G.R. No.

L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney
Concepcion Torrijos-Agapinan for defendants-appellees.
DIZON, J.:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine
Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of
P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out
money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were not
generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division,
but instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders
without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent
message was sent to all postmasters, and the following day notice was likewise served upon all banks, instructing
them not to pay anyone of the money orders aforesaid if presented for payment. The Bank of America received a
copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part
of its sales receipts. The following day it deposited the same with the Bank of America, and one day thereafter the
latter cleared it with the Bureau of Posts and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office,
acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money
order No. 124688 attached to his letter had been found to have been irregularly issued and that, in view thereof, the
amount it represented had been deducted from the bank's clearing account. For its part, on August 2 of the same
year, the Bank of America debited appellant's account with the same amount and gave it advice thereof by means of
a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office
deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So
was appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter,
appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the
actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of
Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment
as follows:
WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from
the said Bank's clearing account the sum of P200.00 represented by postal money order No.
124688, or in the alternative indemnify the plaintiff in the same amount with interest at 8-% per

annum from September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft
account;
(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral
damages in the amount of P1,000.00 or in such amount as will be proved and/or determined by this
Honorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and
the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just and equitable.
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the
Record on Appeal, the above-named court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice
given to the Bank of America on September 27, 1961, deducting from said Bank's clearing account
the sum of P200.00 representing the amount of postal money order No. 124688, or in the alternative,
to indemnify the plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-% per
annum from September 27, 1961 until fully paid; without any pronouncement as to cost and
attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same
stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will
therefore be discussed jointly. They raise this main issue: that the postal money order in question is a negotiable
instrument; that its nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the
Director of Posts and addressed to all banks with a clearing account with the Post Office, and that money orders,
once issued, create a contractual relationship of debtor and creditor, respectively, between the government, on the
one hand, and the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason,
ours are generally construed in accordance with the construction given in the United States to their own postal
statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189
Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing
and operating a postal money order system, the government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of
circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions laid down in the letter of the
Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders
received by it from its depositors. Among others, the condition is imposed that "in cases of adverse claim, the
money order or money orders involved will be returned to you (the bank) and the, corresponding amount will have to
be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you
if such step is deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying
the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore
bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented
by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not
file any protest against such action.
Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the
Bank of America, on the other, appellant has no right to assail the terms and conditions thereof on the ground that
the letter setting forth the terms and conditions aforesaid is void because it was not issued by a Department Head in
accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not

apply to the letter in question because it does not provide for a department regulation but merely sets down certain
conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to
issue it pursuant to Sec. 1190 of the Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments
of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent
court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional
Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against
respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of
record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD
Dates Serial Nos. Quantity Amount
22
Feb.
26
Feb.
2
Mar.
4
Mar.
5
Mar.
5
Mar.
5
Mar.
8
Mar.
9
Mar.
9
Mar.
9
Mar.

Total
===== ========

82
82
82
82
82
82
82
82
82
82
82

CTD

90101
74602
74701
90127
74797
89965
70147
90001
90023
89991
90251

to
to
to
to
to
to
to
to
to
to
to
280

90120
74691
74740
90146
94800
89986
90150
90020
90050
90000
90272

20
90
40
20
4
22
4
20
28
10
22

P80,000
360,000
160,000
80,000
16,000
88,000
16,000
80,000
112,000
40,000
88,000

P1,120,000

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with
his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor
to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he
desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement
CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said

depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated,
among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or amounts may be
due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to
the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel
dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made
with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff
formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the
same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of
the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details
of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits
(Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of
the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this
petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of
the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to
lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues
involved in this recourse.
SECURITY
AND
6778
Metro
SUCAT
CERTIFICATE
Rate 16%

TRUST
Ayala

Ave.,

Makati
Manila,
OFFICEP
OF

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

No.

BANK
COMPANY
90101
Philippines
4,000.00
DEPOSIT

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

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for the
name of the depositor, the words "has deposited" a certain amount follows. The document further
provides that the amount deposited shall be "repayable to said depositor" on the period indicated.
Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor.
In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made
the deposit and further engages itself to pay said depositor the amount indicated thereon at the
stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's
Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than
Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the
one who cause (sic) the amount.

Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties
is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words express, but what is the meaning of the words
they have used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is
the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility
so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents,
therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid
witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously
other parties not privy to the transaction between them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for
the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The
records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own,
delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true
purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security
for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the
fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized
and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit
Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of
evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another
to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have
easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank,
as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as
plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates ofpayment of the
alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs
were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed
the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs
were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the
presumption that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National
Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer was.
If it was intended to secure the payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character
might still be qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a transfer
of property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in
inexistence and is not discharged by the transfer, and that accordingly the use of the
terms ordinarily importing conveyance of absolute ownership will not be given that
effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments
Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of
the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la
Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be
effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is
deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee
but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law,
shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court
quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of
pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs
did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement
under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the
execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was
embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons,
unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in
case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser,
assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution
of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner
and respondent bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent
observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement
certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was
not included in the stipulation of the parties and in the statement of issues submitted by them to the trial
court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs
and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing
enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised
on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly
raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues
of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters.
The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by
the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that
petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of
petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal
reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's
submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot
have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be
followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even
assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first
article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the
lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The
word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission
and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which
petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of
recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the
same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure
outlined therein, and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is
hereby AFFIRMED.
SO ORDERED.

G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO
CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all nonessentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even
abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of
two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish
Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their respective payees,
followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in
Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the
warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from
his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a
"valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the
amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was
P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually
collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last
withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau
of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously
withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial,
judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as
Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan
Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of
P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made
including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and
thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount
outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and
expenses of litigation in the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and
expenses of litigation in the amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review
on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and
conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances where the checks or treasury
warrants are forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent
which cannot be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for
warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the
latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not
negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving
Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to
allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings
would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances
belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account
with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity
of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the gosignal that Gomez was finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more care in checking the personal
circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the
warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to
clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or

of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the
withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling more than one
and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury
warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such
clearance and notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once, not twice, but thrice
from the uncleared treasury warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also
wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the
lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the
deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The
conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting
agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also applies to
checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due
to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden
Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or
not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual
stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering that they have apparently been
imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor,
in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels
that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility
thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that
as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil
Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with
more or less rigor by the courts, according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given
by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury
warrants he had deposited Metrobank misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from
its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total
withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its
belief that the treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not
acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden
Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the

warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way
the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at
bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings
before it made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance
to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the
supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the
drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,
positive and convincing evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in question are not negotiable
instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and this is of equal significance,
it is indicated that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
xxx

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or
promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question that
the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion
conforms to Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled
to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words
"payable from the appropriation for food administration, is actually an Order for payment out of "a particular

fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable
instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were
"genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments
Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement
was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the
back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust
Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is
inapplicable to the present controversy.1wphi1 That case involved checks whereas this case involves treasury
warrants. Golden Savings never represented that the warrants were negotiable but signed them only for the purpose
of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us.
Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was
authorized to indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the
petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to
withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be
charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the
balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to
withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To
also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that
it has already been informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive
portion of the judgment of the lower court shall be reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant
Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.

G.R. No. 89252 May 24, 1993

RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of P300,000.00 with
the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirtytwo (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following
documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors
Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731
to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per
Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment),
with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in
the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks
were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas
Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981

VALUE DATE
TO Raul Sesbreo
April 6, 1981

MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPT
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES
FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent
herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly authorized
representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully
assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor
thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and
handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the
DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of
the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the
security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as
"maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private
respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of
petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities
Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of
DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of
P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it
had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and
exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to
date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for
damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and
Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989,
the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails
of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against
DMC PN No. 2731 when its entire face value was already obligated or earmarked for
set-off or compensation is difficult to comprehend and may have been motivated with

bad faith. Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due
course to the petition and required the parties to file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent
court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned
portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No.
2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to
pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that
the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-avisDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third
relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance
has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship,
except to the extent it necessarily impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta
promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "nonnegotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his
own name and cannot demand or receive payment (Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly
transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note,
was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance
as manifested by the word "non-negotiable" stamp across the face of the Note 10 and because maker
Delta and payee Philfinance intended that this Note would be offset against the outstanding
obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not
against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner
took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No.
2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from
theassignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof
coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of
negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable
instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability,
but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee taking subject to the equities
between the original parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "nonassignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in
part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in
full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note
No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for
P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon coterminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance
assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add
that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration

in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or
transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their
exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731,
both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and
the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected
without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to
DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the
unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on
every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an
entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in
money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera,
made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As
defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not deal directly with each
other but through a middle manor a dealer in the open market." It involves "commercial papers"
which are instruments "evidencing indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to match and
bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The
money market is an "impersonal market", free from personal considerations. "The market
mechanism is intended to provide quick mobility of money and securities."
The impersonal character of the money market device overlooks the individuals or entities
concerned.The issuer of a commercial paper in the money market necessarily knows in advance
that it would be expenditiously transacted and transferred to any investor/lender without need of
notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on
an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing
public must be given adequate and effective protection in availing of the credit of a borrower in the
commercial paper market.18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No.
2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken
place. The essential requirements of compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the
relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "coterminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of
P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have
ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a
valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July
1981, 19that is, after the maturity not only of the money market placement made by petitioner but also of both DMC
PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It
is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the
assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the
equities i.e., the defenses which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at the time he gave his consent,
that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of
all credits prior to the same and also later ones until he had knowledge of the assignment.
(Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his
creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he
pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that
it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to
give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No.
2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from
collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9
February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC

PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance
the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731.
Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself
notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised
by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment
made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that
Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following
words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above
securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay
petitioner the amount of P307,933.33 nor any assumption of liability in solidum with Philfinance and Delta under
DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face
value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February
1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized representative", at any time
during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or
a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt
remain outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into
an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other
time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the
Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled
against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under
article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires
solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner
argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under
the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent
Pilipinas had breached its undertaking under the DCR to petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas
as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We do not consider
that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as

an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the
thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or
assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate
transactions in the money market by providing a basis for confidence on the part of the investors or placers that the
instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely
beyond their reach, that those instruments will be there available to the placers of funds should they have need of
them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of
the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may
have been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship
that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any party that
needs the equalizing protection of the law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it
is not related either in terms of equity ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance).
The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against
the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has
erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when
petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2
April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to
require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner Sesbreo at the time the money market placement with
Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary
agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by
arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing
deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not
Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes.Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC
PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal
interest of six percent (6%) per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may
havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and Pilipinas should be
treated as one corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial
court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition
before us.

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

G.R. No. 113236

March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546,
which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P,
dismissing Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by the Central
Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as
one of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca
maintaining a special savings account with the defendant, the latter authorized and allowed withdrawals of
funds therefrom through the medium of special withdrawal slips. These are supplied by the defendant to
Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement" (Exh. B)
whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on
credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases,
Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these
were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid
by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the
succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying
on such confidence and belief and as a direct consequence thereof, plaintiff extended to Fojas-Arca other
purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to
plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defendant, to wit:
DATE

WITHDRAWAL
SLIP NO.

AMOUNT

June 15, 1978

42127

P1,198,092.80

July 15, 1978

42128

940,190.00

Aug. 15, 1978

42129

880,000.00

Sep. 15, 1978

42130

981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank
forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous
special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount
of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long
period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15,
1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal
slips were likewise sufficiently funded, and that it had received full value and payment of Fojas-Arca's credit
purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to FojasArca further purchase on credit of its products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal slips No. 42127
dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00 were
dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited

plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two
special withdrawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused
by and directly attributable to defendant's gross negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction
of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been
constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees
which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions
mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it
were checks, the truth being that when the special withdrawal slips were received by defendant, it only
verified whether or not the signatures therein were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to
blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated
therein that the withdrawal slips are non-negotiable; that defendant is not a privy to any of the transactions
between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of
anything to plaintiff. If at first defendant had given notice to plaintiff it is merely an extension of usual bank
courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the
plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3,
Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113,
docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Development Bank was
liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA,
petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the
special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general
appearance of checks; and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor
two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed
the judgment of the trial court. According to the appellate court, respondent bank notified the depositor to present
the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent
bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that
the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's
assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent
bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would
have been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or
negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the
twointermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New
Civil Code.8
The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by
petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter purchased tires from
the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank.
Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current

account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention
arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June
15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of
Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires
from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from
petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were non-negotiable.9 Hence, the
rules governing the giving of immediate notice of dishonor of negotiable instruments do not apply in this
case.10 Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate
notice that it would not make payment on the subject withdrawal slips. Citibank should have known that withdrawal
slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities.
Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation
involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had
honored and paid the previous withdrawal slips, automatically credited petitioner's current account with the amount
of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It
presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The
essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate
freely as a substitute for money.12 The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account
consists only of a few hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored
and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and
paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree
of care.14
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the
basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who indicates
therein the current account number to which the deposit is to be credited, the name of the depositor or current
account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits.
Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted
them as such, Citibank and petitioner as account-holder must bear the risks attendant to the acceptance of
these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their
admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. L-2516

September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of Manila. The
Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946, the check
Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to the order of "cash". He delivered it
to Lee Hua Hong in exchange for money which the latter handed in act. On November 18, 1946, the next business
day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for
insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946, appellant
went to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to exchange Exhibit A which he
(appellant) then brought with him with cash alleging that he needed badly the sum of P4,000 represented by the
check, but could not withdraw it from the bank, it being then already closed; that in view of this request and relying
upon appellant's assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to
borrow money from each other, even before the war, and appellant owns a hotel and restaurant known as the North
Bay Hotel, said complainant delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated
efforts to notify him that the check had been dishonored by the bank, appellant could not be located any-where, until
he was summoned in the City Fiscal's Office in view of the complaint for estafa filed in connection therewith; and
that appellant has not paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is whether
under the facts found, estafa had been accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post dating a
check, or issuing such check in payment of an obligation the offender knowing that at the time he had no funds in
the bank, or the funds deposited by him in the bank were not sufficient to cover the amount of the check, and
without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it must be
stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated
check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and had not been endorsed by Ang Tek
Lian, the defendant is not guilty of the offense charged. Based on the proposition that "by uniform practice of all
banks in the Philippines a check so drawn is invariably dishonored," the following line of reasoning is advanced in
support of the argument:
. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did so
with full knowledge that it would be dishonored upon presentment. In that sense, the appellant could not be
said to have acted fraudulently because the complainant, in so accepting the check as it was drawn, must
be considered, by every rational consideration, to have done so fully aware of the risk he was running
thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the Bank
required the indorsement of the drawer before honoring a check payable to "cash." But cases there are too, where
no such requirement had been made . It depends upon the circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a check payable
to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York
(1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N.
Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash "does not purport to be the name of
any person", and hence the instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it without any indorsement. . . . (Zollmann,
Banks and Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand
identification and /or assurance against possible complications, for instance, (a) forgery of drawer's signature, (b)
loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its
protection, that the indorsement of the drawer or of some other person known to it be obtained. But where the
Bank is satisfied of the identity and /or the economic standing of the bearer who tenders the check for collection, it
will pay the instrument without further question; and it would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and is
payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment, need not
have the holder identified, and is not negligent in falling to do so. . . . (Michie on Banks and Banking,
Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily
have the holder identified and ordinarily may not be charged with negligence in failing to do so. See
Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for suspecting any irregularity, it will be
protected in paying a bearer check, "no matter what facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely
reasonable for the bank to insist that holder give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I,
p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected with its
dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer had insufficient
funds not because the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the writ of
certiorari is denied and the decision of the Court of Appeals is hereby affirmed, with costs.

G.R. No. L-18103

June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.
Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and Johnson; Julian Wolfson;
Ross and Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curiae.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in this jurisdiction of a provision in a
promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear and
confess judgment thereon for the principal amount, with interest, costs, and attorney's fees, and waives all errors,
rights to inquisition, and appeal, and all property exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc., executed
and delivered to the Philippine National Bank, a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand
only pesos at Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case
this note be not paid at maturity, to appear in my name and confess judgment for the above sum with
interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors and waiver
of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from
levy or sale. Value received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand. The
Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000, the amount of
the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated with the Philippine National
Bank, entered his appearance in representation of the defendant, and filed a motion confessing judgment. The
defendant, however, in a sworn declaration, objected strongly to the unsolicited representation of attorney Recto.
Later, attorney Antonio Gonzalez appeared for the defendant and filed a demurrer, and when this was overruled,
presented an answer. The trial judge rendered judgment on the motion of attorney Recto in the terms of the
complaint.
The foregoing facts, and appellant's three assignments of error, raise squarely the question which was suggested in
the beginning of this opinion. In view of the importance of the subject to the business community, the advice of
prominent attorneys-at-law with banking connections, was solicited. These members of the bar responded promptly

to the request of the court, and their memoranda have proved highly useful in the solution of the question. It is to the
credit of the bar that although the sanction of judgement notes in the Philippines might prove of immediate value to
clients, every one of the attorneys has looked upon the matter in a big way, with the result that out of their
independent investigations has come a practically unanimous protest against the recognition in this jurisdiction of
judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a confession of
judgment commonly called a judgment note. On the contrary, the provisions of the Code of Civil Procedure, in
relation to constitutional safeguards relating to the right to take a man's property only after a day in court and after
due process of law, contemplate that all defendants shall have an opportunity to be heard. Further, the provisions of
the Code of Civil Procedure pertaining to counter claims argue against judgment notes, especially as the Code
provides that in case the defendant or his assignee omits to set up a counterclaim, he cannot afterwards maintain
an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law, namely, that
the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (Civil Code, art.
1356), constitutes another indication of fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly recognizes
judgment notes, and that they are enforcible under the regular procedure. The Negotiable Instruments Law, in
section 5, provides that "The negotiable character of an instrument otherwise negotiable is not affected by a
provision which ". . . (b) Authorizes a confession of judgment if the instrument be not paid at maturity." We do not
believe, however, that this provision of law can be taken to sanction judgments by confession, because it is a portion
of a uniform law which merely provides that, in jurisdiction where judgment notes are recognized, such clauses shall
not affect the negotiable character of the instrument. Moreover, the same section of the Negotiable Instruments.
Law concludes with these words: "But nothing in this section shall validate any provision or stipulation otherwise
illegal."
The court is thus put in the position of having to determine the validity in the absence of statute of a provision in a
note authorizing an attorney to appear and confess judgment against the maker. This situation, in reality, has its
advantages for it permits us to reach that solution which is best grounded in the solid principles of the law, and
which will best advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a
warrant of attorney to confess judgement became a familiar common law security. At common law, there were two
kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta
verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by
confession, while still other jurisdictions have refused to sanction them. In some States, statutes have been passed
which have either expressly authorized confession of judgment on warrant of attorney, without antecedent process,
or have forbidden judgments of this character. In the absence of statute, there is a conflict of authority as to the
validity of a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized by
statute, warrants of attorney to confess judgment are void, as against public policy.
Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo., 717; 16
Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on October 4, 1990,
the defendant executed and delivered to the plaintiff an obligation in which the defendant authorized any attorney-atlaw to appear for him in an action on the note at any time after the note became due in any court of record in the
State of Missouri, or elsewhere, to waive the issuing and service of process, and to confess judgement in favor of
the First National Bank of Kansas City for the amount that might then be due thereon, with interest at the rate
therein mentioned and the costs of suit, together with an attorney's fee of 10 per cent and also to waive and release
all errors in said proceedings and judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff filed a
petition in the Circuit Court to which was attached the above-mentioned instrument. An attorney named Denham
appeared pursuant to the authority given by the note sued on, entered the appearance of the defendant, and
consented that judgement be rendered in favor of the plaintiff as prayed in the petition. After the Circuit Court had
entered a judgement, the defendants, through counsel, appeared specially and filed a motion to set it aside. The
Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:
But going beyond the mere technical question in our preceding paragraph discussed, we come to a question
urged which goes to the very root of this case, and whilst new and novel in this state, we do not feel that the
case should be disposed of without discussing and passing upon that question.

xxx

xxx

xxx

And if this instrument be considered as security for a debt, as it was by the common law, it has never so
found recognition in this state. The policy of our law has been against such hidden securities for debt. Our
Recorder's Act is such that instruments intended as security for debt should find a place in the public
records, and if not, they have often been viewed with suspicion, and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his
creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would follow
the footsteps of such a diversion in the way of security for debt. Such instruments procured by duress could
shortly be placed in judgment in a foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some other appellate court is granted to all persons
against whom an adverse judgment is rendered, and this statutory right is by the instrument stricken down.
True it is that such right is not claimed in this case, but it is a part of the bond and we hardly know why this
pound of flesh has not been demanded. Courts guard with jealous eye any contract innovations upon their
jurisdiction. The instrument before us, considered in the light of a contract, actually reduces the courts to
mere clerks to enter and record the judgment called for therein. By our statute (Rev. St. 1899, sec. 645) a
party to a written instrument of this character has the right to show a failure of consideration, but this right is
brushed to the wind by this instrument and the jurisdiction of the court to hear that controversy is by the
whose object is to oust the jurisdiction of the courts are contrary to public policy and will not be enforced.
Thus it is held that any stipulation between parties to a contract distinguishing between the different courts of
the country is contrary to public policy. The principle has also been applied to a stipulation in a contract that
a party who breaks it may not be sued, to an agreement designating a person to be sued for its breach who
is nowise liable and prohibiting action against any but him, to a provision in a lease that the landlord shall
have the right to take immediate judgment against the tenant in case of a default on his part, without giving
the notice and demand for possession and filing the complaint required by statute, to a by-law of a benefit
association that the decisions of its officers on claim shall be final and conclusive, and to many other
agreements of a similar tendency. In some courts, any agreement as to the time for suing different from time
allowed by the statute of limitations within which suit shall be brought or the right to sue be barred is held
void.
xxx

xxx

xxx

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

xxx

xxx

From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and the
judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas.
[1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver of
presentment and protest, homestead and exemption rights real and personal, and other rights, and also the
following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or
agent, or any prothonotary or attorney of any Court of Record to appear for us and in our name to confess
judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of suit
and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of West
Virginia, on consideration of the validity of the judgment note above described, speaking through Mr. Justice Miller,
in part said:
As both sides agree the question presented is one of first impression in this State. We have no statutes, as
has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to
render, we must have recourse to the rules and principles of the common law, in force here, and to our
statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the

separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly fifty
years of judicial history this question, strong evidence, we think, that such notes, if at all, have never been in
very general use in this commonwealth. And in most states where they are current the use of them has
grown up under statutes authorizing them, and regulating the practice of employing them in commercial
transactions.
xxx

xxx

xxx

It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here as in
other cases. We do not think so. Strong reasons exist, as we have shown, for denying its application, when
holders of contracts of this character seek the aid of the courts and of their execution process to enforce
them, defendant having had no day in court or opportunity to be heard. We need not say in this case that a
debtor may not, by proper power of attorney duly executed, authorize another to appear in court, and by
proper endorsement upon the writ waive service of process, and confess judgement. But we do not wish to
be understood as approving or intending to countenance the practice employing in this state commercial
paper of the character here involved. Such paper has heretofore had little if any currency here. If the
practice is adopted into this state it ought to be, we think, by act of the Legislature, with all proper
safeguards thrown around it, to prevent fraud and imposition. The policy of our law is, that no man shall
suffer judgment at the hands of our courts without proper process and a day to be heard. To give currency to
such paper by judicial pronouncement would be to open the door to fraud and imposition, and to subject the
people to wrongs and injuries not heretofore contemplated. This we are unwilling to do.
A case typical of those authorities which lend support to judgment notes is First National Bank of Las Cruces vs.
Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in part, said:
In some of the states the judgments upon warrants of attorney are condemned as being against public
policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914
A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep.,
612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be said by
the courts that such judgments are against public policy we are unable to understand. It was a practice from
time immemorial at common law, and the common law comes down to us sanctioned as justified by the
reason and experience of English-speaking peoples. If conditions have arisen in this country which make the
application of the common law undesirable, it is for the Legislature to so announce, and to prohibit the taking
of judgments can be declared as against the public policy of the state. We are aware that the argument
against them is that they enable the unconscionable creditor to take advantage of the necessities of the poor
debtor and cut him off from his ordinary day in court. On the other hand, it may be said in their favor that it
frequently enables a debtor to obtain money which he could by no possibility otherwise obtain. It strengthens
his credit, and may be most highly beneficial to him at times. In some of the states there judgments have
been condemned by statute and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a
promissory note confers a valid power, and authorizes a confession of judgment in any court of competent
jurisdiction in an action to be brought upon said note; that our cognovit statute does not cover the same field
as that occupied by the common-law practice of taking judgments upon warrant of attorney, and does not
impliedly or otherwise abrogate such practice; and that the practice of taking judgments upon warrants of
attorney as it was pursued in this case is not against any public policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it may be said that they are based on the
practice of the English-American common law, and that the doctrines of the common law are binding upon
Philippine courts only in so far as they are founded on sound principles applicable to local conditions.
Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to settle
and secure debts. They are a quick remedy and serve to save the court's time. They also save the time and money
of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this
character may be considered as special agreements, with power to enter up judgments on them, binding the parties
to the result as they themselves viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the considerations just mentioned.
Such warrants of attorney are void as against public policy, because they enlarge the field for fraud, because under
these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument
is to strike down the right of appeal accorded by statute. The recognition of such a form of obligation would bring
about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It
can readily be seen that judgement notes, instead of resulting to the advantage of commercial life in the Philippines
might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgement is ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law.
We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by implication and should only be considered as valid when
given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to the lower court for further proceedings in
accordance with this decision. Without special finding as to costs in this instance, it is so ordered.

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,
vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.
CAMPOS, JR., J.:
This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R.
CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al.,
Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448
except that it completely absolved Fermin Canlas from liability under the promissory notes and reduced the award
for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic
Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and
severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the
dates indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981
until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from
November 27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which interest
from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest
from January 29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest
from November 27, 1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with
interest from January 29, 1981; and under the promissory note (Exhibit "I"), the sum of P200,000.00
with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly
named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly
and severally, the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from
January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered
to pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27,
1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81
with interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with
interest from March 28, 1981, until fully paid.
All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00
as and for reasonable attorney's fee and the further sum equivalent to 3% per annum of the
respective principal sums from the dates above stated as penalty charge until fully paid, plus one
percent (1%) of the principal sums as service charge.
With costs against the defendants.
SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court
Appeals). His contention was that inasmuch as he signed the promissory notes in his capacity as officer of the
defunct Worldwide Garment Manufacturing, Inc, he should not be held personally liable for such authorized
corporate acts that he performed. It is now the contention of the petitioner Republic Planters Bank that having
unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi, jointly and severally, defendant Fermin
Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.

We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin Canlas
were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By
virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin
Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank in the forms of export
advances and letters of credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked
as Exhibits A to I inclusive, each of which were uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and severaIly promise to pay to the
ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of
___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin
Canlas above their printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom
of the promissory notes appeared: "Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was
apparently rubber stamped above the signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch
Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by
the nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was
originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop
Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place. Defendants
Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the
scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended
Answer wherein he, denied having issued the promissory notes in question since according to him, he was not an
officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he
issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the
typewritten entries not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent
Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo
Yamaguchi, on the nine promissory notes.
We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his
signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers
and are liable as such. 3 By signing the notes, the maker promises to pay to the order of the payee or any
holder4 according to the tenor thereof. 5 Based on the above provisions of law, there is no denying that private
respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability
arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to
be jointly and severally liable thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay,
when signed by two or more persons, makes them solidarily liable. 7 The fact that the singular pronoun is used
indicates that the promise is individual as to each other; meaning that each of the co-signers is deemed to have
made an independent singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without
reason for ambiguity, by the presence of the phrase "joint and several" as describing the unconditional promise to
pay to the order of Republic Planters Bank. A joint and several note is one in which the makers bind themselves
both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may
select one or more as the object of the suit. 8 A joint and several obligation in common law corresponds to a civil law
solidary obligation; that is, one of several debtors bound in such wise that each is liable for the entire amount, and
not merely for his proportionate share. 9 By making a joint and several promise to pay to the order of Republic
Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may
choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as
solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in
the notes will affect the liability of the makers, We do not find it necessary to resolve and decide, because it is
immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of the
notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a comaker of each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of
Incorporation effecting a change of corporate name, in this case from Worldwide Garment manufacturing Inc to
Pinch Manufacturing Corporation extinguished the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original
corporation. It is the same corporation with a different name, and its character is in no respect changed.10
A change in the corporate name does not make a new corporation, and whether effected by special act or under a
general law, has no affect on the identity of the corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred. 12
As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or
contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their
capacity as agent of the old corporation and the change of name meant only the continuation of the old juridical
entity, the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.
Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically provided for as
follows:
Sec. 20. Liability of a person signing as agent and so forth. 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 filling a representative character, without
disclosing his principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a
representative capacity or the name of the third party for whom he might have acted as agent, the agent is
personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as
agent of another and parol or extrinsic evidence is not admissible to avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered to him in blank for his signature, we
rule otherwise. A careful examination of the notes in question shows that they are the stereotype printed form of
promissory notes generally used by commercial banking institutions to be signed by their clients in obtaining loans.
Such printed notes are incomplete because there are blank spaces to be filled up on material particulars such as

payee's name, amount of the loan, rate of interest, date of issue and the maturity date. The terms and conditions of
the loan are printed on the note for the borrower-debtor 's perusal. An incomplete instrument which has been
delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which
provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. Where the instrument is wanting in any material particular,
the person in possesion thereof has a prima facie authority to complete it by filling up the blanks
therein. ... In order, however, that any such instrument when completed may be enforced against
any person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas,
as determined by the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the promissory
notes". We chose to believe the bank's testimony that the notes were filled up before they were given to private
respondent Fermin Canlas and defendant Shozo Yamaguchi for their signatures as joint and several promissors.
For signing the notes above their typewritten names, they bound themselves as unconditional makers. We take
judicial notice of the customary procedure of commercial banks of requiring their clientele to sign promissory notes
prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the loan, leaving
the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or comakers. When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete
in the sense that the spaces for the material particular had been filled up by the bank as per agreement. The notes
were not incomplete instruments; neither were they given to private respondent Fermin Canlas in blank as he
claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the
promissory notes from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited
case, the rate of 12% was applied to forebearances of money, goods or credit and court judgemets thereon, only in
the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest
rate the plaintiff may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 ,
the plaintiff had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable
only to interests by way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on
the other hand, governs interests by way of damages. 15 This fine distinction was not taken into consideration by the
appellate court, which instead made a general statement that the interest rate be at 12% per annum.
Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the
Usury Law, the appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905,
Series of 1982 removed the Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter,
the decision of the respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and
SET ASIDE. Judgement is hereby rendered declaring private respondent Fermin Canlas jointly and severally liable
on all the nine promissory notes with the following sums and at 16% interest per annum from the dates indicated, to
wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until
fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27,
1980: under the promissory note denominated as Exhibit C, the amount of P166,466.00 with interest from January
29, 1981; under the promissory note denominated as Exhibit D, the amount of P367,000.00 with interest from
January 29, 1981 until fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 with
interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of P140,000.00 with
interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of
P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit I, the sum of
P200,000.00 with interest on January 29, 1981.

The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and
Shozo Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in accordance with
the judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby
held jointly and solidarity liable with defendants for the amounts found, by the Court a quo. With costs against
private respondent.
SO ORDERED.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a decision of the
Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated October
17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its program of logging activities for the
year 1978 the opening of additional roads, and simultaneous logging operations along the route of said roads, in its
logging concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2)
additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila, through its sister
company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors
and other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors,
one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980, p. 44) and to
determine the capability of the "Used" tractors being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the seller-assignor assured petitioner-corporation that the
"Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of
ninety (90) days performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation
through petitioners Wee and Vergara, president and vice- president, respectively, agreed to purchase on installment
said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand
Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A"). At the same
time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the sellerassignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the chattel mortgage in
favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the petitionercorporation's job site and as agreed, the seller-assignor stationed its own mechanics to supervise the operations of
the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another
nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the tractors
broke down and requested for the seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to the job site
its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the
tractors did not come out to be what they should be after the repairs were undertaken because the units were no
longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous logging operations of petitionercorporation were delayed and petitioner Vergara advised the seller-assignor that the payments of the installments
as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation
under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor to pull out
the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the
respondent and the excess, if any, to be divided between the seller-assignor and petitioner-corporation which
offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several follow-up calls,
the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the respondent
against the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million
Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One
Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing
interest thereafter at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to
order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty
Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and personal capacities the
principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT
PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15, 1979
and accruing interest thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of
the principal and to pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY
OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE
OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in toto the decision of
the trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of the considered
opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of
Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears,
there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does
not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant
herein upon application by appellant corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants either to withdraw
from the contract and/or demand a proportionate reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in
financing and receivable discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring commercial papers or accounts
receivable duly authorized pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker; it contains an unconditional
promise to pay a certain sum of money payable at a fixed or determinable future time; it is payable to
order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by
IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that
the note was complete and regular upon its face before the same was overdue and without notice,
that it had been previously dishonored and that the note is in good faith and for value without notice
of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce payment of the instrument for the full
amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they
would pay the note according to its tenor, and admit the existence of the payee IPM and its capacity
to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory note, We opine that the same
is legally and conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to law and evidence, We find the
appeal without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 5055, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the Intermediate Appellate
Court in its resolution dated October 17, 1985, a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:

I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED
UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE
SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS
WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE
PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well as the
resolution dated October 17, 1985 and dismissing the complaint but granting petitioners' counterclaims before the
court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended
that the petition was filed out of time; that the promissory note is a negotiable instrument and respondent a holder in
due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is
admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant petition to have been filed on time
because the petitioners' motion for reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty because the findings of the
trial court, adopted by the respondent appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the records. The petitioner was clearly a
victim of a warranty not honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they diminish
its fitness for such use to such an extent that, had the vendee been aware thereof, he would not
have acquired it or would have given a lower price for it; but said vendor shall not be answerable for
patent defects or those which may be visible, or for those which are not visible if the vendee is an
expert who, by reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of
the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may
be annexed by the usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold
even though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of
the hidden faults or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This liability as a
general rule, extends to the corporation to whom it assigned its rights and interests unless the assignee is a holder
in due course of the promissory note in question, assuming the note is negotiable, in which case the latter's rights
are based on the negotiable instrument and assuming further that the petitioner's defenses may not prevail against
it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified
the seller-assignor's sister company, AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and
its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for
which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect
between withdrawing from the contract and demanding a proportionate reduction of the price, with
damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, necessarily can no
longer sue the seller-assignor except by way of counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until
fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must
be payable to order or bearer, " it cannot be denied that the promissory note in question is not a negotiable
instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of
negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent
that the instrument may be transferred. This consent is indispensable since a maker assumes
greater risk under a negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order. There must
always be a specified person named in the instrument. It means that the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the

latter." (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent
can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may
raise against the respondent all defenses available to it as against the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by the
respondent-assignee because the petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere assignee of the promissory note in question,
to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the Deed of Sale
with Chattel Mortgage with the promissory note which is as testified to by the witness
was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further
questions on cross,
COURT:
You confirm his manifestation? You are nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to
the IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; .
. . you want to make a distinction, one is an assignment of mortgage right and the
other one is indorsement of the promissory note. What counsel for defendants wants
is that you stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an
arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter
would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the
Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right
to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold
were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for

the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual
knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in
due course. As such, the respondent is subject to all defenses which the petitioners may raise against the sellerassignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with
two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would
justify its act of taking the promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a
holder who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of
deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that
his action in taking the instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the
buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase
price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays
the full price and the note is indorsed to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United States to protect the buyer against the finance
company will , the finance company will be subject to the defense of failure of consideration and
cannot recover the purchase price from the buyer. As against the argument that such a rule would
seriously affect "a certain mode of transacting business adopted throughout the State," a court in
one case stated:
It may be that our holding here will require some changes in business methods and
will impose a greater burden on the finance companies. We think the buyer-Mr. &
Mrs. General Public-should have some protection somewhere along the line. We
believe the finance company is better able to bear the risk of the dealer's insolvency
than the buyer and in a far better position to protect his interests against
unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in
favor of a rule which win afford public protection to the general buying public against
unscrupulous dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So.

2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar
facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates in a transaction of this type from
its inception, it cannot be regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing
company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note
involved in this case are subject to all defenses that the petitioners have against the seller-assignor, Industrial
Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and respondent
appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate
the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the assignerassignor and respondent assignee at the expense of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-assignor has not been impleaded herein, there is no
obstacle for the respondent to file a civil Suit and litigate its claims against the seller- assignor in the rather unlikely
possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well
as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the
petitioner before the trial court is DISMISSED.
SO ORDERED.