Negotiable Instrument Law

ACT NO. 2031February 03, 1911

THE NEGOTIABLE INSTRUMENTS LAW I. FORM AND INTERPRETATION Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

(a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

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.

But an order or promise to pay out of a particular fund is not unconditional.chan robles virtual law library Sec. 4. Determinable future time; what constitutes. - An instrument is payable

at a determinable future time, within the meaning of this Act, which is expressed to be payable:

(a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:

(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that:

(a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.

Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. 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. It may be drawn payable to the order of:

(a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Sec. 9. When payable to bearer. - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.

Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. chanrobles law

Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. 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. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. Sec. 20. Liability of 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. Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or

assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. II. CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons.

But the mere absence of words implying power to negotiate does not make an indorsement restrictive. Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right:

(a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the

indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. robles virtual law library Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Sec. 48. Striking out indorsement. - The holder may at any time strike out any

indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. 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:

(a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. Sec. 55. When title defective. - The title of a person who negotiates an

instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. Sec. 56. What constitutes notice of defect. - To constitutes 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 amounted to bad faith. Sec. 57. Rights of holder in due course. - A holder in due course holds 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. robles virtual law library Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.

Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. robles virtual law library Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be sufficient, must be made:

(a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made.

Sec. 73. Place of presentment. - Presentment for payment is made at the proper place:

(a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence.

Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Sec. 75. Presentment where instrument payable at bank. - Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.

Sec. 81. When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. - Presentment for payment is excused:

(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied.

Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when:

(a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid.

Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. robles virtual law library Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. VII. NOTICE OF DISHONOR

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. chanrobles law Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased.

Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times:

(a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following. (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following.

Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times:

(a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision.

Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or

in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows:

(a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or (b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning.

But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases:

(a) Where the drawer and drawee are the same person;

(b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment.

Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases:

(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation.

Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. Sec. 118. When protest need not be made; when must be made. - Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required except in the case of foreign bills of exchange. robles virtual law library VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged:

(a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.

Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.

Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is

avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes:

(a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.

BILLS OF EXCHANGE IX. FORM AND INTERPRETATION Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. Sec. 130. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note.

Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.

Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all.

Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged.

Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and

(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases:

(a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment can not be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground.

Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance:

(a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or

(b) When presentment for acceptance is excused and the bill is not accepted.

Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. XII. PROTEST Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify:

(a) The time and place of presentment; (b) The fact that presentment was made and the manner thereof; (c) The cause or reason for protesting the bill; (d) The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found.

Sec. 154. Protest, by whom made. - Protest may be made by:

(a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses.

Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is

expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been protested for non-acceptance may be subsequently protested for non-payment. Sec. 158. Protest before maturity where acceptor insolvent. - Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers. robles virtual law library Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. XIII. ACCEPTANCE FOR HONOR Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. chanrobles law Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the

drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor. Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows:

(a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four.

Sec. 169. When delay in making presentment is excused. - The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him. XIV. PAYMENT FOR HONOR Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. Sec. 174. Preference of parties offering to pay for honor. - Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference.

Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment.

Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. XVI. PROMISSORY NOTES AND CHECKS

Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check.

XVII. GENERAL PROVISIONS Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:

"Acceptance" means an acceptance completed by delivery or notification; "Action" includes counterclaim and set-off; "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not; "Bearer" means the person in possession of a bill or note which is payable to bearer; "Bill" means bill of exchange, and "note" means negotiable promissory note;

"Delivery" means transfer of possession, actual or constructive, from one person to another; "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; "Indorsement" means an indorsement completed by delivery; "Instrument" means negotiable instrument; "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; "Person" includes a body of persons, whether incorporated or not; "Value" means valuable consideration; "Written" includes printed, and "writing" includes print.

Sec. 192. Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable. Sec. 193. Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day. Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. chanrobles law Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed. Enacted: February 3, 1911

1) G.R. No. 71694 August 16, 1991

NYCO SALES CORPORATION, petitioner, vs.BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEON—REGIONAL TRIAL COURT, BR. II, INTERMEDIATE APPELLATE COURT, FIRST CIVIL CASES DIVISION, respondents.

In this petition for review on certiorari, petitioner challenges the April 22, 1985 decision * and the July 16, 1985 resolution * of the then Intermediate Appellate Court in AC-G.R. CV No. 02553 entitled "BA Finance Corporation v. Nyco Sales Corporation, et al." which affirmed with modification the July 20, 1983 decision ** of the Regional Trial Court, National Capital Region, Manila, Branch II in the same case docketed as Civil Case No. 125909 ordering petitioner to pay respondent the amount of P60,000.00 as principal obligation plus corresponding interest, the sum of P10,000.00 as and for, attomey's fees and 1/3 of the costs of suit.

It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to as Nyco) whose president and general manager is Rufino Yao, is engaged in the business of selling construction materials with principal office in Davao City. Sometime in 1978, the brothers Santiago and Renato Fernandez (hereinafter referred to as the Fernandezes), both acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance Corporation (hereinafter referred to as BA Finance). Yao apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648 dated February 17, 1979 for the amount of P60,000.00. The said check was payable to Nyco. Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers. Under the said Deed, the subject of the discounting was the aforecited check (Rollo, pp- 26-28). At the back thereof and of every deed of assignment was the Continuing Suretyship Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the full, faithful and prompt payment and discharge of any and all indebtedness of Nyco (Ibid., pp. 36, 46). The BPI check, however, was dishonored by the drawee bank upon presentment for payment. BA Finance immediately reported the matter to the Fernandezes who thereupon issued a substitute check dated February 19,1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust Company check bearing the number 183157, which was again dishonored when it was presented for payment. Despite repeated demands, Nyco and the Fernandezes failed to settle the obligation with BA Finance, thus prompting the latter to institute an action in court (Ibid., p 28). Nyco and the Fernandezes, despite having been served with summons and copies of the complaint, failed to file their answer and were consequently declared in default. On May 16, 1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly and severally, the sum of P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the amount of P3, 000. 00 as well as the costs of suit (Rollo, pp. 51-52). Nyco, however, moved to set aside the order of default, to have its answer admitted and to be able to implead Sanshell. The prayer was granted through an order dated June 23, 1980, wherein the decision of the court was set aside only as regards Nyco. Trial ensued once more until the court reached a second decision which states:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Nyco Sales Corporation by ordering the latter to pay the former the following:

1) P60,000.00 as principal obligation, plus interest thereon at the rate of 14% per annum from February 1, 1979 until fully paid;

2) The amount of P100,000.00 as and for attorney's fees; and

3) One-third (1/3) of the costs of this suit.

With respect to defendants Santiago and Renato Fernandez, the decision of May 16, 1980 stands.

The cross-claim of defendant Nyco Sales Corporation against codefendants Santiago B. Fernandez and Renato B. Fernandez is hereby denied, as there is no showing that Nyco's Answer with cross-claim dated May 29, 1980 was ever received by said Fernandez brothers, even as it is noted that the latter have not been declared in default with respect to said cross-claim, nor were evidence adduced in connection therewith.

As to the would-be litigant Sanshell Construction and Development Corporation, defendant Nyco Sales Corporation did not properly implead said corporation which should have been by way of a third-party complaint instead of a mere cross-claim. The same observations are noted as regard this cross-claim against Sanshell as those made with respect to the Fernandez brothers.

SO ORDERED.

On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by ordering that the interest should run from February 19, 1979 until paid and not from February 1, 1979. Nyco's subsequent motion for reconsideration was denied (Ibid., pp. 33, 62). Hence, the present recourse.

The crux of the controversy is whether or not the assignor is liable to its assignee for its dishonored checks.

For its defense, Nyco anchors its arguments on the following premises: a) that the appellate court erred in affirming its liability for the BPI check despite a similar finding of liability for the SBTC check rendered by the same lower court; b) that it was actually discharged of its liability over the SBTC check when BA Finance failed to give it a notice of dishonor; c) that there was novation when BA Finance accepted the SBTC check in replacement of the BPI check; and d) that it cannot be held liable for its Presidents unauthorized acts.

The petition is devoid of merit.

An assignment of credit is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. It may be done either gratuitously or generously, in which case, the assignment has an effect similar to that of a sale.

According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit itself (its existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties, the assignor-vendor should be held answerable therefor. There is no question then that the assignor-vendor is indeed liable for the invalidity of whatever he as signed to the assignee-vendee.

Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing said deed and the check covered thereby is merely an incidental or collateral matter. This particular check merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is immaterial as it could be any other check. Both the lower and the appellate courts recognized this and so it is utterly misplaced to say that Nyco is being held liable for both the BPI and the SBTC checks. It is only what is represented by the said checks that Nyco is being asked

to pay. Indeed, nowhere in the dispositive parts of the decisions of the courts can it be gleaned that BA Finance may recover from the two checks.

Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand letter but also by the findings of the trial court that Rufino Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before, during and after the dishonor (Rollo, p. 40). More importantly, it fails to realize that for as long as the credit remains outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a notice of dishonor will not discharge it from such liability. This is because the cause of action stems from the breach of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone (See Art. 1628, Civil Code).

Novation is the third defense set up by petitioner Nyco. It insists that novation took place when BA Finance accepted the SBTC check in replacement of the BPI cheek. Such is manifestly untenable.

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed (Mondragon v. Intermediate Appellate Court, G.R. No. 71889, April 17, 1990; Caneda Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990). Secondly, the old and the new obligations must be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence If they cannot, they are incompatible and the latter obligation novates the first (Mondragon v. Intermediate Appellate Court, supra; Caneda Jr. v. Court of Appeals, supra). In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.

Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao (Nyco's President) to even apply to BA Finance for credit accommodation. It supports its argument with the fact that it did not issue a Board resolution giving Yao such authority. However, the very evidence on record readily belies Nyco's contention. Its corporate By-Laws clearly provide for the powers of its President, which include, inter alia, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly adopted the lower court's observation that there was already a previous transaction of discounting of checks involving the same personalities wherein any enabling resolution from Nyco was dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own undertakings. Such effectively places Nyco under estoppel in pais which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts (Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.

PREMISES CONSIDERED, the decision appealed from is AFFIRMED.

SO ORDERED.

2) 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.

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

The antecedent facts culled from the petition are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.

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

WHEREFORE, judgment is hereby rendered:

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

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

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

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

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

I

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

II

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

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

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

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

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

A study of the questioned promissory note reveals that it is a negotiable instrument which was discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing and signed by the maker; it contains an unconditional promise to pay a certain sum of money payable at a fixed or determinable future time; it is payable to order (Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and regular upon its face before the same was overdue and without notice, that it had been previously dishonored

and that the note is in good faith and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).

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

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

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

Hence, this petition was filed on the following grounds:

I.

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

II

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

III.

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

IV.

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

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

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

V.

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

VI.

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

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

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

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

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

The petition is impressed with merit.

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

The Civil Code provides that:

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

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

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

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

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

Articles 1191 and 1567 of the Civil Code provide that:

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

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

xxx xxx xxx

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

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

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

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

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

The pertinent portion of the note is as follows:

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

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

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

xxx xxx xxx

When instrument is payable to order.

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

xxx xxx xxx

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

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

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

ATTY. PALACA:

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

COURT:

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

ATTY. ILAGAN:

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

COURT:

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

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith.

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

xxx xxx xxx

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

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of the person negotiating it

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated

must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)

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

In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will , the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . . .

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

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due course of the note given in the transaction.

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

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

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

SO ORDERED.

3) G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs.MAURICIO A. SORIANO, ET AL., defendant-appellees.

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 8-½% 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 8-½% 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.

4) G.R. No. 100290 June 4, 1993

NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners, vs.THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition for certiorari prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia."

Stated briefly, the relevant facts are as follows:

Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the decision by reducing the award of moral and exemplary damages. The decision having become final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished funds which by then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.

On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following form:

Cashier's Check P262,750.00Cash 135,733.70————Total P398,483.70

Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid. On 29 January 1991, the motion was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender and that payment was made by a third party other than the defendant. A motion for reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's check is not payment in legal tender as required by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991.

In this petition for review, the Tibajia spouses raise the following issues:

I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".

II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES. 1

The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check) is considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.

It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands, undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For Payee's Account Only" and payable to private respondent Eden Tan, is considered legal tender, payment with which operates to discharge their monetary obligation. 2 Petitioners, to support their contention, cite the case of New Pacific Timber and Supply Co., Inc. v. Señeris 3 where this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is deemed as cash".

The provisions of law applicable to the case at bar are the following:

a. Article 1249 of the Civil Code which provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.;

b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.

c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:

Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.

From the aforequoted provisions of law, it is clear that this petition must fail.

In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that —

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

The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check.

Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6 to support their cause. The dissenting opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the PAL checks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no discharge or satisfaction of its judgment obligation." 7 Moreover, the circumstances in the Philippine Airlines case are quite different from those in the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.

In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor."

WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the petitioners.

SO ORDERED.

5) G.R. No. L-49188 January 30, 1990

PHILIPPINE AIRLINES, INC., petitioner, vs.

HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN, respondents.

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more discerning and just approach? Should we not apply the ancient rule of statutory construction that laws are to be interpreted by the spirit which vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia Tan, under the name and style of Able Printing Press commenced a complaint for damages before the Court of First Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages, with legal interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral damages, with legal interest thereon from July 20, 1 967;

4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory and on May 31, 1977, judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On October 11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the corresponding writ in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered for the further sum of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila,

through its manager and garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

I

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that such a return is incapable of being obtained (sic) because the officer who is to make the said return has absconded and cannot be brought to the Court despite the earlier order of the court for him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this circumstance, the order of May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The need for such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed with by the court below and its action in this regard meets with our concurrence. A contrary view will produce an abhorent situation whereby the mischief of an erring officer of the court could be utilized to impede indefinitely the undisputed and awarded rights which a prevailing party rightfully deserves to obtain and with dispatch. The final judgment in this case should not indeed be permitted to become illusory or incapable of execution for an indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights were never intended to rest on the requirement of a return, the office of which is merely to inform the court and the parties, of any and all actions taken under the writ of execution. Where such information can be established in some other manner, the absence of an executing officer's return will not preclude a judgment from being treated as discharged or being executed through an alias writ of execution as the case may be. More so, as in the case at bar. Where the return cannot be expected to be forthcoming, to require the same would be to compel the

enforcement of rights under a judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should not be adjudged as having sued in vain. To decide otherwise would not only give her an empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should have been paid from the start, before 1967, without need of her going to court to enforce her rights. And all because PAL did not issue the checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the Civil Code provides:

Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (Emphasis supplied)

Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.


In the meantime, the action derived from the original obligation shall be held in abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with what he is carrying for another. Payment in

checks is precisely intended to avoid the possibility of the money going to the wrong party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid with checks, PAL should have done so properly.

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash would result in damage or interminable litigations each time a sheriff with huge amounts of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big amounts are involved, escrow arrangements with a bank and carefully supervised by the court would be the safer procedure. Actual transfer of funds takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance, without prudence, departed from what is generally observed and done, and placed as payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. The judicial guideline which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers, of requiring checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must report the sheriff immediately to the court which ordered the execution or to the Supreme Court for appropriate disciplinary action. Fees, commissions, and salaries are paid through regular channels. This improper procedure also allows such officers, who have sixty (60) days within which to make a return, to treat the moneys as their personal finds and to deposit the same in their private accounts to earn sixty (60) days interest, before said finds are turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up the defense that said checks had been issued to them in their private or personal capacity. Without a receipt evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean and complete. The practice is ingenious but

evil as it unjustly enriches court personnel at the expense of litigants and the proper administration of justice. The temptation could be far greater, as proved to be in this case of the absconding sheriff. The correct and prudent thing for the petitioner was to have issued the checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee, without the latter's agreement or consent, are as many as the ways that an artful mind could concoct to get around the safeguards provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would not want the winning party to get what he won in the judgment. He would think of ways to delay the winning party's getting what has been adjudged in his favor. We cannot condone that practice especially in cases where the courts and their officers are involved. We rule against the petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money judgment by levying on all the property, real and personal of every name and nature whatsoever, and which may be disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the respondent judge granting the alias writ of execution may not be pronounced as a nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment and none such payment had been concededly made yet by the absconding Sheriff to the private respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not having been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as those obtaining in this petition, the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of the debtor's property into an amount equal to that due, and, it may be done otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the satisfaction of a judgment when the same has already been realized in fact (Section 47, Rule 39). Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely provides the sheriff with his duties as executing officer including delivery of the proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of payments but must continue until payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered under the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks and interest. The respondent court's decision in CA-G.R. No. 51079-R does not

totally supersede the trial court's judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the petitioner is upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.

SO ORDERED.

6) G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner, vs.HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular 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 BANKMakati Stock Exchange Bldg.,

Ayala Avenue, Makati,Metro Manila

TO Raul Sesbreño

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 AMOUNTNUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33UNDERWRITERSFINANCE 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.

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-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court

nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" 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 the assignment 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 "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

April 10, 1980

Philippine Underwriters Finance Corp.Benavidez St., Makati,Metro Manila.

Attention: Mr. Alfredo O. BanariaSVP-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 co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement:

There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities."

The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18

(Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude

that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22

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 Sesbreño.

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 Sesbreño 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 Sesbreño. 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 Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

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.

7) 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.

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of thewarrants. 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 go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling — more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice — from the uncleared treasury warrants in the total amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have

to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts, according to whether the agency was or was not for a compensation.

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. 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.

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

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

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.


(Sgd.) RAFAEL LOPEZ,Treasurer

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

The foregoing facts, and appellant's three assignments of error, raise squarely the question which was suggested in the beginning of this opinion. In view of the importance of the subject to the business community, the advice of prominent attorneys-at-law with banking connections, was solicited. These members of the bar responded promptly to the request of the court, and their memoranda have proved highly useful in the solution of the

question. It is to the credit of the bar that although the sanction of judgement notes in the Philippines might prove of immediate value to clients, every one of the attorneys has looked upon the matter in a big way, with the result that out of their independent investigations has come a practically unanimous protest against the recognition in this jurisdiction of judgment notes.1

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

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

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

The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgement became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by confession, while still other jurisdictions have refused to sanction them. In some States, statutes have been passed which have either expressly authorized confession of judgment on warrant of attorney, without antecedent process, or have forbidden judgments of this character. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy.

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

the petition. After the Circuit Court had entered a judgement, the defendants, through counsel, appeared specially and filed a motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:

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

x x x x x x x x x

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

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

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

x x x x x x x x x

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

x x x x x x x x x

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

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver of presentment and protest, homestead and exemption rights real and personal, and other rights, and also the following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of Record to appear for us and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of suit and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the judgment note above described, speaking through Mr. Justice Miller, in part said:

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

x x x x x x x x x

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

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

In some of the states the judgments upon warrants of attorney are condemned as being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be said by the courts that such judgments are against public policy we are unable to understand. It was a practice from time immemorial at common law, and the common law comes down to us sanctioned as justified by the reason and experience of English-speaking peoples. If conditions have arisen in this country which make the application of the common law undesirable, it is for the Legislature to so announce, and to prohibit the taking of judgments can be declared as against the public policy of the

state. We are aware that the argument against them is that they enable the unconscionable creditor to take advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On the other hand, it may be said in their favor that it frequently enables a debtor to obtain money which he could by no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at times. In some of the states there judgments have been condemned by statute and of course in that case are not allowed.

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

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

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

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

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

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

1) G.R. No. 71694 August 16, 1991

NYCO SALES CORPORATION, petitioner, vs.BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEON—REGIONAL TRIAL COURT, BR. II, INTERMEDIATE APPELLATE COURT, FIRST CIVIL CASES DIVISION, respondents.

In this petition for review on certiorari, petitioner challenges the April 22, 1985 decision * and the July 16, 1985 resolution * of the then Intermediate Appellate Court in AC-G.R. CV No. 02553 entitled "BA Finance Corporation v. Nyco Sales Corporation, et al." which affirmed with modification the July 20,

1983 decision ** of the Regional Trial Court, National Capital Region, Manila, Branch II in the same case docketed as Civil Case No. 125909 ordering petitioner to pay respondent the amount of P60,000.00 as principal obligation plus corresponding interest, the sum of P10,000.00 as and for, attomey's fees and 1/3 of the costs of suit.

It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to as Nyco) whose president and general manager is Rufino Yao, is engaged in the business of selling construction materials with principal office in Davao City. Sometime in 1978, the brothers Santiago and Renato Fernandez (hereinafter referred to as the Fernandezes), both acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation. They requested Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with BA Finance Corporation (hereinafter referred to as BA Finance). Yao apparently acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648 dated February 17, 1979 for the amount of P60,000.00. The said check was payable to Nyco. Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers. Under the said Deed, the subject of the discounting was the aforecited check (Rollo, pp- 26-28). At the back thereof and of every deed of assignment was the Continuing Suretyship Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the full, faithful and prompt payment and discharge of any and all indebtedness of Nyco (Ibid., pp. 36, 46). The BPI check, however, was dishonored by the drawee bank upon presentment for payment. BA Finance immediately reported the matter to the Fernandezes who thereupon issued a substitute check dated February 19,1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust Company check bearing the number 183157, which was again dishonored when it was presented for payment. Despite repeated demands, Nyco and the Fernandezes failed to settle the obligation with BA Finance, thus prompting the latter to institute an action in court (Ibid., p 28). Nyco and the Fernandezes, despite having been served with summons and copies of the complaint, failed to file their answer and were consequently declared in default. On May 16, 1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly and severally, the sum of P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the amount of P3, 000. 00 as well as the costs of suit (Rollo, pp. 51-52). Nyco, however, moved to set aside the order of default, to have its answer admitted and to be able to implead Sanshell. The prayer was granted through an order dated June 23, 1980, wherein the decision of the court was set aside only as regards Nyco. Trial ensued once more until the court reached a second decision which states:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Nyco Sales Corporation by ordering the latter to pay the former the following:

1) P60,000.00 as principal obligation, plus interest thereon at the rate of 14% per annum from February 1, 1979 until fully paid;

2) The amount of P100,000.00 as and for attorney's fees; and

3) One-third (1/3) of the costs of this suit.

With respect to defendants Santiago and Renato Fernandez, the decision of May 16, 1980 stands.

The cross-claim of defendant Nyco Sales Corporation against codefendants Santiago B. Fernandez and Renato B. Fernandez is hereby denied, as there is no showing that Nyco's Answer with cross-claim dated May 29, 1980 was ever received by said Fernandez brothers, even as it is noted that the latter have not

been declared in default with respect to said cross-claim, nor were evidence adduced in connection therewith.

As to the would-be litigant Sanshell Construction and Development Corporation, defendant Nyco Sales Corporation did not properly implead said corporation which should have been by way of a third-party complaint instead of a mere cross-claim. The same observations are noted as regard this cross-claim against Sanshell as those made with respect to the Fernandez brothers.

SO ORDERED.

On appeal, the appellate court also upheld BA Finance but modified the lower court's decision by ordering that the interest should run from February 19, 1979 until paid and not from February 1, 1979. Nyco's subsequent motion for reconsideration was denied (Ibid., pp. 33, 62). Hence, the present recourse.

The crux of the controversy is whether or not the assignor is liable to its assignee for its dishonored checks.

For its defense, Nyco anchors its arguments on the following premises: a) that the appellate court erred in affirming its liability for the BPI check despite a similar finding of liability for the SBTC check rendered by the same lower court; b) that it was actually discharged of its liability over the SBTC check when BA Finance failed to give it a notice of dishonor; c) that there was novation when BA Finance accepted the SBTC check in replacement of the BPI check; and d) that it cannot be held liable for its Presidents unauthorized acts.

The petition is devoid of merit.

An assignment of credit is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. It may be done either gratuitously or generously, in which case, the assignment has an effect similar to that of a sale.

According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit itself (its existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties, the assignor-vendor should be held answerable therefor. There is no question then that the assignor-vendor is indeed liable for the invalidity of whatever he as signed to the assignee-vendee.

Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing said deed and the check covered thereby is merely an incidental or collateral matter. This particular check merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is immaterial as it could be any other check. Both the lower and the appellate courts recognized this and so it is utterly misplaced to say that Nyco is being held liable for both the BPI and the SBTC checks. It is only what is represented by the said checks that Nyco is being asked to pay. Indeed, nowhere in the dispositive parts of the decisions of the courts can it be gleaned that BA Finance may recover from the two checks.

Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand letter but also by the findings of the trial court that Rufino Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts before, during and after the dishonor (Rollo, p. 40). More importantly, it fails to realize that for as long as the credit remains outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a notice of dishonor will not discharge it from such liability. This is because the

cause of action stems from the breach of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone (See Art. 1628, Civil Code).

Novation is the third defense set up by petitioner Nyco. It insists that novation took place when BA Finance accepted the SBTC check in replacement of the BPI cheek. Such is manifestly untenable.

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed (Mondragon v. Intermediate Appellate Court, G.R. No. 71889, April 17, 1990; Caneda Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990). Secondly, the old and the new obligations must be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence If they cannot, they are incompatible and the latter obligation novates the first (Mondragon v. Intermediate Appellate Court, supra; Caneda Jr. v. Court of Appeals, supra). In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.

Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao (Nyco's President) to even apply to BA Finance for credit accommodation. It supports its argument with the fact that it did not issue a Board resolution giving Yao such authority. However, the very evidence on record readily belies Nyco's contention. Its corporate By-Laws clearly provide for the powers of its President, which include, inter alia, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation. Furthermore, the appellate court correctly adopted the lower court's observation that there was already a previous transaction of discounting of checks involving the same personalities wherein any enabling resolution from Nyco was dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own undertakings. Such effectively places Nyco under estoppel in pais which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts (Panay Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are concerned.

PREMISES CONSIDERED, the decision appealed from is AFFIRMED.

SO ORDERED.

2) 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.

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

The antecedent facts culled from the petition are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises.

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

WHEREFORE, judgment is hereby rendered:

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

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

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

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

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

I

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

II

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

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

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the considered opinion that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon application by appellant corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

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

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

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

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

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

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

Hence, this petition was filed on the following grounds:

I.

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

II

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

III.

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

IV.

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

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

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

V.

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

VI.

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

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

On the other hand, the respondent corporation in its comment to the petition filed on February 20, 1986, contended that the petition was filed out of time; that the promissory note is a negotiable

instrument and respondent a holder in due course; that respondent is not liable for any breach of warranty; and finally, that the promissory note is admissible in evidence.

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

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

The petition is impressed with merit.

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

The Civil Code provides that:

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

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

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the

seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics. However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors became totally unserviceable and useless for the purpose for which they were purchased.

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

Articles 1191 and 1567 of the Civil Code provide that:

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

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

xxx xxx xxx

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

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

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

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

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

The pertinent portion of the note is as follows:

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

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

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

xxx xxx xxx

When instrument is payable to order.

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

xxx xxx xxx

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

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

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

ATTY. PALACA:

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

COURT:

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

ATTY. ILAGAN:

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

COURT:

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

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the respondent cannot be a holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial Products Marketing, and the respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-

assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors -sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the seller-assignor. Any other interpretation would be most inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith.

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

xxx xxx xxx

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

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of the person negotiating it

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)

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

In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will , the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . . .

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

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due course of the note given in the transaction.

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

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

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

SO ORDERED.

3) G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs.MAURICIO A. SORIANO, ET AL., defendant-appellees.

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 8-½% 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 8-½% 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.

4) G.R. No. 100290 June 4, 1993

NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners, vs.THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition for certiorari prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia."

Stated briefly, the relevant facts are as follows:

Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the decision by reducing the award of moral and exemplary damages. The decision having become final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished funds which by then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.

On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following form:

Cashier's Check P262,750.00Cash 135,733.70————Total P398,483.70

Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid. On 29 January 1991, the motion was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender and that payment was made by a third

party other than the defendant. A motion for reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's check is not payment in legal tender as required by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991.

In this petition for review, the Tibajia spouses raise the following issues:

I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".

II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES. 1

The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check) is considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.

It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands, undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For Payee's Account Only" and payable to private respondent Eden Tan, is considered legal tender, payment with which operates to discharge their monetary obligation. 2 Petitioners, to support their contention, cite the case of New Pacific Timber and Supply Co., Inc. v. Señeris 3 where this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is deemed as cash".

The provisions of law applicable to the case at bar are the following:

a. Article 1249 of the Civil Code which provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.


In the meantime, the action derived from the original obligation shall be held in abeyance.;

b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.

c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:

Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.

From the aforequoted provisions of law, it is clear that this petition must fail.

In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that —

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

The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check.

Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6 to support their cause. The dissenting opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the PAL checks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no discharge or satisfaction of its judgment obligation." 7 Moreover, the circumstances in the Philippine Airlines case are quite different from those in the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.

In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor."

WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the petitioners.

SO ORDERED.

5) G.R. No. L-49188 January 30, 1990

PHILIPPINE AIRLINES, INC., petitioner, vs.HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN, respondents.

Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more discerning and just approach? Should we not apply the ancient rule of statutory construction that laws are to be interpreted by the spirit which vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.

The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia Tan, under the name and style of Able Printing Press commenced a complaint for damages before the Court of First Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages, with legal interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral damages, with legal interest thereon from July 20, 1 967;

4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion for reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became final and executory and on May 31, 1977, judgment was correspondingly entered in the case.

The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On October 11, 1977, the trial court, presided over by Judge Galano, issued its

order of execution with the corresponding writ in favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day directing Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon from July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered for the further sum of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been fully satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and garnished the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:

I

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.

II

PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?

We rule in the affirmative and we quote the respondent court's decision with approval:

The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that such a return is incapable of being obtained (sic) because the officer who is to make the said return has absconded and cannot be brought to the Court despite the earlier order of the court for him to appear for this purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this circumstance, the order of May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The need for such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed with by the court below and its action in this regard meets with our concurrence. A contrary view will produce an abhorent situation whereby the mischief of an erring officer of the court could be utilized to impede indefinitely the undisputed and awarded rights which a prevailing party rightfully deserves to obtain and with dispatch. The final judgment in this case should not indeed be permitted to become illusory or incapable of execution for an indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights were never intended to rest on the requirement of a return, the office of which is merely to inform the court and the parties, of any and all actions taken under the writ of execution. Where such information can be established in some other manner, the absence of an executing officer's return will not preclude a judgment from being treated as discharged or being executed through an alias writ of execution as the case may be. More so, as in the case at bar. Where the return cannot be expected to be forthcoming, to require the same would be to compel the enforcement of rights under a judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the issue of satisfaction of judgment.

Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should not be adjudged as having sued in vain. To decide otherwise would not only give her an empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should have been paid from the start, before 1967, without need of her going to court to enforce her rights. And all because PAL did not issue the checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the Civil Code provides:

Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (Emphasis supplied)

Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.

There are circumstances in this case, however, which compel a different conclusion.

The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.


In the meantime, the action derived from the original obligation shall be held in abeyance.

In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt.

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical extremes if in doing so we arrive at unjust or absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to avoid the possibility of the money going to the wrong party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid with checks, PAL should have done so properly.

Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash or legal tender to sheriffs and other executing

officers. Payment in cash would result in damage or interminable litigations each time a sheriff with huge amounts of cash in his hands decides to abscond.

As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big amounts are involved, escrow arrangements with a bank and carefully supervised by the court would be the safer procedure. Actual transfer of funds takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance, without prudence, departed from what is generally observed and done, and placed as payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. The judicial guideline which we take note of states as follows:

As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number of executing officers, of requiring checks in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor to issue the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must report the sheriff immediately to the court which ordered the execution or to the Supreme Court for appropriate disciplinary action. Fees, commissions, and salaries are paid through regular channels. This improper procedure also allows such officers, who have sixty (60) days within which to make a return, to treat the moneys as their personal finds and to deposit the same in their private accounts to earn sixty (60) days interest, before said finds are turned over to the court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up the defense that said checks had been issued to them in their private or personal capacity. Without a receipt evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean and complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of litigants and the proper administration of justice. The temptation could be far greater, as proved to be in this case of the absconding sheriff. The correct and prudent thing for the petitioner was to have issued the checks in the intended payee's name.

The pernicious effects of issuing checks in the name of a person other than the intended payee, without the latter's agreement or consent, are as many as the ways that an artful mind could concoct

to get around the safeguards provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would not want the winning party to get what he won in the judgment. He would think of ways to delay the winning party's getting what has been adjudged in his favor. We cannot condone that practice especially in cases where the courts and their officers are involved. We rule against the petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must enforce an execution of a money judgment by levying on all the property, real and personal of every name and nature whatsoever, and which may be disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the respondent judge granting the alias writ of execution may not be pronounced as a nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the judgment and none such payment had been concededly made yet by the absconding Sheriff to the private respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not having been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as those obtaining in this petition, the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of the debtor's property into an amount equal to that due, and, it may be done otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the satisfaction of a judgment when the same has already been realized in fact (Section 47, Rule 39). Execution is for the sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely provides the sheriff with his duties as executing officer including delivery of the proceeds of his levy on the debtor's property to satisfy the judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of payments but must continue until payment is delivered to the obligor or creditor.

Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered under the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks and interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as actual damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the petitioner is upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.

SO ORDERED.

6) G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner, vs.HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular 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 BANKMakati Stock Exchange Bldg.,

Ayala Avenue, Makati,Metro Manila

———VALUE DATE

TO Raul Sesbreño

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 AMOUNTNUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33UNDERWRITERSFINANCE 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 VillaIllegible 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-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" 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 the assignment 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 "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

April 10, 1980

Philippine Underwriters Finance Corp.Benavidez St., Makati,Metro Manila.

Attention: Mr. Alfredo O. BanariaSVP-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 co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

Very Truly Yours,

(Sgd.)Florencio B. BiaganSenior 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 "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the assignee acquires his rights subject to the equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22

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 Sesbreño.

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 Sesbreño 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 Sesbreño. 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 Sesbreño at the

time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

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.

7) 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.

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of thewarrants. 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 go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling — more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance — and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses — it allowed Golden Savings to withdraw — not once, not twice, but thrice — from the uncleared treasury warrants in the total amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have

to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts, according to whether the agency was or was not for a compensation.

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. 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.

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

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

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 ____


(Sgd.) VICENTE SOTELO, Manager.


(Sgd.) RAFAEL LOPEZ,Treasurer

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

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

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

substantive law, namely, that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (Civil Code, art. 1356), constitutes another indication of fundamental legal purposes.

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

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

The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgement became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by confession, while still other jurisdictions have refused to sanction them. In some States, statutes have been passed which have either expressly authorized confession of judgment on warrant of attorney, without antecedent process, or have forbidden judgments of this character. In the absence of statute, there is a conflict of authority as to the validity of a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy.

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

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

x x x x x x x x x

And if this instrument be considered as security for a debt, as it was by the common law, it has never so found recognition in this state. The policy of our law has been against such hidden securities for debt.

Our Recorder's Act is such that instruments intended as security for debt should find a place in the public records, and if not, they have often been viewed with suspicion, and their bona fides often questioned.

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

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

x x x x x x x x x

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

x x x x x x x x x

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

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained waiver of presentment and protest, homestead and exemption rights real and personal, and other rights, and also the following material provision: "And we do hereby empower and authorize the said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of Record to appear for us and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with costs of suit and release of all errors and without stay of execution after the maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the judgment note above described, speaking through Mr. Justice Miller, in part said:

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

x x x x x x x x x

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

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

In some of the states the judgments upon warrants of attorney are condemned as being against public policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914 A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be said by the courts that such judgments are against public policy we are unable to understand. It was a practice from time immemorial at common law, and the common law comes down to us sanctioned as justified by the reason and experience of English-speaking peoples. If conditions have arisen in this country which make the application of the common law undesirable, it is for the Legislature to so announce, and to prohibit the taking of judgments can be declared as against the public policy of the state. We are aware that the argument against them is that they enable the unconscionable creditor to take advantage of the necessities of the poor debtor and cut him off from his ordinary day in court. On the other hand, it may be said in their favor that it frequently enables a debtor to obtain money which he could by no possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at times. In some of the states there judgments have been condemned by statute and of course in that case are not allowed.

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

judgments upon warrants of attorney as it was pursued in this case is not against any public policy of the state, as declared by its laws.

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

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

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

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

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

9) G.R. No. 74451 May 25, 1988

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

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

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

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

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

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

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

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

SHIPMENT: We will inform you the date and name of the vessel as soon as arranged.

TERMS: By irrevocable domestic letter of credit to be issued in favor of THE EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be opened within ninety (90) days after date of shipment. at first installment will be due one hundred eighty (180) days after date of shipment. Interest-14% per annum (Exhibit A)

xxx xxx xxx

... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de Oro, on or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the information that an irrevocable Domestic Letter of Credit would be opened in plaintiff's favor on or before June 30, 1976 under the terms and conditions agreed upon (Exhibit "B")

On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the amount of P10,640.00 because of the verbal assurance of defendant Casville that it would be covered by the letter of credit soon to be opened.

xxx xxx xxx

On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of P300,000.00 postdated August 4, 1976, which was followed by another check of same date. Plaintiff considered these checks either as partial payment for the skidder that was already delivered to Cagayan de Oro or as reimbursement for the marginal deposit that plaintiff was supposed to pay.

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that their application for a letter of credit for the payment of the Garrett skidders had been approved by the Equitable Banking Corporation. However, the defendants said that they would need the sum of P300,000.00 to stand as collateral or marginal deposit in favor of Equitable Banking Corporation and an additional amount of P100,000.00, also in favor of Equitable Banking Corporation, to clear the title of the Estrada property belonging to defendant Casals which had been approved as security for the trust receipts to be issued by the bank, covering the above-mentioned equipment.

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

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to be used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher (Exhibit "2-A") containing the explanation:

Payment for marginal deposit and other expenses re opening of L/C for account of Casville Ent..

A covering letter (Exhibit "3") was also sent and when the three documents were presented to Severino Santos, executive vice president of defendant bank, Santos did not accept them because the terms and conditions required by the bank for the opening of the letter of credit had not yet been agreed on.

On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to cover its purchase from plaintiff of two Garrett skidders, under the following terms and conditions:

a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral to secure the Trust Receipts; e) We shall chattel mortgage the equipments purchased even after payment of the first L/C as additional security for the balance of the second L/C and f) Other conditions you deem necessary to protect the interest of the bank."

In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was ready to open the letters of credit upon defendant's compliance of the following terms and conditions:

c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and conditions that our bank may impose.

Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three postdated checks. In said letter, plaintiff was informed of the requirements imposed by the defendant bank pointing out that the "cash marginal required under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada property or a total of P427,300.00" and that the check covering said amount should be made payable "to the Order of EQUITABLE BANKING CORPORATION for the account of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed postdated checks were intended as replacement of the checks that were previously issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to defendant bank for the account of defendant Casville. All the new checks were postdated November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H").

On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal covering two pieces of real estate properties.

Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a representative of defendant Casville, went to see Severino Santos to find out the status of the credit line being sought by defendant Casville. Santos assured Umali that the letters of credit would be opened as soon as the requirements imposed by defendant bank in its letter dated August 11, 1976 had been complied with by defendant Casville.

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance of said notation was reproduced in a covering letter dated August 16,1976 that went with the check (Exhibit "E").<äre||anº•1àw> Both the check and the covering letter were sent to defendant bank through defendant Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals because it believed that no one, including defendant Casals, could encash the same as it was made payable to the defendant bank alone. Besides, defendant Casals was known to the bank as the one following up the application for the letters of credit.

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

Meanwhile, upon their presentation for encashment, plaintiff discovered that the three checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by defendant Casville as collateral were all dishonored for having been drawn against a closed account.

As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed the mortgage executed by defendant Casville on the Estrada property which was sold in a public auction sale to a third party.

Plaintiff allowed some time before following up the application for the letters of credit knowing that it took time to process the same. However, when the three checks issued to it by defendant Casville were dishonored, plaintiff became apprehensive and sent Umali on November 29, 1976, to inquire about the status of the application for the letters of credit. When plaintiff was informed that no letters of credit were opened by the defendant bank in its favor and then discovered that defendant Casville had in the meanwhile withdrawn the entire amount of P427,300.00, without paying its obligation to the bank plaintiff filed the instant action.

While the the instant case was being tried, defendants Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of defendants the amount of P450,000.00, as partial satisfaction of plaintiff's claim against them.

Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they show lack of interest in disputing plaintiff's claim by not appearing in most of the hearings, but they also assigned to plaintiff the garrett skidder which is an action of clear recognition of their liability.

What is left for the Court to determine, therefore, is only the liability of defendant bank to plaintiff.

xxx xxx xxx

Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the pertinent portion of which reads:

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the amount of plaintiff's check which defendant bank erroneously credited to the account of defendant Casville and which defendants Casal and Casville misappropriated, with 12% interest thereon from April 5, 1977, until the said sum is fully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the sum of P25,000.00 .

Proportionate cost against all the defendants.

SO ORDERED.

The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly, the Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for the value of the second check issued by NELL, Exhibit "E-l," which was made payable

to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE ENTERPRISES INC.

and which the Bank teller credited to the account of Casville.

The Trial Court found that the amount of the second check had been erroneously credited to the Casville account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay NELL the value of the check in the sum of P427,300.00, with legal interest. Explained the Trial Court:

The Court finds that the check in question was payable only to the defendant bank and to no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the check after or under the name of defendant bank, the payee was still the latter. The addition of said words did not in any

way make Casville Enterprises, Inc. the Payee of the instrument for the words merely indicated for whose account or in connection with what account the check was issued by the plaintiff.

Indeed, the bank teller who received it was fully aware that the check was not negotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING CORPORATION.

But said teller should have exercised more prudence in the handling of Id check because it was not made out in the usual manner. The addition of the words A/C OF CASVILLE ENTERPRISES INC." should have placed the teller on guard and he should have clarified the matter with his superiors. Instead of doing so, however, the teller decided to rely on his own judgment and at the risk of making a wrong decision, credited the entire amount in the name of defendant Casville although the latter was not the payee named in the check. Such mistake was crucial and was, without doubt, the proximate cause of plaintiffs defraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant bank to apply the value of the check as payment for the letter of credit which Casville Enterprises, Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5). The issuance of the subject check was precisely to meet the bank's prior requirement of payment before issuing the letter of credit previously applied for by Casville Enterprises in favor of the appellee;

xxx xxx xxx

We disagree.

1) The subject check was equivocal and patently ambiguous. By making the check read:

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC.

the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law. 3 As worded, it could be accepted as deposit to the account of the party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed against NELL who caused the ambiguity and could have also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the subject check of the words "Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank teller in accordance with customary bank practice, and not by NELL as the drawer of the check, and simply meant that thereafter the same check could no longer be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order solely of "Equitable Banking Corporation." NELL changed the payee in the subject check, Exhibit "E",

however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also eliminated both the cash disbursement voucher accompanying the check which read:

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

and the memorandum:

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

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously, had his own antagonistic interests to promote. Thus it was that Casals did not purposely present the subject check to the Executive Vice-President of the Bank, who was aware of the negotiations regarding the Letter of Credit, and who had rejected the previous check, Exhibit "2," including its three documents because the terms and conditions required by the Bank for the opening of the Letter of Credit had not yet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of goods, the price of which is to be covered by a letter of credit, to advance the marginal deposit for the same.

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

In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville Enterprises to perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta. Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs. Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8).

... As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss.

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, are hereby SET ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI. is modified in that petitioner Equitable Banking Corporation is absolved from any and all liabilities to the private respondent, Edward J. Nell Company, and the Amended Complaint against petitioner bank is hereby ordered dismissed. No costs.

SO ORDERED.

10) ANG TEK LIAN V. CA

87 PHIL 383

FACTS: Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000, payable to cash. This was given to Lee Hua Hong in exchange for cash. Upon presentment of the check, it was dishonored for having insufficient funds. It is argued that the check, being payable to cash, wasn’t indorsed by the defendant, and thus, isn’t guilty of the crime charged.

HELD: A check drawn to the order of “cash” is payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer’s indorsement. Of course, if the bank is not sure of the bearer’s identity or financial solvency, it has the right to demand for identification and/or assurance against possible complications—for instance, forgery of the drawer’s signature, loss of the check by the rightful owner, raising the amount payable, etc. The bank therefore, requires for its protection that the indorsement of the drawer—or some other persons known to it—be obtained. A check payable to bearer is authority for payment to the 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 failing to do so.

11) G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs.

SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of action:

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

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

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

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

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

The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated.

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

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

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

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

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

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

In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5

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

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

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

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

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

SO ORDERED.

12) G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS and FERMIN CANLAS, respondents.

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 holder 4 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 co-maker 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 co-makers. 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.

13) SPOUSES EDUARDO B. EVANGELISTA and EPIFANIA C. EVANGELISTA, petitioners, vs. MERCATOR FINANCE CORP., LYDIA P. SALAZAR, LAMEC’S** REALTY AND DEVELOPMENT CORP. and the REGISTER OF DEEDS OF BULACAN, respondents.

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

Petitioners filed a complaint for annulment of titles against respondents, Mercator Finance Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of Bulacan. Petitioners claimed being the registered owners of five (5) parcels of land contained in the Real Estate Mortgage executed by them and Embassy Farms, Inc. (“Embassy Farms”). They alleged that they executed the Real Estate Mortgage in favor of Mercator Financing Corporation (“Mercator”) only as officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any consideration as to them since they did not personally obtain any loan or credit accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is void. With the void mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale to it as the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the subsequent sale of the same parcels of land to respondent Lydia P. Salazar (“Salazar”), and the transfer of the titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty & Development Corporation (“Lamecs”).

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

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

During pre-trial, the parties agreed on the following issues:

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a. Whether or not the Real Estate Mortgage executed by the plaintiffs in favor of defendant Mercator Finance Corp. is null and void;

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

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

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

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

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

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

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

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

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

The appellate court also observed that “if the appellants really felt aggrieved by the foreclosure of the subject mortgage and the subsequent sales of the realties to other parties, why then did they commence the suit only on August 12, 1997 (when the certificate of sale was issued on January 12, 1987, and the certificates of title in the name of Mercator on September 27, 1988)?” Petitioners’ “procrastination for about nine (9) years is difficult to

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understand. On so flimsy a ground as lack of consideration, (w)e may even venture to say that the complaint was not worth the time of the courts.”

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

THE COURT A QUO ERRED AND ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN AFFIRMING IN TOTO THE MAY 4, 1998 ORDER OF THE TRIAL COURT GRANTING RESPONDENT’S MOTION FOR SUMMARY JUDGMENT DESPITE THE EXISTENCE OF GENUINE ISSUES AS TO MATERIAL FACTS AND ITS NON-ENTITLEMENT TO A JUDGMENT AS A MATTER OF LAW, THEREBY DECIDING THE CASE IN A WAY PROBABLY NOT IN ACCORD WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT.

We affirm.

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

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

The promissory note states:

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

September 16, 1982 - P154,267.87October 16, 1982 - P154,267.87November 16, 1982 - P154,267.87December 16, 1982 - P154,267.87January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

x x x x x x x x x.

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

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

(Embassy Farms, Inc.) Principal(Eduardo B. Evangelista) Surety(Epifania C. Evangelista) Surety(Mercator Finance Corporation)

Creditor

To: MERCATOR FINANCE COPORATION

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

x x x x x x x x x

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

x x x x x x x x x.

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

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

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

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

x x x x x x x x x

(g) Where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

Petitioners also insist that the promissory note does not convey their true intent in executing the document. The defense is unavailing. Even if petitioners intended to sign the note merely as officers of Embassy Farms, still this does not erase the fact that they subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal. Petitioners cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the rule that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. A surety is bound by the same consideration that makes the contract effective between the principal parties

thereto. Having executed the suretyship agreement, there can be no dispute on the personal liability of petitioners.

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

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

SO ORDERED.

ACT NO. 2031February 03, 1911

THE NEGOTIABLE INSTRUMENTS LAW I. FORM AND INTERPRETATION Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

(a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or

(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

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.

But an order or promise to pay out of a particular fund is not unconditional.chan robles virtual law library Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable:

(a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:

(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that:

(a) it is not dated; or

(b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. 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. It may be drawn payable to the order of:

(a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Sec. 9. When payable to bearer. - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.

Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. chanrobles law Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. 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. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the

delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.

Sec. 20. Liability of 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. Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. II. CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Sec. 29. Liability of accommodation party. - An accommodation party is one

who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons.

But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right:

(a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. robles virtual law library

Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. 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:

(a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any

infirmity in the instrument or defect in the title of the person negotiating it.

Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. Sec. 56. What constitutes notice of defect. - To constitutes 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 amounted to bad faith. Sec. 57. Rights of holder in due course. - A holder in due course holds 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. robles virtual law library Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.

Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.

Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. robles virtual law library Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be

sufficient if made within a reasonable time after the last negotiation thereof. Sec. 72. What constitutes a sufficient presentment. - Presentment for payment, to be sufficient, must be made:

(a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made.

Sec. 73. Place of presentment. - Presentment for payment is made at the proper place:

(a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence.

Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Sec. 75. Presentment where instrument payable at bank. - Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of

them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. Sec. 81. When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. - Presentment for payment is excused:

(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied.

Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when:

(a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid.

Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. robles virtual law library Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday.

Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. VII. NOTICE OF DISHONOR Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. chanrobles law Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice

unless the party to whom the notice is given is in fact misled thereby. Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased. Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times:

(a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following. (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following.

Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times:

(a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision.

Sec. 105. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows:

(a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or (b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning.

But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor.

Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases:

(a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment.

Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases:

(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation.

Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. Sec. 118. When protest need not be made; when must be made. - Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required

except in the case of foreign bills of exchange. robles virtual law library VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged:

(a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.

Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.

Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes:

(a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.

BILLS OF EXCHANGE IX. FORM AND INTERPRETATION Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself

does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. Sec. 130. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation.

Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all.

Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and

(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.

Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. Sec. 148. Where presentment is excused. - Presentment for acceptance is

excused and a bill may be treated as dishonored by non-acceptance in either of the following cases:

(a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment can not be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground.

Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance:

(a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted.

Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. XII. PROTEST Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify:

(a) The time and place of presentment; (b) The fact that presentment was made and the manner thereof; (c) The cause or reason for protesting the bill;

(d) The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found.

Sec. 154. Protest, by whom made. - Protest may be made by:

(a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses.

Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been protested for non-acceptance may be subsequently protested for non-payment. Sec. 158. Protest before maturity where acceptor insolvent. - Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers. robles virtual law library Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. XIII. ACCEPTANCE FOR HONOR Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be

for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. chanrobles law Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor. Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows:

(a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four.

Sec. 169. When delay in making presentment is excused. - The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him. XIV. PAYMENT FOR HONOR

Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. Sec. 174. Preference of parties offering to pay for honor. - Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment.

Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such

parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. XVI. PROMISSORY NOTES AND CHECKS Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check.

XVII. GENERAL PROVISIONS

Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:

"Acceptance" means an acceptance completed by delivery or notification; "Action" includes counterclaim and set-off; "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not; "Bearer" means the person in possession of a bill or note which is payable to bearer; "Bill" means bill of exchange, and "note" means negotiable promissory note; "Delivery" means transfer of possession, actual or constructive, from one person to another; "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; "Indorsement" means an indorsement completed by delivery; "Instrument" means negotiable instrument; "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; "Person" includes a body of persons, whether incorporated or not; "Value" means valuable consideration; "Written" includes printed, and "writing" includes print.

Sec. 192. Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable. Sec. 193. Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day.

Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. chanrobles law Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed. Enacted: February 3, 1911

Haystacks and Short Digests: Negotiable Instruments

Nature and Coverage of Act 2031, the Negotiable Instruments Law (NIL) The function of Negotiable Instruments

1. Traders Royal Bank vs. CA, 269 SCRA [ * ]

2. Crystal vs. CA (GR L-35767, 18 June 1976) digest

3. New Pacific Timber vs. Seneris, 101 SCRA [ * ]

4. Roman Catholic Church of Malolos vs. IAC, 191 SCRA [ * ]

5. Tibajia vs. CA (GR 100290, 4 June 1993) haystack digest

6. Vda. de Eduque vs. Ocampo (GR L-222, 26 April 1950) haystack digest

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Negotiation distinguished from assignment

7. Sesbreno vs. CA (GR 89252, 24 May 1993) digest

Specific instrument covered

9. Abubakar vs. Auditor General (GR L-1405, 31 July 1948) haystack digest

10. Philippine Education Co. vs. Soriano (GR L-22405, 30 June 1971) haystack digest

Formal Requisites of Negotiable Instruments

11. Ponce vs. CA (GR L-49444, 31 May 1979) digest

12. Arrieta vs. National Rice and Corn Corporation (GR L-15645, 31 January 1964) digest

13. Kalalo vs. Luz (GR L-27782, 31 July 1970) digest

14. Philippine Bank of Commerce vs. Aruego (GR L-25836-37, 31 January 1981) digest

15. Jimenez vs. Bucoy (GR L-10221, 28 February 1958) digest

Issuance of Negotiable Instruments

Concept of delivery16. Dela Victoria vs. Burgos (GR 111190, 27 June 1995)

digest Negotiation

Transfer of the Negotiable Instrument from one person to another

Caltex (Philippines) Inc. vs. CA (GR 97753, 10 August 1992) digest

Signature and Forgery vs. Alteration

Rules on signatories

Republic Planters Bank vs. CA (GR 93073, 21 December 1992) haystack digest

Republic Bank vs. Ebrada (GR L-40796, 31 July 1975) haystack digest

Forgery

Associated Bank vs. CA (GR 107382, 31 January 1996) haystack digest

PNB vs. Quimpo (GR L-53194, 14 March 1988) haystack digest










MWSS vs. CA (GR L-62943, 14 July 1986) haystack digest

Gempesaw vs. CA (GR 92244, 9 February 1993) haystack digest

Republic Bank vs. CA (GR 42725, 22 April 1991) haystack digest

Manila Lighter Transportation vs. CA (GR L-50373, 15 February 1990) haystack digest

PNB vs. CA, 25 SCRA [ * ]

PNB vs. National City Bank (GR 43596, 31 October 1936) digest

San Carlos Milling vs. BPI (GR 37467, 11 December 1933) digest

Republic vs. Ebrada, supra [See 19] Alteration

Hongkong & Shanghai Bank vs. People’s Bank and Trust (GR L-28226, 30 September 1970) haystack digest

Consideration in a Negotiable Instrument

Presumption as to consideration

Pineda vs. dela Rama (GR L-31831, 28 April 1983) digest

Accommodation party

Ang Tiong vs. Ting (GR L-26767, 22 February 1968) haystack digest

Prudencio vs. CA (GR L-34539, 14 July 1986) digest

Republic Bank vs. Ebrada, 65 SCRA, supra [See 19]Clark vs. Sellner (GR 16477, 22 November 1921)

haystack digest

People vs. Maniego (GR L-30910, 27 February 1987) digest

Discharge of negotiable instrument

37. State Investment House vs. CA (GR 101163, 11 January 1993) haystack digest

Special Provisions applicable only to Bill of Exchange, Promissory Notes and Checks

Bills of Exchange (Special Provisions)40. Section 126

38. Philippine Bank of Commerce vs. Aruego, 102 SCRA digest










41. Types of Bills of Exchange

39. City Trust Banking vs. CA (GR 92591, 30 April 1991) digest

Checks (special provisions)40. Moran vs. CA (GR 105836, 7 March 1994)

haystack digest

41. Tibajia vs. CA, 223 SCRA, supra [See 5]42. Co vs. PNB (GR L-51767, 29 June 1982)

digestState Investment House vs. IAC (GR 72764, 13 July 1989)

haystack digest

Travel On vs. CA (GR 56169, 26 June 1992)

haystack digest

Firestone Tire and Rubber vs. Ines Chaves & Co. (GR L-17106, 19 October 1966)

haystack digest

Stelco Marketing vs. CA (GR 96160, 17 June 1992)

digestTan vs. CA (GR 108555, 20 December 1994)

haystack digest

Certification of a check

New Pacific Timber vs. Seneres, 101 SCRA, supra [See 3]PNB vs. National City Bank of NY, 63 PHIL, supra [See 27]

Types of checks

Bataan Cigar and Cigarette Factory vs. CA (GR 93048, 3 March 1994)

haystack digest

State Investment House vs. IAC, 175 SCRA, supra [See 42]Associated Bank vs. CA (GR 89802, 7 May 1992)

haystack digest

Applicable Laws on Bouncing Checks

BP 2253. Lozano vs. Martinez (GR L-63419, 18 December 1986)

digest54. Caram Resources vs. Contreras (AM MTJ0830849, 26 October 1994)








digest55. Uy vs. CA (GR 119000, 28 June 1997)

haystack digest

56. People vs. Reyes (GR 101127-31, 18 November 1993) haystack digest

57. People vs. Grospe (GR L-74053-54, 20 January 1988) haystack digest

58. Ibasco vs. CA (GR 117488, 5 September 1996) haystack digest

59. People vs. Tuanda (AC 3360, 30 January 1990) digest

60. Llamado vs. CA (GR 99032, 26 March 1997) haystack digest

61. Magno vs. CA (GR 96132, 26 June 1992) digest

62. Navarro vs. CA (GR 112389, 1 August 1994) haystack digest

63. Lao vs. CA (GR 119178, 20 June 1997) digest

64. Que vs. People (GR 75217-18, 21 September 1987) digest

65. Lazaro vs. CA (GR 105461, 11 November 1993) haystack digest

66. Cruz vs. CA (GR 108738, 17 June 1994) digest

67. Lim vs. CA (GR 107898, 19 December 1995) haystack digest

Forgery in Bill of Exchange

68. PNB vs. Quimpo (158 SCRA ), supra [See 21]69. Metropolitan Waterworks vs. CA (143 SCRA), supra [See 22]70. PNB vs. CA (GR L-26001, 29 October 1968)

haystack digest

71. Manila Lighter Transportation vs. CA (182 SCRA), supra [See 25]72. Republic Bank vs. CA (196 SCRA), supra [See 24]73. Associated Bank vs. CA (252 SCRA), supra [See 49]

Additional cases

1. Insular Drug vs. PNB (GR 38816, 3 November 1933) haystack digest

2. Belisario vs. Vda. de Zulueta (GR 39815, 28 April 1934) haystack












digest3. United General Industries vs. Paler (GR L-30205, 15 March 1982)

haystack digest

4. Lim vs. People (GR 130038, 18 September 2000) digest

5. Lim vs. Rodrigo (GR 76974, 18 November 1988) digest

6. Philippine Commercial Industrial Bank vs. CA (GR 121413, 29 January 2001) digest

7. Vaca vs. CA (GR 43596, 31 October 1936) digest


Negotiable Instrument Law

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