may likewise change and thus induce him to act in a
different way. Besides, if evidence of similar acts are to be invariably
admitted, they will give rise to a multiplicity of collateral issues and
will subject the defendant to surprise as well as confuse the court and
prolong the trial.[121]
The factual backgrounds of the two cases are so different and unrelated that the Dy case
cannot be used to prove specific intent, knowledge, identity, plan, system, scheme, habit,
custom or usage on the part of petitioner Citibank or its officer, Mr. Tan, to defraud
respondent in the present case.
IV

The
liquidation
of
respondents
outstanding
loans were valid in so far as
petitioner Citibank used
respondents savings account
with the bank and her money
market placements with
petitioner FNCB Finance;
but illegal and void in so far
as petitioner Citibank used
respondents dollar accounts
with Citibank-Geneva.
Savings Account with petitioner Citibank

Compensation is a recognized mode of extinguishing obligations. Relevant


provisions of the Civil Code provides

the compensation or off-set of respondents outstanding loans, which came from


persons other than petitioner Citibank.

Art. 1278. Compensation shall take place when two persons,


in their own right, are creditors and debtors of each other.

Respondents money market placements were with petitioner FNCB Finance,


and after several roll-overs, they were ultimately covered by PNs No. 20138 and 20139,
which, by 3 September 1979, the date the check for the proceeds of the said PNs were
issued, amounted toP1,022,916.66, inclusive of the principal amounts and interests. As
to these money market placements, respondent was the creditor and petitioner FNCB
Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the
creditor and respondent the debtor. Consequently, legal compensation, under Article
1278 of the Civil Code, would not apply since the first requirement for a valid
compensation, that each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other, was not met.

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 consist in a sum of money, or if the
things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due
time to the debtor.
There is little controversy when it comes to the right of petitioner Citibank to
compensate respondents outstanding loans with her deposit account. As already found
by this Court, petitioner Citibank was the creditor of respondent for her outstanding
loans. At the same time, respondent was the creditor of petitioner Citibank, as far as
her deposit account was concerned, since bank deposits, whether fixed, savings, or
current, should be considered as simple loan or mutuum by the depositor to the banking
institution.[122] Both debts consist in sums of money. By June 1979, all of respondents
PNs in the second set had matured and became demandable, while respondents savings
account was demandable anytime. Neither was there any retention or controversy over
the PNs and the deposit account commenced by a third person and communicated in
due time to the debtor concerned. Compensation takes place by operation of
law,[123] therefore, even in the absence of an expressed authority from respondent,
petitioner Citibank had the right to effect, on 25 June 1979, the partial compensation or
off-set of respondents outstanding loans with her deposit account, amounting
to P31,079.14.
Money market placements with FNCB Finance
Things though are not as simple and as straightforward as regards to the
money market placements and bank account used by petitioner Citibank to complete

What petitioner Citibank actually did was to exercise its rights to the proceeds
of respondents money market placements with petitioner FNCB Finance by virtue of
the Deeds of Assignment executed by respondent in its favor.
The Court of Appeals did not consider these Deeds of Assignment because of
petitioners failure to produce the original copies thereof in violation of the best
evidence rule. This Court again finds itself in disagreement in the application of the
best evidence rule by the appellate court.
To recall, the best evidence rule, in so far as documentary evidence is
concerned, requires the presentation of the original copy of the document only when
the context thereof is the subject of inquiry in the case. Respondent does not question
the contents of the Deeds of Assignment. While she admitted the existence and
execution of the Deeds of Assignment, dated 2 March 1978 and 9 March 1978, covering
PNs No. 8169 and 8167 issued by petitioner FNCB Finance, she claimed, as defense,
that the loans for which the said Deeds were executed as security, were already
paid. She denied ever executing both Deeds of Assignment, dated 25 August 1978,
covering PNs No. 20138 and 20139. These are again issues collateral to the contents of
the documents involved, which could be proven by evidence other than the original
copies of the said documents.
Moreover, the Deeds of Assignment of the money market placements with
petitioner FNCB Finance were notarized documents, thus, admissible in evidence. Rule
132, Section 30 of the Rules of Court provides that

SEC. 30. Proof of notarial documents. Every instrument duly


acknowledged or proved and certified as provided by law, may be
presented in evidence without further proof, the certificate of
acknowledgement being prima facie evidence of the execution of the
instrument or document involved.
Significant herein is this Courts elucidation in De Jesus v. Court of
Appeals,[124] which reads
On the evidentiary value of these documents, it should be
recalled that the notarization of a private document converts it into a
public one and renders it admissible in court without further proof of
its authenticity (Joson vs. Baltazar, 194 SCRA 114 [1991]). This is so
because a public document duly executed and entered in the proper
registry is presumed to be valid and genuine until the contrary is
shown by clear and convincing proof (Asido vs. Guzman, 57 Phil. 652
[1918]; U.S. vs. Enriquez, 1 Phil 241 [1902]; Favor vs. Court of Appeals,
194 SCRA 308 [1991]). As such, the party challenging the recital of
the document must prove his claim with clear and convincing
evidence (Diaz vs. Court of Appeals, 145 SCRA 346 [1986]).
The rule on the evidentiary weight that must be accorded a notarized
document is clear and unambiguous. The certificate of acknowledgement in the
notarized Deeds of Assignment constituted prima facie evidence of the execution
thereof. Thus, the burden of refuting this presumption fell on respondent. She could
have presented evidence of any defect or irregularity in the execution of the said
documents[125]or raised questions as to the verity of the notary publics acknowledgment
and certificate in the Deeds.[126] But again, respondent admitted executing the Deeds of
Assignment, dated 2 March 1978 and 9 March 1978, although claiming that the loans
for which they were executed as security were already paid. And, she assailed the Deeds
of Assignment, dated 25 August 1978, with nothing more than her bare denial of
execution thereof, hardly the clear and convincing evidence required to trounce the
presumption of due execution of a notarized document.
Petitioners not only presented the notarized Deeds of Assignment, but even
secured certified literal copies thereof from the National Archives. [127] Mr. Renato
Medua, an archivist, working at the Records Management and Archives Office of the
National Library, testified that the copies of the Deeds presented before the RTC were
certified literal copies of those contained in the Notarial Registries of the notary publics
concerned, which were already in the possession of the National Archives. He also

explained that he could not bring to the RTC the Notarial Registries containing the
original copies of the Deeds of Assignment, because the Department of Justice (DOJ)
Circular No. 97, dated 8 November 1968, prohibits the bringing of original documents
to the courts to prevent the loss of irreplaceable and priceless documents.[128]
Accordingly, this Court gives the Deeds of Assignment grave importance in
establishing the authority given by the respondent to petitioner Citibank to use as
security for her loans her money her market placements with petitioner FNCB Finance,
represented by PNs No. 8167 and 8169, later to be rolled-over as PNs No. 20138 and
20139. These Deeds of Assignment constitute the law between the parties, and the
obligations arising therefrom shall have the force of law between the parties and should
be complied with in good faith.[129] Standard clauses in all of the Deeds provide that
The ASSIGNOR and the ASSIGNEE hereby further agree
as follows:
xxxx
2. In the event the OBLIGATIONS are not paid at
maturity or upon demand, as the case may be, the ASSIGNEE is
fully authorized and empowered to collect and receive the
PLACEMENT (or so much thereof as may be necessary) and apply
the same in payment of the OBLIGATIONS. Furthermore, the
ASSIGNOR agrees that at any time, and from time to time, upon
request by the ASSIGNEE, the ASSIGNOR will promptly execute
and deliver any and all such further instruments and documents as
may be necessary to effectuate this Assignment.
xxxx
5. This Assignment shall be considered as sufficient
authority to FNCB Finance to pay and deliver the PLACEMENT or
so much thereof as may be necessary to liquidate the
OBLIGATIONS, to the ASSIGNEE in accordance with terms and
provisions hereof.[130]
Petitioner Citibank was only acting upon the authority granted to it under the
foregoing Deeds when it finally used the proceeds of PNs No. 20138 and 20139, paid
by petitioner FNCB Finance, to partly pay for respondents outstanding loans. Strictly
speaking, it did not effect a legal compensation or off-set under Article 1278 of the Civil

Code, but rather, it partly extinguished respondents obligations through the application
of the security given by the respondent for her loans. Although the pertinent
documents were entitled Deeds of Assignment, they were, in reality, more of a pledge
by respondent to petitioner Citibank of her credit due from petitioner FNCB Finance
by virtue of her money market placements with the latter. According to Article 2118 of
the Civil Code
ART. 2118. If a credit has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the amount
due. He shall apply the same to the payment of his claim, and deliver
the surplus, should there be any, to the pledgor.
PNs No. 20138 and 20139 matured on 3 September 1979, without them being
redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB
Finance the proceeds thereof, which included the principal amounts and interests
earned by the money market placements, amounting to P1,022,916.66, and applied the
same against respondents outstanding loans, leaving no surplus to be delivered to
respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondents savings account and the total
application of the proceeds of PNs No. 20138 and 20139 to respondents outstanding
loans, there still remained a balance of P1,069,847.40. Petitioner Citibank then
proceeded to applying respondents dollar accounts with Citibank-Geneva against her
remaining loan balance, pursuant to a Declaration of Pledge supposedly executed by
respondent in its favor.
Certain principles of private international law should be considered herein
because the property pledged was in the possession of an entity in a foreign country,
namely, Citibank-Geneva. In the absence of any allegation and evidence presented by
petitioners of the specific rules and laws governing the constitution of a pledge in
Geneva, Switzerland, they will be presumed to be the same as Philippine local or
domestic laws; this is known as processual presumption.[131]
Upon closer scrutiny of the Declaration of Pledge, this Court finds the same
exceedingly suspicious and irregular.
First of all, it escapes this Court why petitioner Citibank took care to have the
Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge

unnotarized. This Court would think that petitioner Citibank would take greater
cautionary measures with the preparation and execution of the Declaration of Pledge
because it involved respondents all present and future fiduciary placements with a
Citibank branch in another country, specifically, in Geneva, Switzerland. While there is
no express legal requirement that the Declaration of Pledge had to be notarized to be
effective, even so, it could not enjoy the same prima facie presumption of due execution
that is extended to notarized documents, and petitioner Citibank must discharge the
burden of proving due execution and authenticity of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration
of Pledge was actually executed. The photocopy of the Declaration of Pledge submitted
by petitioner Citibank before the RTC was undated.[132] It presented only a photocopy
of the pledge because it already forwarded the original copy thereof to Citibank-Geneva
when it requested for the remittance of respondents dollar accounts pursuant
thereto. Respondent, on the other hand, was able to secure a copy of the Declaration of
Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September
1979.[133] Respondent, however, presented her passport and plane tickets to prove that
she was out of the country on the said date and could not have signed the
pledge. Petitioner Citibank insisted that the pledge was signed before 24 September
1979, but could not provide an explanation as to how and why the said date was written
on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by
respondent personally before him, he could not give the exact date when the said
signing took place. It is important to note that the copy of the Declaration of Pledge
submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva,
which had possession of the original copy of the pledge. It is dated 24 September 1979,
and this Court shall abide by the presumption that the written document is truly
dated.[134] Since it is undeniable that respondent was out of the country on 24
September 1979, then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a
standard printed form. It was constituted in favor of Citibank, N.A., otherwise referred
to therein as the Bank. It should be noted, however, that in the space which should
have named the pledgor, the name of petitioner Citibank was typewritten, to wit
The pledge right herewith constituted shall secure all claims which
the Bank now has or in the future acquires against Citibank, N.A.,
Manila (full name and address of the Debtor), regardless of the legal
cause or the transaction (for example current account, securities
transactions, collections, credits, payments, documentary credits and
collections) which gives rise thereto, and including principal, all
contractual and penalty interest, commissions, charges, and costs.

The pledge, therefore, made no sense, the pledgor and pledgee being the same
entity. Was a mistake made by whoever filled-out the form? Yes, it could be a
possibility. Nonetheless, considering the value of such a document, the mistake as to a
significant detail in the pledge could only be committed with gross carelessness on the
part of petitioner Citibank, and raised serious doubts as to the authenticity and due
execution of the same. The Declaration of Pledge had passed through the hands of
several bank officers in the country and abroad, yet, surprisingly and implausibly, no one
noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of
Pledge. She claimed that the signature was a forgery. When a document is assailed on
the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry
is the contents of a document, no evidence is admissible other than
the original document itself except in the instances mentioned in
Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies
of documents are inadmissible pursuant to the best evidence
rule. This is especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved
by clear, positive and convincing evidence and the burden of proof
lies on the party alleging forgery. The best evidence of a forged
signature in an instrument is the instrument itself reflecting the
alleged forged signature. The fact of forgery can only be established
by a comparison between the alleged forged signature and the
authentic and genuine signature of the person whose signature is
theorized upon to have been forged. Without the original document
containing the alleged forged signature, one cannot make a definitive
comparison which would establish forgery. A comparison based on a
mere xerox copy or reproduction of the document under controversy
cannot produce reliable results.[135]
Respondent made several attempts to have the original copy of the pledge
produced before the RTC so as to have it examined by experts. Yet, despite several
Orders by the RTC,[136] petitioner Citibank failed to comply with the production of the
original Declaration of Pledge. It is admitted that Citibank-Geneva had possession of
the original copy of the pledge. While petitioner Citibank in Manila and its branch in
Geneva may be separate and distinct entities, they are still incontestably related, and

between petitioner Citibank and respondent, the former had more influence and
resources to convince Citibank-Geneva to return, albeit temporarily, the original
Declaration of Pledge. Petitioner Citibank did not present any evidence to convince
this Court that it had exerted diligent efforts to secure the original copy of the pledge,
nor did it proffer the reason why Citibank-Geneva obstinately refused to give it back,
when such document would have been very vital to the case of petitioner
Citibank. There is thus no justification to allow the presentation of a mere photocopy
of the Declaration of Pledge in lieu of the original, and the photocopy of the pledge
presented by petitioner Citibank has nil probative value.[137] In addition, even if this
Court cannot make a categorical finding that respondents signature on the original copy
of the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed the
presentation of the original document, and takes into consideration the presumption
that the evidence willfully suppressed would be adverse to petitioner Citibank if
produced.[138]
Without the Declaration of Pledge, petitioner Citibank had no authority to
demand the remittance of respondents dollar accounts with Citibank-Geneva and to
apply them to her outstanding loans. It cannot effect legal compensation under Article
1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is
a distinct and separate entity. As for the dollar accounts, respondent was the creditor
and Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank
was the creditor and respondent was the debtor. The parties in these transactions were
evidently not the principal creditor of each other.
Therefore, this Court declares that the remittance of respondents dollar accounts
from Citibank-Geneva and the application thereof to her outstanding loans with
petitioner Citibank was illegal, and null and void. Resultantly, petitioner Citibank is
obligated to return to respondent the amount of US$149,632,99 from her CitibankGeneva accounts, or its present equivalent value in Philippine currency; and, at the same
time, respondent continues to be obligated to petitioner Citibank for the balance of her
outstanding loans which, as of 5 September 1979, amounted toP1,069,847.40.
V

The parties shall be liable for


interests on their monetary
obligations to each other, as
determined herein.
In summary, petitioner Citibank is ordered by this Court to pay respondent the
proceeds of her money market placements, represented by PNs No. 23356 and 23357,

amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5%


per annum as stipulated in the PNs,[139] beginning 17 March 1977, the date of the
placements.
Petitioner Citibank is also ordered to refund to respondent the amount of
US$149,632.99, or its equivalent in Philippine currency, which had been remitted from
her Citibank-Geneva accounts. These dollar accounts, consisting of two fiduciary
placements and current accounts with Citibank-Geneva shall continue earning their
respective stipulated interests from 26 October 1979, the date of their remittance by
Citibank-Geneva to petitioner Citibank in Manila and applied against respondents
outstanding loans.
As for respondent, she is ordered to pay petitioner Citibank the balance of her
outstanding loans, which amounted to P1,069,847.40 as of 5 September 1979. These
loans continue to earn interest, as stipulated in the corresponding PNs, from the time of
their respective maturity dates, since the supposed payment thereof using respondents
dollar accounts from Citibank-Geneva is deemed illegal, null and void, and, thus,
ineffective.
VI

Petitioner Citibank shall be


liable for damages to
respondent.
Petitioners protest the award by the Court of Appeals of moral damages,
exemplary damages, and attorneys fees in favor of respondent. They argued that the
RTC did not award any damages, and respondent, in her appeal before the Court of
Appeals, did not raise in issue the absence of such.
While it is true that the general rule is that only errors which have been stated in
the assignment of errors and properly argued in the brief shall be considered, this Court
has also recognized exceptions to the general rule, wherein it authorized the review of
matters, even those not assigned as errors in the appeal, if the consideration thereof is
necessary in arriving at a just decision of the case, and there is a close inter-relation
between the omitted assignment of error and those actually assigned and discussed by
the appellant.[140] Thus, the Court of Appeals did not err in awarding the damages when
it already made findings that would justify and support the said award.
Although this Court appreciates the right of petitioner Citibank to effect legal
compensation of respondents local deposits, as well as its right to the proceeds of PNs

No. 20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly
extinguish respondents outstanding loans, it finds that petitioner Citibank did commit
wrong when it failed to pay and properly account for the proceeds of respondents
money market placements, evidenced by PNs No. 23356 and 23357, and when it sought
the remittance of respondents dollar accounts from Citibank-Geneva by virtue of a
highly-suspect Declaration of Pledge to be applied to the remaining balance of
respondents outstanding loans. It bears to emphasize that banking is impressed with
public interest and its fiduciary character requires high standards of integrity and
performance.[141] A bank is under the obligation to treat the accounts of its depositors
with meticulous care whether such accounts consist only of a few hundred pesos or of
millions of pesos.[142] The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible.[143] Petitioner Citibank evidently failed to
exercise the required degree of care and transparency in its transactions with respondent,
thus, resulting in the wrongful deprivation of her property.
Respondent had been deprived of substantial amounts of her investments and
deposits for more than two decades. During this span of years, respondent had found
herself in desperate need of the amounts wrongfully withheld from her. In her
testimony[144] before the RTC, respondent narrated
Q

By the way Mrs. Witness will you kindly tell us again, you said
before that you are a businesswoman, will you tell us again
what are the businesses you are engaged into [sic]?

I am engaged in real estate. I am the owner of the Modesta


Village 1 and 2 in San Mateo, Rizal. I am also the President
and Chairman of the Board of Macador [sic] Co. and
Business Inc. which operates the Macador [sic] International
Palace Hotel. I am also the President of the Macador [sic]
International Palace Hotel, and also the Treasures Home
Industries, Inc. which I am the Chairman and president of
the Board and also operating affiliated company in the name
of Treasures Motor Sales engaged in car dealers [sic] like
Delta Motors, we are the dealers of the whole Northern
Luzon and I am the president of the Disto Company, Ltd.,
based in Hongkong licensed in Honkong [sic] and now
operating in Los Angeles, California.

What is the business of that Disto Company Ltd.?

Disto Company, Ltd., is engaged in real estate and


construction.

Of all the company [sic] that I have, only the Disto Company
that is now operating in California.

Aside from those businesses are you a member of any


national or community organization for social and civil
activities?

How about your candidacy as Mayor of Dagupan, [sic] City,


and later as Assemblywoman of Region I, what happened to
this?

Yes sir.

What are those?

I am the Vice-President of thes [sic] Subdivision Association


of the Philippines in 1976, I am also an officer of the
Chamber of Real Estate Business Association; I am also an
officer of the Chatholic [sic] Womens League and I am also
a member of the CMLI, I forgot the definition.

I won by voting but when election comes on [sic] the counting


I lost and I protested this, it is still pending and because I
dont have financial resources I was not able to push
through the case. I just have it pending in the Comelec.

Now, do these things also affect your social and civic


activities?

Yes sir, definitely.

How?

I was embarrassed because being a businesswoman I would


like to inform the Honorable Court that I was awarded as
the most outstanding businesswoman of the year in 1976
but when this money was not given back to me I was not
able to comply with the commitments that I have promised
to these associations that I am engaged into [sic], sir.

How about any political affiliation or government position


held if any?

I was also a candidate for Mayo last January 30, 1980.

Where?

In Dagupan City, Pangasinan.

What else?

I also ran as an Assemblywoman last May, 1984, Independent


party in Regional I, Pangasinan.

What happened to your businesses you mentioned as a result


of your failure to recover you [sic] investments and bank
deposits from the defendants?

They are not all operating, in short, I was hampered to push


through the businesses that I have.

A [sic] Of all the businesses and enterprises that you mentioned what
are those that are paralyzed and what remain inactive?

For the mental anguish, serious anxiety, besmirched reputation, moral shock and social
humiliation suffered by the respondent, the award of moral damages is but
proper. However, this Court reduces the amount thereof to P300,000.00, for the award
of moral damages is meant to compensate for the actual injury suffered by the
respondent, not to enrich her.[145]
Having failed to exercise more care and prudence than a private individual in
its dealings with respondent, petitioner Citibank should be liable for exemplary damages,
in the amount of P250,000.00, in accordance with Article 2229[146] and 2234[147] of the
Civil Code.
With the award of exemplary damages, then respondent shall also be entitled to
an award of attorneys fees.[148] Additionally, attorney's fees may be awarded when a
party is compelled to litigate or to incur expenses to protect his interest by reason of an

unjustified act of the other party.[149] In this case, an award of P200,000.00 attorneys
fees shall be satisfactory.
In contrast, this Court finds no sufficient basis to award damages to
petitioners. Respondent was compelled to institute the present case in the exercise of
her rights and in the protection of her interests. In fact, although her Complaint before
the RTC was not sustained in its entirety, it did raise meritorious points and on which
this Court rules in her favor. Any injury resulting from the exercise of ones rights
is damnum absque injuria.[150]
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY
GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. No. 51930,
dated 26 March 2002, as already modified by its Resolution, dated 20 November 2002,
is hereby AFFIRMED WITH MODIFICATION, as follows
1.
PNs No. 23356 and 23357 are DECLARED subsisting and
outstanding. Petitioner Citibank is ORDERED to return to respondent the principal
amounts of the said PNs, amounting to Three Hundred Eighteen Thousand Eight
Hundred Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34) and Two
Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00), respectively, plus
the stipulated interest of Fourteen and a half percent (14.5%) per annum, beginning 17
March 1977;
2.
The remittance of One Hundred Forty-Nine Thousand Six Hundred
Thirty Two US Dollars and Ninety-Nine Cents (US$149,632.99) from respondents
Citibank-Geneva accounts to petitioner Citibank in Manila, and the application of the
same against respondents outstanding loans with the latter, is DECLARED illegal, null
and void. Petitioner Citibank is ORDERED to refund to respondent the said amount,
or its equivalent in Philippine currency using the exchange rate at the time of payment,
plus the stipulated interest for each of the fiduciary placements and current accounts
involved, beginning 26 October 1979;
3.
Petitioner Citibank is ORDERED to pay respondent moral damages in
the amount of Three Hundred Thousand Pesos (P300,000.00); exemplary damages in
the amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and attorneys fees
in the amount of Two Hundred Thousand Pesos (P200,000.00); and
4.
Respondent is ORDERED to pay petitioner Citibank the balance of
her outstanding loans, which, from the respective dates of their maturity to 5 September
1979, was computed to be in the sum of One Million Sixty-Nine Thousand Eight
Hundred Forty-Seven Pesos and Forty Centavos (P1,069,847.40), inclusive of

interest. These outstanding loans shall continue to earn interest, at the rates stipulated
in the corresponding PNs, from 5 September 1979 until payment thereof.
SO ORDERED.

G.R. Nos. L-25836-37 January 31, 1981


THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,
vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the
Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his
motion to set aside the order declaring him in default, 1 and from the order of said court
in the same case denying his motion to set aside the judgment rendered after he was
declared in default. 2These two appeals of the defendant were docketed as CA-G.R.
NO. 27734-R and CA-G.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of
Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CAG.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division,
certified the consolidated appeal to the Supreme Court on the ground that only
questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M.
Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with
daily interest thereon from November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees
equivalent to 10% of the total amount due and costs. 6 The complaint filed by the
Philippine Bank of Commerce contains twenty-two (22) causes of action referring to
twenty-two (22) transactions entered into by the said Bank and Aruego on different
dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to
be recovered represents the cost of the printing of "World Current Events," a periodical
published by the defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every printing of the
"World Current Events," the printer, Encal Press and Photo Engraving, collected the
cost of printing by drawing a draft against the plaintiff, said draft being sent later to the

defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required
defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant
undertook to hold in trust for plaintiff the periodicals and to sell the same with the
promise to turn over to the plaintiff the proceeds of the sale of said publication to
answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on December 2,
1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time
to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied
defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss
the complaint on December 17, 1959 on the ground that the complaint states no cause
of action because:
a) When the various bills of exchange were presented to the defendant as drawee for
acceptance, the amounts thereof had already been paid by the plaintiff to the drawer
(Encal Press and Photo Engraving), without knowledge or consent of the defendant
drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the defendant
drawee is an accommodating party only for the drawer (Encal Press and PhotoEngraving) and win be liable in the event that the accommodating party (drawer) fails to
pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of which was
received by the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7,
1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set
aside its order dismissing the complaint and set the case for hearing on March 15, 1960
at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was
received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according
to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following
day, March 12, 1960, the defendant filed a motion to postpone the trial of the case on
the ground that there having been no answer as yet, the issues had not yet been
joined. 15 On the same date, the defendant filed his answer to the complaint interposing
the following defenses: That he signed the document upon which the plaintiff sues in
his capacity as President of the Philippine Education Foundation; that his liability is only
secondary; and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in
default on the ground that the defendant should have filed his answer on March 11,
1960. He contends that by filing his answer on March 12, 1960, defendant was one day
late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The
defendant learned of the order declaring him in default on March 21, 1960. On March
22, 1960 the defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on March 11, 1960 at
5:00 in the afternoon, it could not have been reasonably expected of the defendant to
file his answer on the last day of the reglementary period, March 11, 1960, within office
hours, especially because the order of the court dated March 7, 1960 was brought to the
attention of counsel only in the early hours of March 12, 1960. The defendant also
alleged that he has a good and substantial defense. Attached to the motion are the
affidavits of deputy sheriff Mamerto de la Cruz that he served the order of the court
dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial
court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial
court rendered judgment sentencing the defendant to pay to the plaintiff the sum of
P35,444.35 representing the total amount of his obligation to the said plaintiff under the
twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and
the sum of P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25,
1961 denying his motion to set aside the order declaring him in default, an appeal bond
in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to
the approval of defendant's record on appeal on May 13, 1960. The following day, May
14, 1960, the lower court dismissed defendant's appeal from the order dated March 25,
1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the
defendant filed a motion for reconsideration of the trial court's order dismissing his
appeal.23 The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court
reconsidered its previous order dismissing the appeal and approved the defendant's
record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from
the Clerk of Court dated May 26, 1960, informing the defendant that the record on
appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was
declared in default reiterating the same ground previously advanced by him in his
motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on
June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment
by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his
notice of appeal from the order of the court denying his motion to set aside the

judgment by default, his appeal bond, and his record on appeal. The defendant's record
on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had
two appeals with the Court of Appeals: (1) Appeal from the order of the lower court
denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R;
(2) Appeal from the order denying his motion to set aside the judgment by default
docketed as CA-G.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE
DEFENDANT WAS IN DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE
MOTION TO DECLARE DEFENDANT IN DEFAULT
ALTHOUGH AT THE TIME THERE WAS ALREADY ON
FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF
SAID ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S
PETITION FOR RELIEF OF ORDER OF DEFAULT AND
FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him
through his mistake, inadvertence, surprise or excusable neglect, he must show to the
court that he has a meritorious defense. 32 In other words, in order to set aside the order
of default, the defendant must not only show that his failure to answer was due to fraud,
accident, mistake or excusable negligence but also that he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with the
summons on December 2, 1960; that on December 17, 1960, the last day for filing his
answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court
dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for
reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the

trial court issued an order setting aside the order of dismissal; that a copy of the order
was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as
shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.
The failure then of the defendant to file his answer on the last day for pleading is
excusable. The order setting aside the dismissal of the complaint was received at 5:00
o'clock in the afternoon. It was therefore impossible for him to have filed his answer on
that same day because the courts then held office only up to 5:00 o'clock in the
afternoon. Moreover, the defendant immediately filed his answer on the following day.
However, while the defendant successfully proved that his failure to answer was due to
excusable negligence, he has failed to show that he has a meritorious defense. The
defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation
Company, publisher of "World Current Events and Decision Law Journal," printed by
Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the
plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as
accommodation or additional party obligor, to add to the security of said plaintiff bank.
The reason for this statement is that unlike real bills of exchange, where payment of the
face value is advanced to the drawer only upon acceptance of the same by the drawee, in
the case in question, payment for the supposed bills of exchange were made before
acceptance; so that in effect, although these documents are labelled bills of exchange,
legally they are not bills of exchange but mere instruments evidencing indebtedness of
the drawee who received the face value thereof, with the defendant as only additional
security of the same. 33
The first defense of the defendant is that he signed the supposed bills of exchange as an
agent of the Philippine Education Foundation Company where he is president. Section
20 of the Negotiable Instruments Law provides that "Where the instrument contains or
a person adds to his signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent or as filing a

representative character, without disclosing his principal, does not exempt him from
personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine Education
Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor)
(SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally
liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation party
and as such, should be made liable only after a showing that the drawer is incapable of
paying. This contention is also without merit.
An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to
some other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument knew him to be
only an accommodation party. 35 In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto
because he wants to accommodate another. In the instant case, the defendant signed as
a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable.
Thus, if the defendant who is a lawyer, he should not have signed as an
acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of
exchange but mere pieces of evidence of indebtedness because payments were made
before acceptance. This is also without merit. Under the Negotiable Instruments Law, a
bill of exchange is an unconditional order in writting addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to
order or to bearer. 36 As long as a commercial paper conforms with the definition of a
bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is
important only in the determination of the kind of liabilities of the parties involved, but
not in the determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the defendant's
prayer will result in a new trial which will serve no purpose and will just waste the time
of the courts as well as of the parties because the defense is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First
Instance of Manila denying the petition for relief from the judgment rendered in said
case is hereby affirmed, without pronouncement as to costs.
SO ORDERED.

BPI v. CIR October 17, 2005


This Petition for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil
Procedure, assails the Decision of the Court of Appeals in CA-G.R. SP No. 51271,
dated 11 August 1999,[1] which reversed and set aside the Decision of the Court of Tax
Appeals (CTA), dated 02 February 1999,[2] and which reinstated Assessment No. FAS-585-89-002054 requiring petitioner Bank of the Philippine Islands (BPI) to pay the
amount of P28,020.00 as deficiency documentary stamp tax (DST) for the taxable year
1985, inclusive of the compromise penalty.
There is hardly any controversy as to the factual antecedents of this Petition.
Petitioner BPI is a commercial banking corporation organized and existing
under the laws of the Philippines. On two separate occasions, particularly on 06 June
1985 and 14 June 1985, it sold United States (US) $500,000.00 to the Central Bank of
the Philippines (Central Bank), for the total sales amount of US$1,000,000.00.
On 10 October 1989, the Bureau of Internal Revenue (BIR) issued Assessment
No. FAS-5-85-89-002054,[3] finding petitioner BPI liable for deficiency DST on its
afore-mentioned sales of foreign bills of exchange to the Central Bank, computed as
follows
1985 Deficiency Documentary Stamp Tax
Foreign Bills of Exchange..

P 18,480,000.00

Tax Due Thereon:


P18,480,000.00 x P0.30 (Sec. 182 NIRC).
P200.00

27,720.00

Add: Suggested compromise penalty.


TOTAL AMOUNT DUE AND COLLECTIBLE.

300.00
P

28,020.00

Petitioner BPI received the Assessment, together with the attached Assessment
Notice,[4] on 20 October 1989.

Petitioner BPI, through its counsel, protested the Assessment in a letter


dated 16 November 1989, and filed with the BIR on 17 November 1989. The said
protest letter is reproduced in full below

In view of the foregoing, we request that the assessment be


revoked and cancelled.

November 16, 1989


The Commissioner of Internal Revenue
Quezon City

Very truly yours,


OFFICE

Attention of: Mr. Pedro C. Aguillon


Asst. Commissioner for Collection
Sir:
On behalf of our client, Bank of the Philippine Islands
(BPI), we have the honor to protest your assessment against it for
deficiency documentary stamp tax for the year 1985 in the amount
of P28,020.00, arising from its sale to the Central Bank of U.S.
$500,000.00 on June 6, 1985 and another U.S. $500,000.00 on June
14, 1985.
1. Under established market practice, the documentary
stamp tax on telegraphic transfers or sales of foreign exchange is paid
by the buyer. Thus, when BPI sells to any party, the cost of
documentary stamp tax is added to the total price or charge to the
buyer and the seller affixes the corresponding documentary stamp on
the document. Similarly, when the Central Bank sells foreign
exchange to BPI, it charges BPI for the cost of the documentary
stamp on the transaction.
2. In the two transactions subject of your assessment, no
documentary stamps were affixed because the buyer,
Central Bank of the Philippines, was exempt from such tax. And
while it is true that under P.D. 1994, a proviso was added to sec. 222
(now sec. 186) of the Tax Code that whenever one party to a taxable
document enjoys exemption from the tax herein imposed, the other
party thereto who is not exempt shall be the one directly liable for the
tax, this proviso (and the other amendments of P.D. 1994) took
effect only on January 1, 1986, according to sec. 49 of P.D.
1994. Hence, the liability for the documentary stamp tax could not
be shifted to the seller.

JR.[5]

PADILLA

LAW

By:
(signed)
SABINO PADILLA,

Petitioner BPI did not receive any immediate reply to its protest
letter. However, on 15 October 1992, the BIR issued a Warrant of Distraint and/or
Levy[6] against petitioner BPI for the assessed deficiency DST for taxable year 1985,
in the amount of P27,720.00 (excluding the compromise penalty of P300.00). It
served the Warrant on petitioner BPI only on 23 October 1992.[7]
Then again, petitioner BPI did not hear from the BIR until 11 September
1997, when its counsel received a letter, dated 13 August 1997, signed by then BIR
Commissioner Liwayway Vinzons-Chato, denying its request for reconsideration,
and addressing the points raised by petitioner BPI in its protest letter, dated 16
November 1989, thus
In reply, please be informed that after a thorough and
careful study of the facts of the case as well as the law and
jurisprudence pertinent thereto, this Office finds the above argument
to be legally untenable. It is admitted that while industry practice or
market convention has the force of law between the members of a
particular industry, it is not binding with the BIR since it is not a
party thereto. The same should, therefore, not be allowed to
prejudice the Bureau of its lawful task of collecting revenues
necessary to defray the expenses of the government. (Art. 11 in
relation to Art. 1306 of the New Civil Code.)
Moreover, let it be stated that even before the amendment
of Sec. 222 (now Sec. 173) of the Tax Code, as amended, the same

was already interpreted to hold that the other party who is not
exempt from the payment of documentary stamp tax liable from the
tax. This interpretation was further strengthened by the following
BIR Rulings which in substance state:
1.

BIR Unnumbered Ruling dated May 30, 1977

x x x Documentary stamp taxes are payable by


either person, signing, issuing, accepting, or transferring the
instrument, document or paper. It is now settled that where one
party to the instrument is exempt from said taxes, the other party
who is not exempt should be liable.
2.

BIR Ruling No. 144-84 dated September 3, 1984

x x x Thus, where one party to the contract is


exempt from said tax, the other party, who is not exempt, shall be
liable therefore. Accordingly, since A.J.L. Construction Corporation,
the other party to the contract and the one assuming the payment of
the expenses incidental to the registration in the vendees name of the
property sold, is not exempt from said tax, then it is the one liable
therefore, pursuant to Sec. 245 (now Sec. 196), in relation to Sec. 222
(now Sec. 173), both of the Tax Code of 1977, as amended.
Premised on all the foregoing considerations, your request
for reconsideration is hereby DENIED.[8]

Upon receipt of the above-cited letter from the BIR, petitioner BPI
proceeded to file a Petition for Review with the CTA on 10 October 1997; [9] to
which respondent BIR Commissioner, represented by the Office of the Solicitor
General, filed an Answer on 08 December 1997.[10]
Petitioner BPI raised in its Petition for Review before the CTA, in addition
to the arguments presented in its protest letter, dated 16 November 1989, the
defense of prescription of the right of respondent BIR Commissioner to enforce
collection of the assessed amount. It alleged that respondent BIR Commissioner
only had three years to collect on Assessment No. FAS-5-85-89-002054, but she
waited for seven years and nine months to deny the protest. In her Answer and
subsequent Memorandum, respondent BIR Commissioner merely reiterated her

position, as stated in her letter to petitioner BPI, dated 13 August 1997, which
denied the latters protest; and remained silent as to the expiration of the
prescriptive period for collection of the assessed deficiency DST.
After due trial, the CTA rendered a Decision on 02 February 1999, in
which it identified two primary issues in the controversy between petitioner BPI and
respondent BIR Commissioner: (1) whether or not the right of respondent BIR
Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable
year 1985 had prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06
June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were subject to
DST.
The CTA answered the first issue in the negative and held that the statute
of limitations for respondent BIR Commissioner to collect on the Assessment had
not yet prescribed. In resolving the issue of prescription, the CTA reasoned that
In the case of Commissioner of Internal Revenue vs.
Wyeth Suaco Laboratories, Inc., G.R. No. 76281, September 30,
1991, 202 SCRA 125, the Supreme Court laid to rest the first issue. It
categorically ruled that a protest is to be treated as request for
reinvestigation or reconsideration and a mere request for
reexamination or reinvestigation tolls the prescriptive period of the
Commissioner to collect on an assessment. . .
...
In the case at bar, there being no dispute that petitioner
filed its protest on the subject assessment on November 17, 1989,
there can be no conclusion other than that said protest stopped the
running of the prescriptive period of the Commissioner to collect.
Section 320 (now 223) of the Tax Code, clearly states that a
request for reinvestigation which is granted by the Commissioner,
shall suspend the prescriptive period to collect. The underscored
portion above does not mean that the Commissioner will cancel the
subject assessment but should be construed as when the same was
entertained by the Commissioner by not issuing any warrant of
distraint or levy on the properties of the taxpayer or any action
prejudicial to the latter unless and until the request for reinvestigation
is finally given due course. Taking into consideration this provision
of law and the aforementioned ruling of the Supreme Court in Wyeth
Suaco which specifically and categorically states that a protest could be

considered as a request for reinvestigation, We rule that prescription


has not set in against the government.[11]
The CTA had likewise resolved the second issue in the negative. Referring
to its own decision in an earlier case, Consolidated Bank & Trust Co. v. The Commissioner
of Internal Revenue,[12] the CTA reached the conclusion that the sales of foreign
currency by petitioner BPI to the Central Bank in taxable year 1985 were not subject
to DST
From the abovementioned decision of this Court, it can be
gleaned that the Central Bank, during the period June 11, 1984 to
March 9, 1987 enjoyed tax exemption privilege, including the
payment of documentary stamp tax (DST) pursuant to Resolution
No. 35-85 dated May 3, 1985 of the Fiscal Incentive Review
Board. As such, the Central Bank, as buyer of the foreign currency,
is exempt from paying the documentary stamp tax for the period
above-mentioned. This Court further expounded that said tax
exemption of the Central Bank was modified beginning January 1,
1986 when Presidential Decree (P.D.) 1994 took effect. Under this
decree, the liability for DST on sales of foreign currency to the
Central Bank is shifted to the seller.
Applying the above decision to the case at bar, petitioner
cannot be held liable for DST on its 1985 sales of foreign currencies
to the Central Bank, as the latter who is the purchaser of the subject
currencies is the one liable thereof. However, since the Central Bank
is exempt from all taxes during 1985 by virtue of Resolution No. 3585 of the Fiscal Incentive Review Board dated March 3, 1985, neither
the petitioner nor the Central Bank is liable for the payment of the
documentary stamp tax for the formers 1985 sales of foreign
currencies to the latter. This aforecited case of Consolidated Bank vs.
Commissioner of Internal Revenue was affirmed by the Court of
Appeals in its decision dated March 31, 1995, CA-GR Sp. No.
35930. Said decision was in turn affirmed by the Supreme Court in
its resolution denying the petition filed by Consolidated Bank dated
November 20, 1995 with the Supreme Court under Entry of
Judgment dated March 1, 1996.[13]

In sum, the CTA decided that the statute of limitations for respondent BIR
Commissioner to collect on Assessment No. FAS-5-85-89-002054 had not yet
prescribed; nonetheless, it still ordered the cancellation of the said Assessment
because the sales of foreign currency by petitioner BPI to the Central Bank in
taxable year 1985 were tax-exempt.
Herein respondent BIR Commissioner appealed the Decision of the CTA
to the Court of Appeals. In its Decision dated 11 August 1999,[14]the Court of
Appeals sustained the finding of the CTA on the first issue, that the running of the
prescriptive period for collection on Assessment No. FAS-5-85-89-002054 was
suspended when herein petitioner BPI filed a protest on 17 November 1989 and,
therefore, the prescriptive period for collection on the Assessment had not yet
lapsed. In the same Decision, however, the Court of Appeals reversed the CTA on
the second issue and basically adopted the position of the respondent BIR
Commissioner that the sales of foreign currency by petitioner BPI to the Central
Bank in taxable year 1985 were subject to DST. The Court of Appeals, thus,
ordered the reinstatement of Assessment No. FAS-5-85-89-002054 which required
petitioner BPI to pay the amount of P28,020.00 as deficiency DST for taxable year
1985, inclusive of the compromise penalty.
Comes now petitioner BPI before this Court in this Petition for Review
on Certiorari, seeking resolution of the same two legal issues raised and discussed in
the courts below, to reiterate: (1) whether or not the right of respondent BIR
Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable
year 1985 had prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06
June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were subject to
DST.
I
The efforts of respondent Commissioner to collect on Assessment No. FAS-5-8589-002054 were already barred by prescription.

Anent the question of prescription, this Court disagrees in the Decisions of


the CTA and the Court of Appeals, and herein determines the statute of limitations
on collection of the deficiency DST in Assessment No. FAS-5-85-89-002054 had
already prescribed.

The period for the BIR to assess and collect an internal revenue tax is
limited to three years by Section 203 of the Tax Code of 1977, as amended,[15] which
provides that
SEC. 203. Period of limitation upon assessment and collection.
Except as provided in the succeeding section, internal revenue taxes
shall be assessed within three years after the last day prescribed by
law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three-year period shall
be counted from the day the return was filed. For the purposes of
this section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day.[16]

The three-year period of limitations on the assessment and collection of


national internal revenue taxes set by Section 203 of the Tax Code of 1977, as
amended, can be affected, adjusted, or suspended, in accordance with the following
provisions of the same Code
SEC. 223. Exceptions as to period of limitation of assessment and
collection of taxes. (a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud, or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action
for the collection thereof.
(b) If before the expiration of the time prescribed in the
preceding section for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in writing to its
assessment after such time the tax may be assessed within the period
agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the
period previously agreed upon.

(c) Any internal revenue tax which has been assessed within
the period of limitation above-prescribed may be collected by
distraint or levy or by a proceeding in court within three years
following the assessment of the tax.
(d) Any internal revenue tax which has been assessed within
the period agreed upon as provided in paragraph (b) hereinabove may
be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the three-year
period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period
previously agreed upon.
(e) Provided, however, That nothing in the immediately
preceding section and paragraph (a) hereof shall be construed to
authorize the examination and investigation or inquiry into any tax
returns filed in accordance with the provisions of any tax amnesty law
or decree.[17]
SEC. 224. Suspension of running of statute. The running of
the statute of limitation provided in Section[s] 203 and 223 on the
making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of
any change in address, the running of the statute of limitations will
not be suspended; when the warrant of distraint and levy is duly
served upon the taxpayer, his authorized representative, or a member
of his household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines.[18]

As enunciated in these statutory provisions, the BIR has three years,


counted from the date of actual filing of the return or from the last date prescribed
by law for the filing of such return, whichever comes later, to assess a national

internal revenue tax or to begin a court proceeding for the collection thereof
without an assessment. In case of a false or fraudulent return with intent to evade
tax or the failure to file any return at all, the prescriptive period for assessment of
the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or
omission. When the BIR validly issues an assessment, within either the three-year or
ten-year period, whichever is appropriate, then the BIR has another three
years[19] after the assessment within which to collect the national internal revenue tax
due thereon by distraint, levy, and/or court proceeding. The assessment of the tax
is deemed made and the three-year period for collection of the assessed tax begins to
run on the date the assessment notice had been released, mailed or sent by the BIR
to the taxpayer.[20]

tax, because it may only be upon the service of the Warrant that the taxpayer is
informed of the denial by the BIR of any pending protest of the said taxpayer, and
the resolute intention of the BIR to collect the tax assessed.
If the service of the Warrant of Distraint and/or Levy on petitioner BPI on
23 October 1992 was already beyond the prescriptive period for collection of the
deficiency DST, which had expired on 19 October 1992, then what more the letter
of respondent BIR Commissioner, dated 13 August 1997 and received by the
counsel of the petitioner BPI only on 11 September 1997, denying the protest of
petitioner BPI and requesting payment of the deficiency DST? Even later and more
unequivocally barred by prescription on collection was the demand made by
respondent BIR Commissioner for payment of the deficiency DST in her Answer to
the Petition for Review of petitioner BPI before the CTA, filed on 08 December
1997.[23]

In the present Petition, there is no controversy on the timeliness of the


issuance of the Assessment, only on the prescription of the period to collect the
deficiency DST following its Assessment. While Assessment No. FAS-5-85-89002054 and its corresponding Assessment Notice were both dated 10 October 1989
and were received by petitioner BPI on 20 October 1989, there was no showing as
to when the said Assessment and Assessment Notice were released, mailed or sent
by the BIR. Still, it can be granted that the latest date the BIR could have released,
mailed or sent the Assessment and Assessment Notice to petitioner BPI was on the
same date they were received by the latter, on 20 October 1989. Counting the threeyear prescriptive period, for a total of 1,095 days,[21] from 20 October 1989, then the
BIR only had until 19 October 1992 within which to collect the assessed deficiency
DST.
The earliest attempt of the BIR to collect on Assessment No. FAS-5-8589-002054 was its issuance and service of a Warrant of Distraint and/or Levy on
petitioner BPI. Although the Warrant was issued on 15 October 1992, previous to
the expiration of the period for collection on 19 October 1992, the same was served
on petitioner BPI only on 23 October 1992.
Under Section 223(c) of the Tax Code of 1977, as amended, it is not
essential that the Warrant of Distraint and/or Levy be fully executed so that it can
suspend the running of the statute of limitations on the collection of the tax. It is
enough that the proceedings have validly began or commenced and that their
execution has not been suspended by reason of the voluntary desistance of the
respondent BIR Commissioner. Existing jurisprudence establishes that distraint and
levy proceedings are validly begun or commenced by the issuance of the
Warrant and service thereof on the taxpayer.[22] It is only logical to require that the
Warrant of Distraint and/or Levy be, at the very least, served upon the taxpayer in
order to suspend the running of the prescriptive period for collection of an assessed

II
There is no valid ground for the suspension of the running of the prescriptive period
for collection of the assessed DST under the Tax Code of 1977, as amended.

In their Decisions, both the CTA and the Court of Appeals found that the
filing by petitioner BPI of a protest letter suspended the running of the prescriptive
period for collecting the assessed DST. This Court, however, takes the opposing
view, and, based on the succeeding discussion, concludes that there is no valid
ground for suspending the running of the prescriptive period for collection of the
deficiency DST assessed against petitioner BPI.
A.

The statute of limitations on assessment and collection of taxes is for the protection of the
taxpayer and, thus, shall be construed liberally in his favor.
Though the statute of limitations on assessment and collection of national
internal revenue taxes benefits both the Government and the taxpayer, it principally
intends to afford protection to the taxpayer against unreasonable investigation. The
indefinite extension of the period for assessment is unreasonable because it deprives
the said taxpayer of the assurance that he will no longer be subjected to further
investigation for taxes after the expiration of a reasonable period of time. [24] As
aptly explained in Republic of the Philippines v. Ablaza[25]

The law prescribing a limitation of actions for the


collection of the income tax is beneficial both to the Government
and to its citizens; to the Government because tax officers would be
obliged to act promptly in the making of assessment, and to citizens
because after the lapse of the period of prescription citizens would
have a feeling of security against unscrupulous tax agents who will
always find an excuse to inspect the books of taxpayers, not to
determine the latters real liability, but to take advantage of every
opportunity to molest peaceful, law-abiding citizens. Without such a
legal defense taxpayers would furthermore be under obligation to
always keep their books and keep them open for inspection subject
to harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive to
bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which
recommend the approval of the law.
In order to provide even better protection to the taxpayer against
unreasonable investigation, the Tax Code of 1977, as amended, identifies specifically
in Sections 223 and 224[26] thereof the circumstances when the prescriptive periods
for assessing and collecting taxes could be suspended or interrupted.
To give effect to the legislative intent, these provisions on the statute of
limitations on assessment and collection of taxes shall be construed and applied
liberally in favor of the taxpayer and strictly against the Government.
B.

The statute of limitations on assessment and collection of national internal revenue taxes may be
waived, subject to certain conditions, under paragraphs (b) and (d) of Section 223 of the Tax
Code of 1977, as amended, respectively. Petitioner BPI, however, did not execute any such
waiver in the case at bar.

According to paragraphs (b) and (d) of Section 223 of the Tax Code of
1977, as amended, the prescriptive periods for assessment and collection of national
internal revenue taxes, respectively, could be waived by agreement, to wit
SEC. 223. Exceptions as to period of limitation of assessment and
collection of taxes.
...

(b) If before the expiration of the time prescribed in the


preceding section for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in writing to its
assessment after such time the tax may be assessed within the period
agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the
period previously agreed upon.
...
(d) Any internal revenue tax which has been assessed within
the period agreed upon as provided in paragraph (b) hereinabove may
be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the three-year
period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period
previously agreed upon.[27]
The agreements so described in the afore-quoted provisions are often
referred to as waivers of the statute of limitations. The waiver of the statute of
limitations, whether on assessment or collection, should not be construed as a
waiver of the right to invoke the defense of prescription but, rather, an agreement
between the taxpayer and the BIR to extend the period to a date certain, within
which the latter could still assess or collect taxes due. The waiver does not mean
that the taxpayer relinquishes the right to invoke prescription unequivocally.[28]
A valid waiver of the statute of limitations under paragraphs (b) and (d) of
Section 223 of the Tax Code of 1977, as amended, must be: (1) in writing; (2) agreed
to by both the Commissioner and the taxpayer; (3) before the expiration of the
ordinary prescriptive periods for assessment and collection; and (4) for a definite
period beyond the ordinary prescriptive periods for assessment and collection. The
period agreed upon can still be extended by subsequent written agreement, provided
that it is executed prior to the expiration of the first period agreed upon. The BIR
had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay
down an even more detailed procedure for the proper execution of such a
waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver
shall be strictly followed, and any revenue official who fails to comply therewith
resulting in the prescription of the right to assess and collect shall be administratively
dealt with.

This Court had consistently ruled in a number of cases that a request for
reconsideration or reinvestigation by the taxpayer, without a valid waiver of the
prescriptive periods for the assessment and collection of tax, as required by the Tax
Code and implementing rules, will not suspend the running thereof.[29]
In the Petition at bar, petitioner BPI executed no such waiver of the statute
of limitations on the collection of the deficiency DST per Assessment No. FAS-585-89-002054. In fact, an internal memorandum of the Chief of the Legislative,
Ruling & Research Division of the BIR to her counterpart in the Collection
Enforcement Division, dated 15 October 1992, expressly noted that, The taxpayer
fails to execute a Waiver of the Statute of Limitations extending the period of
collection of the said tax up to December 31, 1993 pending reconsideration of its
protest. . .[30] Without a valid waiver, the statute of limitations on collection by the
BIR of the deficiency DST could not have been suspended under paragraph (d) of
Section 223 of the Tax Code of 1977, as amended.
C.

The protest filed by petitioner BPI did not constitute a request for reinvestigation, granted by the
respondent BIR Commissioner, which could have suspended the running of the statute of
limitations on collection of the assessed deficiency DST under Section 224 of the Tax Code
of 1977, as amended.
The Tax Code of 1977, as amended, also recognizes instances when the
running of the statute of limitations on the assessment and collection of national
internal revenue taxes could be suspended, even in the absence of a waiver, under
Section 224 thereof, which reads
SEC. 224. Suspension of running of statute. The running of
the statute of limitation provided in Section[s] 203 and 223 on the
making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of
any change in address, the running of the statute of limitations will
not be suspended; when the warrant of distraint and levy is duly
served upon the taxpayer, his authorized representative, or a member

of his household with sufficient discretion, and no property could be


located; and when the taxpayer is out of the Philippines.[31]

Of particular importance to the present case is one of the circumstances


enumerated in Section 224 of the Tax Code of 1977, as amended, wherein the
running of the statute of limitations on assessment and collection of taxes is
considered suspended when the taxpayer requests for a reinvestigation which is
granted by the Commissioner.
This Court gives credence to the argument of petitioner BPI that there is a
distinction between a request for reconsideration and a request for
reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November 1985
by the Secretary of Finance, upon the recommendation of the BIR Commissioner,
governs the procedure for protesting an assessment and distinguishes between the
two types of protest, as follows
PROTEST TO ASSESSMENT
SEC. 6. Protest. The taxpayer may protest administratively
an assessment by filing a written request for reconsideration or
reinvestigation. . .
...
For the purpose of the protest herein
(a) Request for reconsideration. refers to a plea for a reevaluation of an assessment on the basis of existing
records without need of additional evidence. It may involve both a
question of fact or of law or both.
(b) Request for reinvestigation. refers to a plea for reevaluation of an assessment on the basis of newly-discovered or
additional evidencethat a taxpayer intends to present in the
reinvestigation. It may also involve a question of fact or law or both.

With the issuance of RR No. 12-85 on 27 November 1985 providing the


above-quoted distinctions between a request for reconsideration and a request for

reinvestigation, the two types of protest can no longer be used interchangeably and
their differences so lightly brushed aside. It bears to emphasize that under Section
224 of the Tax Code of 1977, as amended, the running of the prescriptive period for
collection of taxes can only be suspended by a request for reinvestigation, not a
request for reconsideration. Undoubtedly, a reinvestigation, which entails the
reception and evaluation of additional evidence, will take more time than a
reconsideration of a tax assessment, which will be limited to the evidence already at
hand; this justifies why the former can suspend the running of the statute of
limitations on collection of the assessed tax, while the latter can not.
The protest letter of petitioner BPI, dated 16 November 1989 and filed
with the BIR the next day, on 17 November 1989, did not specifically request for
either a reconsideration or reinvestigation. A close review of the contents thereof
would reveal, however, that it protested Assessment No. FAS-5-85-89-002054 based
on a question of law, in particular, whether or not petitioner BPI was liable for DST
on its sales of foreign currency to the Central Bank in taxable year 1985. The same
protest letter did not raise any question of fact; neither did it offer to present any
new evidence. In its own letter to petitioner BPI, dated 10 September 1992, the BIR
itself referred to the protest of petitioner BPI as a request for
reconsideration.[32] These considerations would lead this Court to deduce that the
protest letter of petitioner BPI was in the nature of a request for reconsideration,
rather than a request for reinvestigation and, consequently, Section 224 of the Tax
Code of 1977, as amended, on the suspension of the running of the statute of
limitations should not apply.
Even if, for the sake of argument, this Court glosses over the distinction
between a request for reconsideration and a request for reinvestigation, and
considers the protest of petitioner BPI as a request for reinvestigation, the filing
thereof could not have suspended at once the running of the statute of
limitations. Article 224 of the Tax Code of 1977, as amended, very plainly requires
that the request for reinvestigationhad been granted by the BIR
Commissioner to suspend the running of the prescriptive periods for assessment
and collection.
That the BIR Commissioner must first grant the request for reinvestigation
as a requirement for suspension of the statute of limitations is even supported by
existing jurisprudence.
In the case of Republic of the Philippines v. Gancayco,[33] taxpayer Gancayco
requested for a thorough reinvestigation of the assessment against him and placed at
the disposal of the Collector of Internal Revenue all the evidences he had for such

purpose; yet, the Collector ignored the request, and the records and documents were
not at all examined. Considering the given facts, this Court pronounced that

. . .The act of requesting a reinvestigation alone does


not suspend the period. The request should first be granted, in
order to effect suspension. (Collector vs. Suyoc Consolidated,
supra; also Republic vs. Ablaza, supra). Moreover, the Collector gave
appellee until April 1, 1949, within which to submit his evidence,
which the latter did one day before. There were no impediments on
the part of the Collector to file the collection case from April 1,
1949. . . .[34]

In Republic of the Philippines v. Acebedo,[35] this Court similarly found that


. . . [T]he defendant, after receiving the assessment notice of
September 24, 1949, asked for a reinvestigation thereof on October
11, 1949 (Exh. A). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then
Collector of Internal Revenue issued a warrant of distraint and levy
for the full amount of the assessment (Exh. D), but there was no
follow-up of this warrant. Consequently, the request for

reinvestigation did not suspend the running of the period for


filing an action for collection.

The burden of proof that the taxpayers request for reinvestigation had
been actually granted shall be on respondent BIR Commissioner. The grant may be
expressed in communications with the taxpayer or implied from the actions of the
respondent BIR Commissioner or his authorized BIR representatives in response to
the request for reinvestigation.
In Querol v. Collector of Internal Revenue,[36] the BIR, after receiving the protest
letters of taxpayer Querol, sent a tax examiner to San Fernando, Pampanga, to
conduct the reinvestigation; as a result of which, the original assessment against
taxpayer Querol was revised by permitting him to deduct reasonable
depreciation. In another case, Republic of the Philippines v. Lopez,[37] taxpayer Lopez

filed a total of four petitions for reconsideration and reinvestigation. The first
petition was denied by the BIR. The second and third petitions were granted by the
BIR and after each reinvestigation, the assessed amount was reduced. The fourth
petition was again denied and, thereafter, the BIR filed a collection suit against
taxpayer Lopez. When the taxpayers spouses Sison, in Commissioner of Internal Revenue
v. Sison,[38] contested the assessment against them and asked for a reinvestigation, the
BIR ordered the reinvestigation resulting in the issuance of an amended
assessment. Lastly, in Republic of the Philippines v. Oquias,[39] the BIR granted taxpayer
Oquiass request for reinvestigation and duly notified him of the date when such
reinvestigation would be held; only, neither taxpayer Oquias nor his counsel
appeared on the given date.
In all these cases, the request for reinvestigation of the assessment filed by
the taxpayer was evidently granted and actual reinvestigation was conducted by the
BIR, which eventually resulted in the issuance of an amended assessment. On the
basis of these facts, this Court ruled in the same cases that the period between the
request for reinvestigation and the revised assessment should be subtracted from the
total prescriptive period for the assessment of the tax; and, once the assessment had
been reconsidered at the taxpayers instance, the period for collection should begin
to run from the date of the reconsidered or modified assessment.[40]
The rulings of the foregoing cases do not apply to the present Petition
because: (1) the protest filed by petitioner BPI was a request for reconsideration, not
a reinvestigation, of the assessment against it; and (2) even granting that the protest
of petitioner BPI was a request for reinvestigation, there was no showing that it was
granted by respondent BIR Commissioner and that actual reinvestigation had been
conducted.
Going back to the administrative records of the present case, it would seem
that the BIR, after receiving a copy of the protest letter of petitioner BPI on 17
November 1989, did not attempt to communicate at all with the latter until 10
September 1992, less than a month before the prescriptive period for collection on
Assessment No. FAS-5-85-89-002054 was due to expire. There were internal
communications, mostly indorsements of the docket of the case from one BIR
division to another; but these hardly fall within the same sort of acts in the
previously discussed cases that satisfactorily demonstrated the grant of the taxpayers
request for reinvestigation. Petitioner BPI, in the meantime, was left in the dark as
to the status of its protest in the absence of any word from the BIR. Besides, in its
letter to petitioner BPI, dated 10 September 1992, the BIR unwittingly admitted that
it had not yet acted on the protest of the former

This refers to your protest against and/or request for


reconsideration of the assessment/s of this Office against you
involving the amount ofP28,020.00 under FAS-5-85-89-002054 dated
October 23, 1989 as deficiency documentary stamp tax inclusive of
compromise penalty for the year 1985.
In this connection, it is requested that the enclosed waiver
of the statute of limitations extending the period of collection of the
said tax/es to December 31, 1993 be executed by you as a condition
precedent of our giving due course to your protest[41]
When the BIR stated in its letter, dated 10 September 1992, that the waiver of the
statute of limitations on collection was a condition precedent to its giving due course
to the request for reconsideration of petitioner BPI, then it was understood that the
grant of such request for reconsideration was being held off until compliance with
the given condition. When petitioner BPI failed to comply with the condition
precedent, which was the execution of the waiver, the logical inference would be
that the request was not granted and was not given due course at all.
III
The suspension of the statute of limitations on collection of the assessed deficiency
DST from petitioner BPI does not find support in jurisprudence.

It is the position of respondent BIR Commissioner, affirmed by the CTA


and the Court of Appeals, that the three-year prescriptive period for collecting on
Assessment No. FAS-5-85-89-002054 had not yet prescribed, because the said
prescriptive period was suspended, invoking the case of Commissioner of Internal
Revenue v. Wyeth Suaco Laboratories, Inc.[42] It was in this case in which this Court ruled
that the prescriptive period provided by law to make a collection is interrupted once
a taxpayer requests for reinvestigation or reconsideration of the assessment.
Petitioner BPI, on the other hand, is requesting this Court to revisit
the Wyeth Suaco case contending that it had unjustifiably expanded the grounds for
suspending the prescriptive period for collection of national internal revenue taxes.
This Court finds that although there is no compelling reason to abandon its
decision in the Wyeth Suaco case, the said case cannot be applied to the particular
facts of the Petition at bar.

A.

The only exception to the statute of limitations on collection of taxes, other than those already
provided in the Tax Code, was recognized in the Suyoc case.
As had been previously discussed herein, the statute of limitations on
assessment and collection of national internal revenue taxes may be suspended if the
taxpayer executes a valid waiver thereof, as provided in paragraphs (b) and (d) of
Section 223 of the Tax Code of 1977, as amended; and in specific instances
enumerated in Section 224 of the same Code, which include a request for
reinvestigation granted by the BIR Commissioner. Outside of these statutory
provisions, however, this Court also recognized one other exception to the statute
of limitations on collection of taxes in the case of Collector of Internal Revenue v. Suyoc
Consolidated Mining Co.[43]
In the said case, the Collector of Internal Revenue issued an assessment
against taxpayer Suyoc Consolidated Mining Co. on 11 February 1947 for deficiency
income tax for the taxable year 1941. Taxpayer Suyoc requested for at least a year
within which to pay the amount assessed, but at the same time, reserving its right to
question the correctness of the assessment before actual payment. The Collector
granted taxpayer Suyoc an extension of only three months to pay the assessed
tax. When taxpayer Suyoc failed to pay the assessed tax within the extended period,
the Collector sent it a demand letter, dated 28 November 1950. Upon receipt of the
demand letter, taxpayer Suyoc asked for a reinvestigation and reconsideration of the
assessment, but the Collector denied the request. Taxpayer Suyoc reiterated its
request for reconsideration on 25 April 1952, which was denied again by the
Collector on 06 May 1953. Taxpayer Suyoc then appealed the denial to the
Conference Staff. The Conference Staff heard the appeal from 02 September 1952
to 16 July 1955, and the negotiations resulted in the reduction of the assessment on
26 July 1955. It was the collection of the reduced assessment that was questioned
before this Court for being enforced beyond the prescriptive period.[44]
In resolving the issue on prescription, this Court ratiocinated thus
It is obvious from the foregoing that petitioner refrained
from collecting the tax by distraint or levy or by proceeding in court
within the 5-year period from the filing of the second amended final
return due to the several requests of respondent for extension to
which petitioner yielded to give it every opportunity to prove its
claim regarding the correctness of the assessment. Because of such
requests, several reinvestigations were made and a hearing was even

held by the Conference Staff organized in the collection office to


consider claims of such nature which, as the record shows, lasted for
several months. After inducing petitioner to delay collection as he in
fact did, it is most unfair for respondent to now take advantage of
such desistance to elude his deficiency income tax liability to the
prejudice of the Government invoking the technical ground of
prescription.
While we may agree with the Court of Tax Appeals that a
mere request for reexamination or reinvestigation may not have the
effect of suspending the running of the period of limitation for in
such case there is need of a written agreement to extend the period
between the Collector and the taxpayer, there are cases however
where a taxpayer may be prevented from setting up the defense of
prescription even if he has not previously waived it in writing as
when by his repeated requests or positive acts the Government

has been, for good reasons, persuaded to postpone collection to


make him feel that the demand was not unreasonable or that no
harassment or injustice is meant by the Government. And when
such situation comes to pass there are authorities that hold, based on
weighty reasons, that such an attitude or behavior should not be
countenanced if only to protect the interest of the Government.[45]

By the principle of estoppel, taxpayer Suyoc was not allowed to raise the defense of
prescription against the efforts of the Government to collect the tax assessed against
it. This Court adopted the following principle from American jurisprudence: He who
prevents a thing from being done may not avail himself of the nonperformance which
he has himself occasioned, for the law says to him in effect this is your own act, and
therefore you are not damnified.[46]
In the Suyoc case, this Court expressly conceded that a mere request for
reconsideration or reinvestigation of an assessment may not suspend the running of the
statute of limitations. It affirmed the need for a waiver of the prescriptive period in
order to effect suspension thereof. However, even without such waiver, the taxpayer
may be estopped from raising the defense of prescription because by his repeated
requests or positive acts, he had induced Government authorities to delay collection of
the assessed tax.

Based on the foregoing, petitioner BPI contends that the declaration made in the
later case of Wyeth Suaco, that the statute of limitations on collection is suspended once
the taxpayer files a request for reconsideration or reinvestigation, runs counter to the
ruling made by this Court in theSuyoc case.

These letters of Wyeth Suaco interrupted the running of the


five-year prescriptive period to collect the deficiency taxes. The

B.

receipt by Wyeth Suaco of this final assessment that the five-year


prescriptive period started to run again.[47]

Although this Court is not compelled to abandon its decision in the Wyeth Suaco case, it finds
that Wyeth Suaco is not applicable to the Petition at bar because of the distinct facts involved
herein.

In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit
withholding taxes on royalties and dividend declarations, as well as, for deficiency sales
tax. The BIR issued two assessments, dated 16 December 1974 and 17 December 1974,
both received by taxpayer Wyeth Suaco on 19 December 1974. Taxpayer Wyeth Suaco,
through its tax consultant, SGV & Co., sent to the BIR two letters, dated 17 January
1975 and 08 February 1975, protesting the assessments and requesting their cancellation
or withdrawal on the ground that said assessments lacked factual or legal basis. On 12
September 1975, the BIR Commissioner advised taxpayer Wyeth Suaco to avail itself of
the compromise settlement being offered under Letter of Instruction No.
308. Taxpayer Wyeth Suaco manifested its conformity to paying a compromise amount,
but subject to certain conditions; though, apparently, the said compromise amount was
never paid. On 10 December 1979, the BIR Commissioner rendered a decision
reducing the assessment for deficiency withholding tax against taxpayer Wyeth Suaco,
but maintaining the assessment for deficiency sales tax. It was at this point when
taxpayer Wyeth Suaco brought its case before the CTA to enjoin the BIR from
enforcing the assessments by reason of prescription. Although the CTA decided in
favor of taxpayer Wyeth Suaco, it was reversed by this Court when the case was brought
before it on appeal. According to the decision of this Court
Settled is the rule that the prescriptive period provided by
law to make a collection by distraint or levy or by a proceeding in
court is interrupted once a taxpayer requests for reinvestigation or
reconsideration of the assessment. . .
...
Although the protest letters prepared by SGV & Co. in
behalf of private respondent did not categorically state or use the
words reinvestigation and reconsideration, the same are to be
treated as letters of reinvestigation and reconsideration

Bureau of Internal Revenue, after having reviewed the records


of Wyeth Suaco, in accordance with its request for
reinvestigation, rendered a final assessment It was only upon

The foremost criticism of petitioner BPI of the Wyeth Suaco decision is


directed at the statement made therein that, settled is the rule that the prescriptive
period provided by law to make a collection by distraint or levy or by a proceeding
in court is interrupted once a taxpayer requests for reinvestigation or reconsideration
of the assessment.[48] It would seem that both petitioner BPI and respondent BIR
Commissioner, as well as, the CTA and Court of Appeals, take the statement to
mean that the filing alone of the request for reconsideration or reinvestigation can
already interrupt or suspend the running of the prescriptive period on
collection. This Court therefore takes this opportunity to clarify and qualify this
statement made in the Wyeth Suaco case. While it is true that, by itself, such
statement would appear to be a generalization of the exceptions to the statute of
limitations on collection, it is best interpreted in consideration of the particular facts
of the Wyeth Suaco case and previous jurisprudence.
The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are
substantial differences in the factual backgrounds of the two cases. The Suyoc case
refers to a situation where there were repeated requests or positive acts performed by
the taxpayer that convinced the BIR to delay collection of the assessed tax. This Court
pronounced therein that the repeated requests or positive acts of the taxpayer prevented
or estopped it from setting up the defense of prescription against the Government
when the latter attempted to collect the assessed tax. In the Wyeth Suaco case, taxpayer
Wyeth Suaco filed a request for reinvestigation, which was apparently granted by the
BIR and, consequently, the prescriptive period was indeed suspended as provided under
Section 224 of the Tax Code of 1977, as amended.[49]
To reiterate, Section 224 of the Tax Code of 1977, as amended, identifies
specific circumstances when the statute of limitations on assessment and collection
may be interrupted or suspended, among which is a request for reinvestigation that
is granted by the BIR Commissioner. The act of filing a request for reinvestigation
alone does not suspend the period; such request must be granted.[50] The grant need

not be express, but may be implied from the acts of the BIR Commissioner or
authorized BIR officials in response to the request for reinvestigation.[51]
This Court found in the Wyeth Suaco case that the BIR actually conducted a
reinvestigation, in accordance with the request of the taxpayer Wyeth Suaco, which
resulted in the reduction of the assessment originally issued against it. Taxpayer
Wyeth Suaco was also aware that its request for reinvestigation was granted, as
written by its Finance Manager in a letter dated 01 July 1975, addressed to the Chief
of the Tax Accounts Division, wherein he admitted that, [a]s we understand, the
matter is now undergoing review and consideration by your Manufacturing Audit
Division The statute of limitations on collection, then, started to run only upon
the issuance and release of the reduced assessment.
The Wyeth Suaco case, therefore, is correct in declaring that the prescriptive
period for collection is interrupted or suspended when the taxpayer files a request
for reinvestigation, provided that, as clarified and qualified herein, such request is
granted by the BIR Commissioner.
Thus, this Court finds no compelling reason to abandon its decision in
the Wyeth Suaco case. It also now rules that the said case is not applicable to the Petition
at bar because of the distinct facts involved herein. As already heretofore determined
by this Court, the protest filed by petitioner BPI was a request for reconsideration,
which merely required a review of existing evidence and the legal basis for the
assessment. Respondent BIR Commissioner did not require, neither did petitioner BPI
offer, additional evidence on the matter. After petitioner BPI filed its request for
reconsideration, there was no other communication between it and respondent BIR
Commissioner or any of the authorized representatives of the latter. There was no
showing that petitioner BPI was informed or aware that its request for reconsideration
was granted or acted upon by the BIR.
IV
Conclusion
To summarize all the foregoing discussion, this Court lays down the following
rules on the exceptions to the statute of limitations on collection.
The statute of limitations on collection may only be interrupted or suspended
by a valid waiver executed in accordance with paragraph (d) of Section 223 of the Tax
Code of 1977, as amended, and the existence of the circumstances enumerated in
Section 224 of the same Code, which include a request for reinvestigation granted by
the BIR Commissioner.

Even when the request for reconsideration or reinvestigation is not


accompanied by a valid waiver or there is no request for reinvestigation that had been
granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be
prevented from setting up the defense of prescription of the statute of limitations on
collection when, by his own repeated requests or positive acts, the Government had
been, for good reasons, persuaded to postpone collection to make the taxpayer feel that
the demand is not unreasonable or that no harassment or injustice is meant by the
Government, as laid down by this Court in the Suyoc case.
Applying the given rules to the present Petition, this Court finds that
(a)
The statute of limitations for collection of the deficiency DST in
Assessment No. FAS-5-85-89-002054, issued against petitioner BPI, had already
expired; and
(b) None of the conditions and requirements for exception from the statute of
limitations on collection exists herein: Petitioner BPI did not execute any waiver of the
prescriptive period on collection as mandated by paragraph (d) of Section 223 of the
Tax Code of 1977, as amended; the protest filed by petitioner BPI was a request for
reconsideration, not a request for reinvestigation that was granted by respondent BIR
Commissioner which could have suspended the prescriptive period for collection under
Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than filing
a request for reconsideration of Assessment No. FAS-5-85-89-002054, did not make
repeated requests or performed positive acts that could have persuaded the respondent
BIR Commissioner to delay collection, and that would have prevented or estopped
petitioner BPI from setting up the defense of prescription against collection of the tax
assessed, as required in the Suyoc case.
This is a simple case wherein respondent BIR Commissioner and other BIR
officials failed to act promptly in resolving and denying the request for reconsideration
filed by petitioner BPI and in enforcing collection on the assessment. They presented
no reason or explanation as to why it took them almost eight years to address the
protest of petitioner BPI. The statute on limitations imposed by the Tax Code precisely
intends to protect the taxpayer from such prolonged and unreasonable assessment and
investigation by the BIR.
Considering that the right of the respondent BIR Commissioner to collect from
petitioner BPI the deficiency DST in Assessment No. FAS-5-85-89-002054 had already
prescribed, then, there is no more need for this Court to make a determination on the
validity and correctness of the said Assessment for the latter would only be
unenforceable.

WHEREFORE, based on the foregoing, the instant Petition is GRANTED. The


Decision of the Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999,
which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner BPI to pay
the amount of P28,020.00 as deficiency documentary stamp tax for the taxable year
1985, inclusive of the compromise penalty, is REVERSED and SET
ASIDE. Assessment No. FAS-5-85-89-002054 is hereby ordered CANCELED.

G.R. No. 148211

July 25, 2006

SINCERE Z. VILLANUEVA, petitioner,


vs.
MARLYN P. NITE,* respondent.

SO ORDERED.

DECISION
CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that the Court
of Appeals (CA) erred in annulling and setting aside the Regional Trial Court (RTC)
decision on the ground of extrinsic fraud.
The facts follow.1
Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan,
respondent issued petitioner an Asian Bank Corporation (ABC) check (Check No. AYA
020195) in the amount of P325,500 dated February 8, 1994. The date was later changed
to June 8, 1994 with the consent and concurrence of petitioner.
The check was, however, dishonored due to a material alteration when petitioner
deposited the check on due date. On August 24, 1994, respondent, through her
representative Emily P. Abojada, remitted P235,000 to petitioner as partial payment of
the loan. The balance of P174, 000 was due on or before December 8, 1994.
On August 24, 1994, however, petitioner filed an action for a sum of money and
damages (Civil Case No. Q-94-21495) against ABC for the full amount of the
dishonored check. And in a decision dated May 23, 1997, the RTC of Quezon City,
Branch 101 ruled in his favor.2 When respondent went to ABC Salcedo Village Branch
on June 30, 1997 to withdraw money from her account, she was unable to do so
because the trial court had ordered ABC to pay petitioner the value of respondents
ABC check.
On August 25, 1997, ABC remitted to the sheriff a managers check amounting
to P325,500 drawn on respondents account. The check was duly received by petitioner
on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside the trial
courts decision ordering ABC to pay petitioner the value of the ABC check. 3 The CA
ruled:
WHEREFORE, premises considered, the petition is GRANTED and the
Decision dated May 23, 1997 of the public respondent is
hereby ANNULLED and SET ASIDE for extrinsic fraud.
[Petitioner] Villanueva is hereby ordered to pay [Nite]
1) the sum of [P146,500] as actual damages plus interest at 12% per annum
from August 25, 1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and
4) the sum of [P50,000] as attorneys fees and cost of suit.
SO ORDERED.4
Thus, this petition. We find for respondent.
Annulment of judgment is a remedy in law independent of the case where the judgment
sought to be annulled is promulgated. It can be filed by one who was not a party to the case in
which the assailed judgment was rendered. Section 1 of Rule 47 provides:
Section 1. Coverage. This Rule shall govern the annulment by the Court of
Appeals of judgments or final orders and resolutions in civil actions of
Regional Trial Courts for which the ordinary remedies of new trial, appeal,
petition for relief or other appropriate remedies are no longer available
through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule 47. The
ordinary remedies of new trial, appeal and petition for relief were not available to her for the simple
reason that she was not made a party to the suit against ABC.Thus, she was neither able to participate
in the original proceedings nor resort to the other remedies because the case was filed when she was
abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of


jurisdiction.5 Extrinsic or collateral fraud pertains to such fraud which prevents the
aggrieved party from having a trial or presenting his case to the court, or is used to
procure the judgment without fair submission of the controversy.6 This refers to acts
intended to keep the unsuccessful party away from the courts as when there is a false
promise of compromise or when one is kept in ignorance of the suit.7
We uphold the appellate courts finding of extrinsic fraud:
Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing
that the balance of P174,000.00 shall be paid on or before December 8, 1994,
[Sincere] filed his complaint against [ABC] for the full amount of the
dishonored check in the sum of P320,500.00 without impleading petitioner.
The apparent haste by which [Sincere] filed his complaint and his failure to
implead [Marlyn] clearly shows his intent to prevent [Marlyn] from opposing
his action.
[A]t the time news about [Marlyn] having left the country was widespread,
appearing even in print media as early as May 1994, [Marlyn] paid [Sincere] the
amount of P235,000.00 as partial payment on [August 18, 1994], through a
representative.
Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994,
Sincere] instituted an action for collection with damages for the whole
amount of the issued check.
[Sincere] does not deny knowledge of such payment neither of the fact that he
concurred in settling the balance of P174,000.00 on December 8, 1994.
[His] actuation and pronouncement shows not only bad faith on his part but
also of his fraudulent intention to completely exclude [Marlyn] from the
proceedings in the court a quo. By doing what he did he prevented the [trial
court] from fully appreciating the particulars of the case.8
In any event, the RTC decision may be annulled for lack of jurisdiction over the person
of respondent. The pertinent provisions of the Negotiable Instruments Law are
enlightening:

SEC. 185. Check, defined. A check is a bill of exchange drawn on a


bank payable on demand. Except as herein otherwise provided, the provisions
of this Act applicable to a bill of exchange payable on demand apply to a
check.9(emphasis ours)
SEC. 189. When check operates as an assignment. A check of itself does not
operate as an assignment of any part of the funds to the credit of the drawer
with the bank, and the bank is not liable to the holder, unless and until it
accepts or certifies the check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payeeholder cannot, in view of the cited sections, sue the bank. The payee should instead sue
the drawer who might in turn sue the bank. Section 189 is sound law based on logic and
established legal principles: no privity of contract exists between the drawee-bank and
the payee. Indeed, in this case, there was no such privity of contract between ABC and
petitioner.
Petitioner should not have sued ABC. Contracts take effect only between the parties,
their assigns and heirs, except in cases where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by provision of
law.10 None of the foregoing exceptions to the relativity of contracts applies in this case.
The contract of loan was between petitioner and respondent. No collection suit could
prosper without respondent who was an indispensable party. Rule 3, Sec. 7 of the Rules of
Court states:
Sec. 7. Compulsory joinder of indispensable parties. Parties in
interest without whom no final determination can be had of an
action shall be joined either as plaintiffs or defendants. (emphasis ours)
An indispensable party is one whose interest in the controversy is such that a final
decree will necessarily affect his rights. The court cannot proceed without his
presence.11 If an indispensable party is not impleaded, any judgment is ineffective.12On
this, Aracelona v. Court of Appeals13 declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as partiesin-interest without whom there can be no final determination of an action. As
such, they must be joined either as plaintiffs or as defendants. The general rule
with reference to the making of parties in a civil action requires, of course, the

joinder of all necessary parties where possible, and the joinder of all
indispensable parties under any and all conditions, their presence being sine qua
non for the exercise of judicial power. It is precisely "when an indispensable
party is not before the court (that) the action should be dismissed." The
absence of an indispensable party renders all subsequent actions of the court
null and void for want of authority to act, not only as to the absent parties but
even as to those present.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 44971 isAFFIRMED in toto.
Costs against petitioner.
SO ORDERED.

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